8 ways to take charge of your finances in 2008
Posted
Jan 21 2008, 02:52 PM
by
Karen Datko
Rating:
This post comes from J.D. Roth at partner blog Get Rich Slowly.
If one of your resolutions for 2008 is to take control of your money (instead of letting it control you), this crash course in financial basics can help guide the way.
Here's a summary of everything I've learned about personal finance.
Track every penny you spend. The authors of "Your Money or Your Life" admonish readers to "keep track of every cent that comes into or goes out of your life."
(This is) the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes .... This is the step that somehow makes the biggest impact.
It doesn't matter how you track your spending -- the most important thing is to do it. You can use a cash notebook, you can use an on-line tool like Wesabe, or you can use software like Quicken or Microsoft Money.
Whichever method you choose, stick with it. Make it a habit. Don't fudge the numbers. Record your transactions as soon as possible. Most of all, don't judge yourself. Tracking your spending is an exercise in data collection; it's not the appropriate time to change your habits.
Develop a budget. After you've tracked your spending for a few weeks (or months), use the data you've collected to develop a budget. According to "The Millionaire Next Door," budgeting is one thing that sets the wealthy apart from the rest of us -- 55% of millionaires keep a budget.
Many people -- including myself -- fail to budget for a variety of reasons: It's boring, we don't think we need it, we don't know how. But this simple act provides a roadmap for your money. There are a variety of budgeting methods you can choose, from Andrew Tobias' three-step budget to the 60% budget. I'm not disciplined enough to adhere to a budget, so I maintain a spending plan.
Start an emergency fund. For years I lived paycheck to paycheck. I spent everything I earned. This worked well until something went wrong. And something always went wrong. Suddenly I'd find myself without money to pay for a car repair, or facing an expensive medical bill. I financed emergencies with credit cards. After years of carrying debt, I finally paid off all these emergencies last month.
In "The Total Money Makeover," Dave Ramsey explains why he believes an emergency fund should come before anything else.
Since I hate debt so much, people often ask why we don't start with the debt. I used to do that when I first started teaching and counseling, but I discovered that people would stop their whole Total Money Makeover because of an emergency -- they felt guilty that they had to stop debt-reducing to survive.
After you've saved $1,000, then you can attack your debt. Open an online high-yield savings account and add $20 or $50 to your account every time you get paid. Last summer, I opened an account at ING Direct, where it's simple to schedule automatic deposits.
Get out of debt. Are you struggling under a heavy debt load from credit cards or student loans? Make it a priority to unload some of this burden in 2008. If you have the mental discipline, you'll save money by paying down your high-interest debt first. But if you've tried that method before and failed, consider using a debt snowball. Pay your debts starting with the smallest balance first.
Here's how:
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Order your debts from lowest balance to highest balance.
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Designate a certain amount of money to pay toward debts each month.
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Pay the minimum payment on all debts except the one with the lowest balance.
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Throw every other penny at the debt with the lowest balance.
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When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
The debt snowball can give you awesome psychological payoffs, keeping you motivated to stay in the game. It's not mathematically ideal, but it worked for me (and for many others).
Open a retirement account. If you're young, you probably don't think you need to start a retirement account. You're wrong. No matter how old you are, now is the time to begin saving for retirement. In "The Automatic Millionaire," David Bach writes:
The single biggest investment mistake you can make (is) not using your (retirement) plan and not maxing it out.
After reading "The Automatic Millionaire" a couple years ago, I opened a Roth IRA at Sharebuilder. It was easier than opening a checking account. I managed to make the maximum contribution in both 2006 and 2007, and I hope to do so again this year.
Spend less than you earn. This is the fundamental money skill. It's common sense, yet many people never do it. Only by spending less than you earn can you hope to build wealth. This is easier to do if you track your spending or develop a budget, but those steps aren't completely necessary. Even if you do nothing else on this list, spending less than you earn can put you ahead of your peers.
Automate your finances. My current project is to move toward a system of paperless personal finance. Along the way, I'm learning the value of automating routine transactions. When you make things automatic, you remove the human element, making it more difficult for you to mess things up.
The classic example is overdraft protection. By tying your checking account to your savings account, you have a safety net if you bounce a check. But there are other ways this can work for you. For example, I've set up automatic payments with the gas company, the cable company and my auto insurance company. I also make automatic deposits in my retirement account.
Educate yourself. Knowledge is power. Personal finance doesn't have to be a mystery. Visit personal-finance blogs. I recommend:
Last spring, I shared a vast collection of online financial-literacy resources, including video tutorials, Web-based courses and much more. This is a great place to begin learning about the basics of saving and investing.
Finally, read personal-finance books and self-development manuals. These are four of my favorites from the past year:
You don't have to agree with everything in a book to get something out of it. I read a lot of personal-finance books -- some are good, but many are not. Even the worst books usually have one or two things I can use. Learn to pick and choose those pieces appropriate for your life. And remember to use your public library.
Final words
Taking control of your finances can be intimidating -- there's so much to do -- but it doesn't have to be that way. One effective solution is to take a vacation day from work: Designate one specific date as your personal "Money Day." Use this day to finally set up Quicken on your computer, to open a retirement account, and to call around for a better deal on your insurance.
Two final notes:
Do what works for you. There are few hard-and-fast rules in the world of personal finance. I can suggest methods that have worked for me (and for others), but only you can determine if these methods are appropriate for your own circumstances.
The perfect is the enemy of the good. When you spend so much time looking for the "best" choice that you never actually do anything, you are sabotaging yourself.
The good news is that you can get out of debt. You can save for retirement. If I can do it, so can you. Best wishes for a prosperous new year.
Other articles of interest at Get Rich Slowly:
"25 of the best books about money"
"How to start a Roth IRA (and where to do it)"
"Which online high-yield savings account is best?"
