Are you intimidated by organizing budgeting, expenses, debt and savings? Don't be. The hardest part about money management is getting started. These simple but necessary tasks help organize your personal finance activity into easy-to-follow steps. Choose a money management system that works for you and learn to avoid a financial crisis with proper planning.
Choose a Money Management System That Suits You
Financial experts like Suze Orman and Dave Ramsey agree that the key to successful money management is to understand how you're spending your paycheck. It's not enough to rely on your memory. Choose a system for tracking the money you spend, and stick to it for at least one month so you can see where your money actually goes. The results may surprise you!
This simple expense tracking method requires only a small notebook and pencil to carry in your pocket, purse or briefcase. Every time you pay for something, write it down. Once a week add any direct payments from your bank account. At the end of the month, total your spending according to categories that best represent your lifestyle. For example, if you drive to work, include a gas category, but if you take the bus or train, use a public transportation category.
If recording expenses right as they happen isn't your style, save your receipts instead to either record them in a notebook with pages for each type of spending, or on a computer spreadsheet each evening. Don't let your receipts pile up for a few days before recording them as you may find it difficult to remember what they were for.
This method works best for people who remember to record every expense, are honest about their spending, have an easily accessible place to carry the notebook or store receipts, and can stick to a nightly expense-recording routine.
Automatic Expense Tracking
An automatic money management system takes the responsibility of tracking spending out of your hands. Whether you choose a software system, an online service such as Mint.com, or the options provided by your financial institution, this system works best for people who do not want to write down every instance of spending money for later scrutiny. It does not, however, account for cash purchases that can add up quickly over time, so it is best used in conjunction with one of the other methods for people who use both cash and cards for purchases.
If you're passionate about technology, you may prefer to manage your money with a software program such as Quicken. These programs help users create graphs and spreadsheets that track where your money goes each month, and may be used with many online banking systems. If you also run a small business, these programs simplify invoice preparation and can also keep track of your tax-deductible expenses. This system also suits busy people who prefer to track all their money-related activities in one place.
The Envelope System
A cash-only approach made popular by financial experts such as Dave Ramsey, the envelope system requires people to allocate their expenses at the beginning of a month and pay for everything with cash. Label envelopes with each expense type and allocate cash to each. When you withdraw money, replace it with a receipt for the item or service purchased. This method works best for people who must stick to a strict budget, are comfortable paying cash for everything, and can remember to collect and file receipts. With this system, it's easy to see exactly where your money is going because you have a specific dollar amount placed in each envelope. When the money is gone, your spending for that particular category must stop until it's time to replenish the envelopes.
Identify and Cut Unnecessary Expenses
Once you've recorded at least one month's worth of expenses, go through all of your spending. If you haven't already done so, organize it according to category. Identify areas where you can cut costs. Typical areas include grocery bills, restaurant meals, buying clothes, and entertainment expenses. Look for ways to reduce fixed costs such as gym memberships, utility bills, phone bills, and cable TV services. In some cases you may be able to cancel these services altogether in an attempt to give your budget a little more wiggle room.
Make Frugal Substitutions
Find frugal ideas to replace expensive choices. Here are some ideas to get you started:
- Select store-brand instead of brand name items at the grocery store.
- Clip and organize coupons.
- Comparison shop for everything.
- Cook meals at home instead of going to restaurants.
- Buy clothes at consignment or thrift shops.
- Invite friends over for a potluck to watch the big game instead of buying expensive tickets.
- Walk to work and save money on your gym membership and gas.
- Learn how to reduce your heating and electricity bills with energy-efficient options.
- Cancel your home phone and just use your cell phone.
These are just a few of the ways you can save money without making highly noticeable sacrifices. Explore other options for saving money without depriving yourself of basic necessities.
Managing Your Debt Repayment
Now that you have more money to work with in your budget, the next step in money management is to reduce your debt as much as possible. Financial experts such as David Bach advise borrowers to make debt repayment a priority because borrowed funds mean you are paying interest, which is the cost of borrowing the money. The longer you take to pay off your debt, the more interest you'll be charged. If you carry credit card or loan balances, contact your lender and ask them to lower your interest rate. The money you save on interest payments can then be used to increase your monthly payments on the debt, paying it off faster.
Arrange your credit cards from the highest interest rate to the lowest. Continue to make the minimum payment on each card, but pay as much as possible over the minimum payment required on the highest interest rate card each month until the balance is zero. Then apply the amount you were paying to the next highest rate card, and so on, until you've paid off all your debt.
You should then turn your attention to your non-revolving debt accounts, such as car loans and personal loans. Check with your tax professional to see if it makes sense to hold off on aggressively paying off debt that features tax deductions (such as mortgage debt) until everything else is paid off.
Set Up a Savings Plan
Effective money management also includes saving for emergencies, short-term goals such as vacations or buying a vehicle, and longer-term goals such as retirement or college funds for your children. Once you've identified and cut your expenses, start building your emergency fund. According to Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, many financial advisors today recommend saving nine months to a year's worth of living expenses. These funds can be used if you lose your job or experience another unexpected financial setback.
Once your emergency fund is in place, set up savings plans for your long and short term goals. While saving for far-off expenses like retirement is important, don't neglect fun short-term goals such as a weekend away or attending a special event like a concert. It is easier to stick with a money management system if you have rewards to look forward to in the near future.
Take Charge of Your Finances Today
Managing your money when times are good can make a big financial difference when times are not so good. It is difficult to suddenly change your spending habits because of job loss or another unexpected financial disaster. Many people who start tracking their expenses are shocked at the amount of money spent on things they hadn't noticed before, such as bank service charges and administration fees. When you see these items, call your service provider to negotiate a lower fee or switch to a different account.
Always be vigilant in looking for ways to reduce expenses, pay down debt and increase savings. Incorporate careful money management into your lifestyle, and soon you will see results with more savings, less debt, and less stress.