It’s a Process
Managing your personal finances is not a one time affair. Don’t get me wrong, creating a budget is a great starting point. But unless you continually track your actual spending against that budget you will never know:
A) Whether or not your budget is realistic for your circumstances
B) If you are sticking to the goals you established for yourself
C) The true depth of your debt problems
D) Where you are overspending
Personal financial management is not a venture to undertake with pen and paper alone. Find yourself good software and make use of it. My personal preference is www.mint.com. It is a free online tool offered by Intuit, which allows you to link your bank and credit card accounts, automatically loading your detailed transaction data on a near real-time basis, and categorizing it for you. You can view reports and charts to monitor your spending, and load in your assets and liabilities to watch your net worth grow.
Once you finalize your initial budget and embark on your financial management journey, make sure that all members of your household are on board. If Mom is being diligent with her spending, but, Dad is out golfing every Sunday, you will be spinning your wheels.
When developing your household budget, use your last 6 month’s worth of financial information and be sure to factor in any upcoming changes to your financial picture. If you are a big cash spender, track it down to see where you have been spending it.
- First, determine how much income is coming into your household each month. If your income is variable, calculate a realistic average based on your last 6 months and your current earning situation.
- Next, identify your fixed expenses. These include your mortgage, loans, car payments, etc.
- Then, review your variable spending. Items such as gas, groceries, etc. Calculate a reasonable average of these as well. Be very detailed here and make sure that you budget for all of your costs.
- Review all of the costs above and analyze the areas in which you can cut back. Tackle the easy changes first, items such as cutting back on cable or shopping at discount grocery stores. Then look at your bigger ticket items. Does it make sense for you to re-finance your mortgage to obtain a better rate? Should you lower your car payment by trading in for a different vehicle? Spend a fair amount of time here, there is always fat to trim.
- If applicable, create a debt reduction plan. Here, you want to focus on paying off your highest interest rate debt first and ensure that you are making at least the minimum payments on your other debts while paying off the high interest cards so that your credit rating is protected.
- Create a line item for emergency savings. I don’t care if you have thousands of dollars in debt, you still need a line item in your budget for savings. Look at it this way, if you don’t have a rainy day fund and your car breaks down, you are just going to go further into debt to fix it. So, save. It doesn’t have to be a huge amount….even $20 a month is a start.
- Ensure you are thinking about retirement savings, and saving for your future. We will have a future blog post on this topic….so check back soon. The key thing to remember is that the earlier you start, the more opportunity for it to grow.
- Revisit! As you cut spending, pay down debt and monitor your finances, you should find that you have a greater amount of disposable income available to you. Make sure reevaluate your budget frequently.
Establish Reasonable Goals
There is nothing harder than trying to stick to a budget that is unrealistic. When establishing your goals, you definitely want to aim for the guidelines below from DebtSteps.com, however, you also need to make sure they are reasonable for your current circumstances. If you can’t meet these today, don’t stress about it, the last thing you want is to get overwhelmed and give up.
- Housing 35% – This includes mortgage, rent, taxes, repairs, improvements or renovations, insurance, utilities, and any other expenses pertaining to the maintenance and upkeep of the home.;
- Transportation 20% – This category includes monthly car payments, gas, oil, repairs, insurance, parking, and public transportation fees.
- Debt 15% – Basically any debt except your mortgage and car payment should be placed into this category including credit cards, personal loans, or student loans.
- Personal Expenses 20% – Here you have all additional “cost of living” expenses such as food, insurance, prescriptions, clothing, entertainment, dental, medical, prescriptions, or any other miscellaneous expenditures.
- Investments & Savings 10% – This category includes stocks, bonds, savings, retirement plans, rental properties, or artwork.
Even if you can’t reach these at first, aim for them. It is great to have stretch goals, but, make sure you put together a separate plan for achieving those. For example, if you want to pay off your debt in 18 months so that you can place 10% into savings, but, your current situation will only allow you to do so in 24 months, figure out how much additional income you need to earn to get you there and how you are going to earn it.
It Is A Lot of Work
Yep, I said it. Personal financial management is a lot of work. Trust me, I track every penny that enters and leaves our household. But, it is incredibly worthwhile. Anything that you want to be successful at is going to take work, and knowing your true financial situation helps you sleep better at night. Who couldn’t use a better night’s sleep?