Take Control of Your Finances
Most people would like to have more control of their money…instead of their money taking control of them. More than ever before, Americans are drowning in debt. In fact, studies show that the average American family uses up to eight credit cards and carries between $7,500 and $10,000 in credit card debt alone. In this module, we will discuss some steps you can follow to take control of your finances in your effort to reach financial freedom.
Step #1: Track Every Penny You Spend
One of the first things you need to do to get your expenses in order is track everything you spend…down to the last penny. It doesn’t matter how you track your spending, you just need to do it.
Some people track expenses automatically using a computerized money management program, such as Quicken or Microsoft Money. Others track their spending manually by saving receipts and entering them into a cash notebook. Whichever method you choose, stick with it, make it a habit, and record your transactions as soon as possible. Click below for a sample of a Weekly/Monthly/Annual Expenses Worksheet for you to use to help in this process.
This step is all about gathering data, not judging how you spend money or making drastic changes to your current money management habits. When you see something written down, you may be motivated to live more frugally. You may find that you are spending too much on fast food, or maybe the cost of commuting is higher than you thought.
Step #2: Develop a Useful Budget
After you have collected data on your spending habits for a few weeks, or even a month, you should then develop a budget. Did you know that 55 percent of millionaires develop and live on a budget?
Many people fail to live by a budget because it appears to be limiting, or it may be boring to create. Or, some just feel they don’t know how to do it. Developing a budget, though, is a great way to keep yourself focused on the financial goals you have determined to be important.
In some instances, you will need to “cut the fat” in your spending habits. Maybe you will be limited in the number of times you eat out for lunch, but if you keep focused on the long-term goal of buying a home or enjoying a vacation with your family, that may not seem as difficult.
Take a look at your income using the Income Worksheet and then subtract your overall expenses from the Expense Worksheet using the Comparison Worksheet to help you see where you stand. Next, take a look at where you can possibly make cuts in your spending to meet some of your savings and/or other financial goals.
You should use caution during this step to make cuts in your spending that are realistic. You do not want to make deep cuts in areas where you really need to spend money. For example, if you have a family of four, your food budget must take into account your entire family’s needs. Can you live on $250 a month in groceries? Is that realistic? Will you be able to meet that budget or will you fail every month? Be sure your budget can be met and that it is actually a useful tool in managing your family.
Step #3: Start an Emergency Fund
Many people live paycheck-to-paycheck and figure they cannot save; however, everyone can save…it just takes discipline. As part of your budget, you need to develop an emergency fund for things like unexpected medical or vehicle expenses. Some experts state that once you have safely put together an emergency fund of at least $1,000, then you can move on to attacking your debt (which is the next step in our process).
But how can you create a fund when you are living so tightly month-to-month? Pay yourself first! Make having an emergency fund something that you MUST do to survive, or at least as important as paying the rent, mortgage or electricity bill. The rule of thumb is to save approximately 10 percent of your gross income. To determine the recommended amount of savings for your individual needs, click on the following Savings Rate form. You may want to consider saving this amount automatically so you never see the money.
Step #4: Get Out of Debt
Debt is a killer when it comes to managing your finances. Maybe you struggle with heavy credit card debt, or even student loans. There is a method to help you eliminate the debt that you have, but you will need to be patient and consistent in this effort. To start, pay your debts beginning with the smallest balance first. Let’s take a look:
- Order your debts from the lowest to the highest balance.
- Pay the minimum balance on all debts, except for the smallest balance, where you can make a higher payment (based on your budget).
- Using your budget, designate a fixed amount you will pay monthly toward each debt.
- When the smallest debt is gone, work on the next smallest debt, and so forth.
When you begin to pay off your debt, you will feel an accomplishment that may motivate you to continue in the process.
Furthermore, once you get out of debt, don’t get back into it. Limit your credit cards and other loans to “emergency only” choices. The key is to really spend less than you earn each month.
Step #5: Focus on Your Future
If you are young, you need to be focused on your future. Take time to set up a retirement account and even college funds for your children, and then pay into these accounts automatically each month. The reality is that education is getting more expensive and Social Security is not going to be what it is today when Generation X and beyond enter into retirement. Being smart now will help you continue to live a similar (or better) lifestyle to what you currently live.
Taking control of your finances can be intimidating. Following these five steps will help to eliminate your financial stress and have more enjoyment in your life today.