The new year is beginning. If you are kicking yourself for not being in a more secure financial position, now is the time to plan. Here are five steps to help you get there.
Review income and spending. It’s difficult to plan to do better if you don’t know what is going on now. Most of us know how much our income is, but there is usually a big difference between what we make and what we net. Social Security, retirement, income tax, health insurance and other deductions reduce the amount you are paid by as much as 25 to 40 percent. That’s the first lesson. Base any spending on your net income, not your gross income.
When you take a look at your net income, if it seems to be lower than what you are spending, look for ways to increase your income. That might be a side job or even selling items you own that you may not need.
Look at your spending next. It may take a little while with your calculator, bank statements and credit card bill, but it is essential to figure out where your money went in the past year. Most of us spend more than we think. Figuring out what you spent your money on is the best way to change your future.
Pay down debt. Not only does debt weigh you down, it also obligates future income. Start with the most expensive, or highest-interest-rate debt and pay it first. Then move down the list to less expensive debt. In general, credit card debt is the most expensive. If you get rid of it, you will have more money to put toward other obligations, which will make you more financially secure. Always pay more than the minimum on revolving credit, even if it’s only a few dollars more.
Create a plan, and let’s call it a spending plan rather than a budget. Go back to the review of your spending from the first step. Look at where your money went last year, and ask yourself if that is where you wanted to spend your money. Divide the totals by 12 to come up with a monthly amount, then reduce or add to the amount to make it fit your needs. Live by this spending plan during the next year.
Start saving. Set up an emergency fund. Though experts tell us to have enough money to cover three to six months’ worth of expenses in the bank, this may seem intimidating. Just start with a manageable amount and increase it over time. Start with a small goal. When it is achieved, move the bar higher. The average cost of a financial emergency is $2,000, so try to have that much money in the bank. If you want to have this amount in the bank by the end of the year, save $160 a month or $40 a week — or it might be easier to think of saving $6 a day. Simply forgo that fancy coffee or that beer after work, and save that amount of money. Before you know it, you’ll have the money in the bank and, more importantly, you will have established a savings habit.
Make it easy. Automate your savings and your spending. Most bank accounts allow you to set up bill pay so you avoid any costly late payments. Automatic withdrawals can help you add to your savings account. If saving happens automatically, you will be far more likely to have something at the end of the year.
An insecure financial situation is fixable. You just need to take small, positive steps and stay the course. Start now to change your future.