Love it or hate it. Money is the lifeblood of modern life. It enables you to live comfortably, provide for your loved ones, and plan for the future. Not having enough money is a significant source of stress for many Americans. Indeed, data from the American Psychological Association shows that six out of ten Americans consistently rank worrying about money as a primary source of stress.
One of the best ways to manage stress around money is to frequently review your finances. As you become more familiar with your financial situation, you’ll gain confidence, and over time you’ll do a better job of staying on track to meet your goals. Regularly reviewing your finances reduces ambiguity in your financial life. It enables you to see what's going well and the areas that need improvement. There's a rule in the business world that says, "If you can't measure it, you can't improve it."
If you have yet to develop strong money habits, it's never too late to start. Follow these five simple steps to make the most of your money — and start on the path towards your goals.
Step #1: Review Your General Financial Picture
To begin, start by gathering a complete overview of your current financial situation. Understand how much money you have coming in and what your fixed and variable expenses are. List out things like your rent, groceries, and other bills. Total up all your assets and debts subtract these numbers to figure out your net worth. Next, get an idea of your spending patterns — what you spend the most on each month (e.g., rent, eating at restaurants, buying clothes), how much you've been saving and/or investing, and how much you've been putting towards debt repayment.
Throughout this process, you'll get an understanding of where you can make changes. Can you spend less on luxury items? Can you eat out one less time per week? Can you cancel a subscription to a service you no longer use? This process enables you to understand your financial patterns, weed out basic ways to spend less, and see if you're on track towards any pre-established goals.
Step #2: Formulate Goals
Understanding your priorities and goals is essential to developing a strategy to manage your money. Do you want to eliminate credit card debt or pay off student loans? Have you not yet started to save for retirement? Are you planning a wedding? Is there an upcoming trip you need to budget for? Do you want to increase your saving and investing?
Taking a look at what is on the horizon for the new year is an excellent place to start. It can be easy not to factor in "small" expenses, such as a flight ticket home for a holiday, but these expenses can add up. Thinking both short- and long-term is key when identifying your goals.
Step #3: Create a Budget
Budgeting is like a four-letter word. People cringe at the thought of creating a budget. Budgeting doesn’t have to be painful, and it doesn’t have to be hard - if you are not focused on being perfect.
The main point of budgeting is not to track your cash flow down to the penny. The goal is to develop an understanding of your spending patterns so you can make money choices more consciously. Over time, as you get better at handling your finances, the finite details of your spending habits will come into focus.
There are some incredible technology tools to help assist with the budgeting process, such as Tiller or the budgeting website, You Need A Budget (YNAB). Using technology to start budgeting is very helpful, and if you want to track your spending down to the penny, this is the most efficient way to do it. However, in my opinion, nothing is faster cheaper, and easier to complete a budget than a pen and a pad of paper or a simple excel spreadsheet.
Start by collecting your last few months of banking and credit card statements. Next, total up all your inflows of after-tax money during the same period. This is going to be your salary or any other source of income. Just make sure it’s the money leftover from your paycheck after you’ve contributed to your 401(k), paid your employee benefits, and taxes. Next, think about all of your fixed expenses such as rent, mortgage, food, insurance, debt payments, and utilities. These are all the things you have to pay each month, no matter what happens. After that, fill in your variable expenses, such as dining out, after-tax savings, entertainment, travel, and extra items. If this spending is uneven in a category, use an average, and mark it as an item to keep an eye on overtime.
Once you have a total amount of your monthly spending, subtract it from your total income. The leftover number is either money flowing into savings or is unaccounted for as miscellaneous expenditure. Your goal is to reduce the miscellaneous category as much as possible. In this way, you’ll gain a better handle on how you're spending your resources, and it’ll be easier to spot areas requiring your attention.
Step #4: Automate Your Finances
Managing the responsibilities of day-to-day life is time-consuming. To maximize efficiency, set up automatic payments and transfers as an easy way to stay aligned with your goals. Always utilize direct deposit and familiarize yourself with the various digital banking tools which make paying bills and managing your money easier than ever before. For example, you can set up a plan to put a specific amount of your income towards your IRA, savings account, or debt every month.
Additionally, you might choose to automate your recurring bills like your internet or heat. Not only does this ensure your bills get paid on time, but it holds you accountable as you work towards specific goals. On the other hand, the only bill I don’t recommend automating is credit card bills. Manually paying your credit card every month focuses your attention on keeping these bills as low as possible and helps track your overall spending.
Step #5: Monitor Your Finances
Establishing a plan and automating your finances will make it easier to organize all the different aspects of your financial life. However, some components of your financial situation are not fixed and cannot be automated. For example, spending decisions are up to your discretion every month. Also, your financial life changes over time. You might receive a salary bump or a bonus, in which case you might decide to start investing more or paying down debt. Keeping an eye on how you're doing in the present while also anticipating activity in the future is the key to successfully managing your finances.
Taking a regular look at your accounts and seeing if you're on track towards your goals is critical. Setting up a time every week or every month is one way to make sure you're consistently reviewing your situation. The more energy you put into the process, the easier it becomes.
Managing your finances is an ongoing process. Developing strong money skills is much like learning to consistently exercise. It takes work to get started, but once you make it part of your life, it becomes a habit. One thing you want to keep in mind is your strategies, goals, and plan may look different as you move through new life chapters, but you can still take steps today to plan for the future you envision.
At Thirty Mile Financial, as a CFP® professional, I’m passionate about helping others organize and manage their finances. If you have questions about your individual financial situation, feel free to contact me.