Effectively managing money is arguably the most important thing you can do to create a simple (and less stressful) life. Yet it’s one of those things that is easy to say, and often hard to do. Indeed, hubby and I struggled with money management for years, and until we learned to live below our means we just never got ahead. If you’re ready to get a handle on money matters, here’s where to start.
Opt Out of Consumerism
Daily, we are bombarded with ways to spend our money. Companies work hard to convince us that our wants are really needs that we can’t possibly live without. We also learn from a very young age that success equals “more.” A bigger house, a nicer car, and more stuff than we know what to do with is the “American Dream.” Pfft. I learned the hard way this is NOT TRUE! The sooner you opt out of this consumer mentality, the better off your finances will be. Trust me on this one.
Determine Wants vs Needs
This is harder than it sounds. So much of what is in our daily lives, we consider a need. Yet much of it isn’t. For example, clothing is a need, but brand name and high end clothing are a want. Food is a need, but brand loyalty (ie I must have Gevalia coffee!) is a want. Cable TV is a want. Unlimited data on your cell phone (or even the cell phone) is a want. Shelter is a need, but living in the high rent district is a want. You get the picture. It’s perfectly OK to indulge wants if you can afford it, but be honest with yourself and recognize what you are spending your money on.
Someone once said “Failure to plan is planning to fail.” So it is with money. If you have only a vague idea of where your money is going, then you need this. And if you are already using a monthly budget, now might be a good time to review it, and make sure nothing has snuck in when you weren’t looking. It happens.
To start, make a list of all your income and expenses. Next, put an asterisk next to all “mandatory” expenses like rent, utilities, prescriptions, gasoline, etc. These are spending categories that you can’t easily reduce or eliminate. Then look at “optional” expenses like cable, subscriptions, dining out, Starbuck’s, etc. Reduce them if you are trying to save or pay down debt, but in any case set a limit on these spending categories. To help with this, you can download our Budget Worksheets.
Plan to Save Money
Personal savings should be listed as mandatory; shoot for 20% (including retirement savings), but try to start with at least 5%. If you’re really tight then drop to 2.5%. But you must assign some amount, no matter how small, to savings. If you don’t have an emergency fund, this is the first thing that your savings should go towards. Saving money is the most critical financial habit to develop, and a lack of savings is the number one reason a budget falls apart. Without savings, any unexpected expense will blow your budget out of the water, so make savings a priority. As you gain control of your money, increase your savings.
Let’s take a moment here to mention retirement savings as well. If your employer offers any kind of retirement savings, participate in it. Contribute at least the percentage that your employer matches. Do this even if you are only 18 and this is your real first job. Do this even if you are positive you can’t afford it. It will reduce your check less than you think because it also reduces the taxes withheld from your pay. If you don’t participate, you are literally leaving money on the table (your employer’s match). With money going to a retirement account, you leverage the power of compounding interest. In the event of a catastrophic event, such as serious illness or foreclosure on your home, you can access those funds. And when you retire; voila! you have money to live on.
Keep it Real
Once you’ve gotten through savings and bills, earmark some money for fun. Unless you have an iron will, there will come a time when you’d like to grab a coffee with a friend, or curl up in your jammies and rent a movie. Allow for that so you can stick to the budget. You will also want to include occasional expenses such as car maintenance, annual dues, subscriptions, etc. If you can, set aside a small amount each month for these items. Dave Ramsey’s envelope system is a great way to deal with occasional expenses. Label an envelope for each of these types of expenses and put a small portion of that expense into the envelope each month. A small accordion file or coupon holder works well for this, too. If you find that you can’t cover your monthly expenses, look for debt-reduction help from a non-profit such as consumer credit counseling services. They are a legitimate company; many are not.
Make it a Team Effort
Now that you’ve created your beautiful, realistic budget that includes savings, it’s time to put it into action. If you are in a relationship, bring in your partner and talk about budgeting and your financial goals. In many relationships, one person will be the money manager. If that’s you, make it a point of involving your significant other. Go over your bills together every month. Celebrate positives, like your first $100 in savings, or a credit card paid off, or a month where you stayed 100% on budget. If money is tight you need to share both the successes and the stresses of your financial situation. A burden shared is easier to bear.
Keep it Stress Free
The easiest way to be successful at something is to make it “invisible.” By invisible I mean seamless and easy to manage. For example, I work in healthcare where new initiatives are always tried and seldom stick. The initiatives that are successful became part of our practice because they could be accomplished without extra work. So apply this principal to your budget; do what you can to lessen the work of budgeting. Put all your utilities on budget billing, so they are about the same every month. Set up bills so they are paid automatically. I strongly suggest doing this through your bank’s bill-paying service, rather than authorizing creditors to withdraw from your account. By using your bank’s service, you have control of when money is taken from your account.
Although creating a budget is a lot of work in the beginning, it’s totally worth it. We found that once we had the budget and the Bill Pay set up through our bank, managing money became much simpler, and took up far less time. And knowing that all that is taken care of without a monthly sit-down-at-the-desk-for-hours has been amazing.