Personal Finances: Get Your Money in Order

I flunked Accounting 101 my freshman year of college. After a high school career in which I excelled at all the math that was offered – Algebra, Geometry, Trigonometry, Calculus – I breezed into accounting and was quickly humbled. Looking back, I wonder if accounting was something my still-developing brain could not comprehend. Or, more likely, if the combination of 50 percent attendance in class, 100 percent attendance at the bars, and holding down a 30-hour-per-week job caused me to mix up my priorities.

I think about that class frequently because I handle the budgeting and finances in my family, and a few times a week I gleefully track our spending, manipulating the numbers until it all makes sense. The competitor in me wants to tackle Accounting 101 one more time. But the pragmatist in me says: who cares? I don’t need to pass an accounting class (or be a finance major) to figure out how to make my money work for me. And neither do you. Here are five steps you can take to get your personal finances in order.

1. Review your finances: Where is your money going?

If you want to save money, it’s simple: you must spend less than you earn. But putting that rule into practice takes planning. First, take an inventory of all your income. Include your yearly salary, side work, income from rental properties, and any other way you earn money. Next, tally up all your debt: mortgage, school loans, credit cards, and personal loans. Do you have an emergency fund? Life insurance? A retirement account? Write it all down and try not to judge yourself for any perceived financial weaknesses.

2. Make a plan: Daydreaming and budgeting

Now for the fun part. Start a bucket list, and put it someplace easily accessible. You’ll be adding to and revising this list for the rest of your life. Consider asking your significant other to make a bucket list too. Then do the exercise together. Do you prefer the latest electronics and gadgets to big annual vacations? Maybe having a new car is important to you. Dream big, because once you start budgeting, you’ll be able to save for all your goals, both short- and long-term.

Making a budget is the surest way to live within your means. But before you start groaning, try not to think of budgeting as a dirty word. Making a budget just means you are planning where you’ll spend your money before you get it. You probably already have a rough idea of how much you spend on fixed expenses like rent/mortgage, utilities, and car loans. But creating and sticking to a restaurant, grocery, and entertainment budget could lead to lots of additional savings. I like these forms for paper-and-pencil budgeting. Quicken and Mint have terrific electronic budgeting tools. Staying on top of your budget can be a completely satisfying experience. My husband and I challenge each other to find unexpected savings each month, and it’s a thrill to discover an extra $100 to put towards our family vacation or treat ourselves to a fancy dinner.

3. Take action: Aim for these financial goals

• Pay off all debt except your mortgage (and pay that off too, if you have the cash funds). If you have multiple sources of debt, either start paying down the debt with the highest interest rate first, or pay off the smallest debt amount first. Sometimes paying off a smaller, nagging bill gives you a psychological boost, and the drive to keep going. It can take years (or more) to get out of debt. Stick with it.
• Create an emergency savings fund with up to six months of living expenses. This is strictly for emergencies, so if you have an unexpected expense, you must adjust your monthly budget the next month and keep saving until you replenish the money.
• Purchase a life insurance policy in an amount that will keep your family comfortable for at least six months to one year.
• Set up a retirement account and aim to contribute 15% of your salary.

Each month, contribute to your retirement account, savings account, and pay down debt first. Then spend what’s left, according to how you budgeted for the month. Automate where you can – if you never see the money, it’s harder to miss. And the less you have to think about setting money aside, the easier it will be. Focus on conserving your willpower for other decisions. Life is short, and you don’t need to spend a lot of time each month organizing your finances.

4. Stay focused and positive

Getting your finances in order is not easy; it’s a process. Don’t expect immediate results and be realistic about how quickly you can build up your savings. If you are in over your head, hire a professional to help you get organized and provide accountability. A financial planner can also help you set up and maintain retirement plans or college savings plans for your children.

 

5. Review your plan annually

Things change. Make a calendar appointment to review your finances at the same time every year and incorporate any life-changing events. Taking the time to make minor tweaks annually will keep you on track without being an overwhelming chore. Tracking your progress can also be very uplifting. It’s rewarding to see how far you have come in one year’s time.

Managing your finances is a task that never ends. But controlling your money will ensure that it doesn’t control you. And that’s a lesson worth every penny.

source: formen.com