Do you make good money but wonder where it all went at the end of the month? Many people work hard, pay their bills, and don’t keep track of where their money is going. For this reason, they don’t know if their money could be working harder for them or if they could be enjoying it more.
Try these five techniques to get control over your finances. You will be glad you did.
1. Create a Budget and Live Within Your Means
First things first - how much do you take home each month? If it varies, be sure to take an average and when you earn more, save the overage for the times you earn less.
Next, subtract your necessary expenses - housing, food, transportation, utilities, medical co-pays. Then subtract the cost of premiums for your insurance policies, such as car insurance, homeowners insurance, renters insurance, life insurance, and health insurance. Cell phone and cable packages are next, but be sure to look them over and see if you could be getting a better deal.
What you have left you will put aside for the moment.
2. Save 10% of Income for a Rainy Day Fund
Things happen. Emergency car repairs, a trip across the country to attend a wedding, a tree falls on the roof of your house, your hours are cut at work… all of these are unexpected expenses that you need to plan for. Sounds silly, but yes, unexpected expenses can be planned for!
Set aside 10% of everything you earn for this emergency fund. Ideally, you will have at least eight months’ worth of savings at any given time, and if you have more, that’s great. You will be amazed at how confident and relaxed you feel when you know you have a substantial cushion to fall back on if an unexpected expense or drop in income happens.
3. Contribute the Maximum to Your 401K
If your company matches pension contributions, it is a no-brainer to contribute up to the match limit. Beyond that, you need to take a look at whether that money might be more useful if spent elsewhere, such as paying down credit card debt or boosting or replenishing your emergency fund.
If your company does not match, then you should shop around for a 401K or Roth IRA that gives you the return you need depending upon where you are in life. Search online and visit your local bank to discuss your options.
4. Be Sure to Budget for Fun
This is a must. It is demoralizing to work hard and feel as if all you do is pay bills. Make a list of the things you’d like to have or do that will contribute to your happiness and satisfaction. This can be a new bike for a cyclist or a kiln for a potter. It can be a trip to see a cousin or a national park. It can be cooking classes, or raised beds for your garden.
Whatever makes you happy, budget for it, again, within your means. A young couple might budget for weekly pizza and a movie night, while a more established older couple might budget for a monthly weekend away.
5. Use Credit Wisely
This last tip is as important as the first. Hopefully, you’ve established an emergency fund or “rainy day” fund and are using it and replenishing it as the need and ability arise. However, if you’ve used credit cards as your emergency fund, you will quickly find that the exorbitant interest rates cause even a modest balance to balloon out of control.
If this is the case for you, forget techniques number 2 and number 3 and scale way back on number 4. You need to devote your discretionary spending to paying down those credit cards because they represent the most expensive money you can borrow.
If you have multiple credit cards and are unsure where to start, take the card with the highest balance or highest interest rate and pay that one off first, paying only the minimum on your other credit cards. When that first card is paid off, tackle the next highest, etc. until all are paid off.
Now, once you have zero balance, do not close those accounts. Having all of that available yet unused credit will boost your credit rating significantly, as will this improvement in your debt-to-income ratio.
Future use of credit should be for purchases that give you points, or cash back, or airline miles, whichever of these you can use. Then pay the balance off each month. You are saving money this way and getting something in return!
Hopefully, these five techniques will help keep you in the black and feeling in control of your finances. Good luck!
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a busy life insurance beneficiary attorney.