Thursday, February 17, 2011

A few Money Management Tips for the new year

I don’t know if there is anything I can say to convince people of the importance of money management. If you think it is stupid, or a waste of time, I don’t know that I can convince you otherwise.

I do have some thoughts for those of you that want to manage your money,  feel at a loss on how to actually do it.

Before I start, I want to say that I am just giving advice on the ways that work for me. Each person’s situation is different, and you have to find what works for you. But you have to stick things through. Behavior change is hard to do. Just because something doesn’t work at first, does not mean it won’t work over time. Don’t give up too soon.

Tip number one. If you feel like you are drowning in debt, sign up for Dave Ramsey’s Financial Peace University. It is a class that meets one night a week for thirteen weeks. There is cost involved, around $100. It is totally worth the cost. I know several people that were really helped by this class. So stop reading this post and sign up for the class at Dave’s website.

If you are sticking with me, then the first thing you will need to do is develop a spending plan. Most people use a tool called a budget. Calm down, I know people don’t like budgets. Sorry for that. But you need to have some way of knowing how much you make, how much you plan to spend, and how much you actually spend.

Since most bills are monthly, I do my plan on a monthly basis. For the purposes of this post, I am using someone who makes a regular salary and is paid the same amount every month (one paycheck per month or two paychecks per month). It is a little bit more difficult if you are paid weekly or every two weeks, or if you don’t make a consistent salary, i.e. commission based pay. It is still doable, just not as straightforward. So the first thing you do is figure out how much you make per month. Write this down. The take home pay, after taxes and other deductions.

Now you need to figure out what you are spending per month already. Write down each bill you have, and how much you pay each month. Also write down other expenses you have besides bills.

It will look something like this:

Monthly Income: 2000

Rent: 800

Cable: 100

Cell Phone: 100

Food: 300

Etc. Etc,

Add up your expenses. Subtract that number from your income. Hopefully the number you have left is positive, or at least zero. If not, then you have a problem.

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
Charles Dickens, David Copperfield, 1849
If you go on spending more than you make, you will eventually find yourself in a troublesome amount of debt. If you are in this situation, then you might need more assistance that you will find in one simple blog post.  FOr those of you dealing with this, I would again recommend taking Financial Peace. But feel free to read on. Maybe this will help.

Money is spent to buy things. We can divide the spending into two categories based on time frame: money we spend now (within a month of earning it), and money we save to spend later. Each of these can have a few subcategories, like so:


For emergencies

For specific things that you plan to purchase later

For retirement/wealth building

Spending now


Household expenses (groceries, toiletries, etc.)

Entertainment and fun stuff


Another thing to keep in mind is needs vs. wants. I wont’ talk as much about this because it is somewhat subjective. You need to eat. Do you need to eat steak? Just keep this in mind while planning your spending.

So now look at your list of expenses and divide them up into the categories above. Feel free to make up your own categories if needed. Now comes the actual planning part. Are you spending too much in some categories? Leaving out others altogether? Now that you see that, you can develop a plan to adjust your spending. But first, let’s make sure you have a few things in your plan.

Do you have an emergency fund? While experts argue on the amount of money it should have, they do agree that everyone should have an emergency fund.  I say at least three months of expenses, but you need some money set aside for unexpected stuff. If you don’t have one, you need to start one, and be putting money there.

Are you giving money to your local church, spiritual organization, charity, or cause that you believe in? Hopefully I don’t have to justify this one.

Are you saving for retirement? The general rule of thumb is that you should be saving 15% of your income for retirement. If not, you should be making plans to get it there. If you work for a company that matches 401(k) contributions, you need to start participating ASAP. You are throwing away free money if you don’t.

Are you saving for future expenses that you know will come up? For example, most places require that you renew you License plate tags every year. Are you planning for that? The big one is Christmas. A lot of people seem surprised when that comes around and they start buying gifts and making travel plans. I recommend setting money aside for future expenses that you know about.

If you haven’t been doing those things, then your plan probably got screwed up a little. That’s okay! Now you can be adding things in and making adjustments.

I do better with an example, so here is the system that my wife and I use to manage our money. I like it, and it works for us. This isn’t what I would do if I were single, and the same goes for my wife. We had to come up with something together that works. You might have a different system.

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