From those who simply don’t know where their money goes to the folks who hoard every single cash slip and proof of payment and don’t have time to go back and analyze, getting disorganized with your finances takes on many forms.
Budget and track costs
According to Gallup, only one in three Americans prepares a household budget every month, so although this step may sound like a no-brainer, it’s the place where most of us should start. Preparing a budget might seem like a daunting task, but you can use free budgeting software that will make your life a whole lot easier. Mint.com will help you to make your budget and track your expenses free.
As a guideline, most Americans need 35% of their income for home-based expenses, 12% for transport, 15% for food, and 18% for miscellaneous odds and ends. That leaves 12% for savings and 8% for paying off any debts. Of course, your personal situation may differ. You might already have debt repayment commitments exceeding 15% of your income, or you may have a long commute to work, but this is what you should ultimately aim for.
Tracking your spending
Some people hoard up all their slips and never get round to checking them out. Others don’t even try to track spending. Get businesslike with Mint.com or another free app or website that helps you to track spending. Record everything immediately so that you don’t have to go back and deal with a huge backlog later on.
As for paper slips, you don’t need most of them. Keep everything related to your earnings and tax-deductible expenses and dump the rest. If you don’t, you’ll end up with a stockpile of papers and files that you don’t need and that make your money management efforts seem impossible.
By all means reconcile your statements, but once you’re happy everything’s in order, turf out the useless paper and only keep tax-related documents.
Revisit your budget and expenses every month
Just having a plan isn’t going to work if you don’t use it and adjust it as needed. Check your progress every month and tweak your budget according to last month’s performance if necessary, or add extra expenses you know you can expect. For instance, your winter electricity bill will be higher than your summer one, so using a summer budget in winter isn’t going to work for that.
Sitting down with your finances and giving them a good going over every month is hard work – and if you’re having a difficult time, you may even tell yourself that you don’t want to know. But burying your head in the sand is only going to get your finances even more muddled, so set a date and knuckle down!
Pay as you go
The less accounts you have to manage and pay off, the easier your money management becomes. So pay right away whenever you can. Using your debit card instead of cash can also help you to track spending – but only if you check your statements carefully every month.
Pay down your debt and start saving
As long as you have debt, it’s better to pay off what you owe. You save more interest on liquidated debts than you’ll earn in interest on savings. But once you’ve escaped the debt trap, it’s time to start putting money away for the future. That way, you won’t have to start borrowing all over again next time you need money for an emergency car repair or a trip to the emergency room.
Compound with creditors
If you’re already in big trouble financially, you may be tempted to avoid communicating with the people you owe money to, but that’s the last thing you should do! Once you know where you stand budget-wise, you need to start talking.
Most creditors just want to know that you’re making your best effort to pay their accounts – but you have to discuss it with them first and determine how they can accommodate you. If you can’t afford the full repayments, but can afford a smaller amount, you may lose out on interest charges, but, at least, you won’t get threatening letters – as long as you’ve got a formal repayment arrangement with your creditors.
Consolidate debt – but only if it’s profitable
Another strategy for those with too many bills to pay is to consolidate debt. Only do this if you’re absolutely sure it will help you to pay off what you owe faster and not merely to delay the effects of your financial problems.
If you can get a low-interest loan to pay off all your creditors, you’ll only have one thing to pay – your loan – you stand to save on bank charges for dozens of transactions, and possibly on interest too. You may also get a longer repayment period than you had before and have smaller monthly installments. Do your math carefully!
Start planning for your retirement
The sooner you start planning for your retirement, the more comfortable you will be when the time comes to stop working. As soon as your finances are under control, you should start looking at retirement fund options – even if you already have a plan at your workplace. Retirement plans might sound like they’re worth a lot of money today, but what you can get for $1,000 this year and what you can get for the same value in a decade or two aren’t the same thing.
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