Get your finances under control in a single day.
Many people in today’s economy are struggling to stay afloat. They are working to rein in their spending and get their finances under control, but when they see the amount of debt they have, or the 0 balance in their savings or retirement accounts they feel overwhelmed. The good news is that regardless of how big of a challenge your getting control is for you, you can do it. Doing so actually isn’t that hard, but it will take time. Here’s how to get control of your finances in a single day:
Analyze your spending
The first thing you’ll need to do is analyze your current spending. Unless you understand where your money is coming from and going, you can’t control money. Login to your online banking and begin analyzing each and every expense. If you made a cash withdrawal, try to remember what you used that money for and make a note of it. So for example, if your transaction says “Food Lion $200.00”, than that’s groceries. While you’re doing this, I should also note expenses that are what’s called in the financial world “discretionary”. These are expenses you can do without. Expenses that come to mind are: Starbucks coffee, eating out, movies, etc.
If you don’t use online banking (you should btw) or don’t have a bank statement and don’t have this information available, than what you’ll need to do is start writing down your daily expenses. Do so for 30 days then come back here and pick up at the next section: creating a budget.
Create a budget
I know, many of you are saying: Oh no, not a budget! I promise a budget is a great thing and contrary to popular belief a budget doesn’t control you. Remember you create the budget, so technically you are controlling yourself.
For this exercise, we’re going to create a very simple paper budget for next month. If you want to use a spreadsheet, check out my persona Excel budget spreadsheet. If you prefer using a software package, I highly recommend (and use) You Need a Budget. Again though, for now let’s just use a simple sheet of paper.
At the top, write “Budget for <>”. So let’s assume it’s the end of July, you’re budget would read: “Budget for August”. Below that, write: “Income”. Under income, write down each income source and then to the right enter the amount of the income. For many there will only be one or two lines here. Here’s an example for a couple that works two jobs:
Ford Motor Company $3000.00
Cracker Barrel $2000.00
I suggest listing take-home pay, after taxes and all other expenses for your first budget, it just makes things easier. After you get used to the concept you can list pre-taxes and include all of the other items removed from your paycheck as expenses. But skip this for now.
Now we’ll list our expenses. Here’s where you’ll use the analysis you did on your prior months spending. Under expenses I want you to put a category for each and every dollar you plan to spend and Miscellaneous isn’t allowed. You have to put each and every dollar of your income into a real category and you’ll use your past months spending to help you do that. Also use this exercise as a time to trim expenses. So if you spent $30.00 on Starbucks coffee last month and don’t want to next month, then put that $30.00 in another category, preferably savings or debt payment. Here’s a simple example:
Eating out: $100.00
Car payment: $300.00
Electric bill: $100.00
Water bill: $30.00
Ladies night out: $60.00
Cell phone: $50.00
Credit Card 1: $200.00
Credit Card 2: $200.00
Total Expenses: $5000.00
If you balance isn’t $0, make it $0. Remember, every dollar has a home. Now, if your balance is negative, you’re spending more than you earn, a big problem in today’s world. You’ll need to trim some expenses. You can’t spend more than you earn. That’s a big golden rule of personal finance.
Now that you have a brand new $0 based budget, go grab a soda or a nice glass of tea and take a break. You just made a huge accomplishment, you created a budget! Creating it’s the easy the part though, following it is the hard part.
Next month you’re going to track your spending, and when you reach a budget amount for a spending category, you’re going to stop spending. If you can’t stop spending in that category, than you have to pull the money from another category. Don’t be discouraged, your first budget won’t be 100% correct, you’ll have to adjust and that’s normal. Just use what your learned for your next month’s budget.
Establish an emergency fund
This step is really important. One of the biggest budget busters is unexpected expenses such as: the car breaking down, problems with your house, unexpected medical situations, etc. The way you’re going to keep from using credit cards to handle these situations is to create an emergency fund. An emergency fund is an account that’s easy to access and contains money you’ll use for emergencies only! The amount you should have in this account really varies, but I’d recommend starting with $1000.00. You can always adjust later.
If you have $1000.00 in savings already, than move this info your emergency fund. If not, you’ll need to start saving it, so head back to our previous step and add in “Emergency fund savings” under Expenses and put a number.
Your emergency fund should be separate from your regular money, but easy enough to access that you can quickly get to it. I have my emergency fund in a separate checking account and separate bank from my regular checking. Doing so gives me a debit card I can use for emergencies. Be disciplined though…an eating out, that TV on sale, etc aren’t emergencies and don’t abuse your emergency account. Use it for true emergencies only.
Set-up your debt snowball
If you don’t have any debt, you can skip this section. A debt snowball is way of tracking and accelerating your debt payoff. You can read all about the details of creating one in my article: Get out of debt. A debt snowball is an very simple but incredibly powerful way of kicking your debt right out the door.
Now that all of the tools are in place to control and manage your finances, here’s were you really have to be careful. All of these concepts and tools only work if you manage yourself. If you aren’t 100% committed to making this all happen, it won’t. Be diligent and watch yourself. Recognize if you’re falling back into old habits of impulse spending. If you even say to yourself once “Oh, it’s ok to skip the budget this month” or “Opps, that category was too low, oh well”…SOUND THE ALARMS!
As humans we are creatures of habit, and unfortunately sometimes those are bad habits. In order to get control of your finances, you’re going to have to establish new habits, which takes time and discipline. Don’t let those bad habits win. Keep focused on the big picture and the destination. Don’t let things sidetrack you. Remember, like anything else in life, your finances are a journey. Just keep heading towards the end goal.
Oh! Congrats on getting control of your finances! That wasn’t so bad huh?
author: Larry (this was his last post… and gift!)
Photo by: Robbert van der Steeg