Spending a Saturday morning figuring out your finances may not fit into your idea of a fun weekend. It’s a painfully revealing process to realize you’re behind on your retirement savings or spending more than you thought. Mapping out your financial goals for the year can also bring up the possibility of major expenses you’re unprepared for.
Yet preparation is your exact end goal. With pre-planning, you can handle emergency medical bills or car repairs without taking out additional credit. You’ll also make wiser decisions about spending, saving, and stretching your income. If you’re new to the financial planning process, you may not know where to begin or what techniques to use. Here are some tips to help get you started.
1. Streamline Your Credit Card Spending
Whether you have more than one unsecured or secured credit card, you’ll want to review how you’re using them. For instance, do you carry balances over each month and make new charges on top of those balances? If so, you’re paying interest charges that keep accumulating on purchases you made months ago. All of a sudden, a $75 pair of shoes might eat up to $85 of your take-home pay.
Ten dollars might not seem like much of an increase. However, paying the credit card statement in full or using cash would’ve put $10 back in your pocket. And how much more are you paying in interest when you carry balances on several $75 purchases? Consolidating your credit card spending so those statements get paid in full each month is the ideal way to go.
You may find it easier to limit your number of credit cards to one or two. Then only use them to buy groceries, put gas in the car, or for online shopping. In other words, use credit cards as a pseudo-30-days-same-as-cash loan.
By charging what you can afford to pay off in 30 days, you’ll be building or maintaining your credit score. Plus, you’ll stay within budget and possibly score any perks that come with using the cards. These perks could include travel points or reward cash to apply toward other expenses.
2. Outline Your Goals
When it comes to money, everyone’s short-term and long-term goals will look a little different. Still, if you don’t write down your aspirations, you’ll continue to chase them. Start with the big picture, such as paying off a mortgage eight years early or establishing an emergency fund. Then, look at what steps you’ll have to take to get there.
Maybe you set up two forms of direct deposit with your employer. Send 90% of your paycheck to a regular checking account and the remaining 10% to your emergency savings fund. Keep doing this until you’ve saved three to six months’ worth of income. You can always make adjustments according to changes in your pay or essential expenses.
Goals that involve paying off debt might be a little more complicated, but not impossible, to figure out. You’ll first want to determine how much wiggle room you have in your budget. Second, you’ll need to see how much extra you’ll have to pay toward debt balances to meet your timeline. Amortized balances, such as mortgages, may require advanced calculations or professional advice.
When mapping out your payoff plan, knowledge of financial calculators or debt payoff methods can come in handy. The snowball, avalanche, and consolidation techniques are the most popular. Choose to tackle your smallest balances or those with the highest interest rates first. Alternatively, you could combine all your balances into a single loan or account with a lower interest rate.
3. Use a Budgeting Method
A simple way to create a budget is to track your expenses for a month or two. Then categorize what you spend and identify areas you could possibly trim. There could be changes from last year that require adjustments. Perhaps you’re working from home now and aren’t spending as much on gas and car maintenance. Maybe this year, you need to up how much money you’ve designated for groceries or home maintenance items.
While tracking or reviewing recent trends in expenses is one budgeting technique, there are other ways to do it. You could use the 50/30/20 structure or the 60% method.
With the 50/30/20 framework, you’ll direct 50% of your take-home pay to essentials, such as housing and food costs. About 30% of your income will go to other things you rely on or like to have. These items might include streaming services and the occasional trip. The remaining 20% of your income goes into savings, including investment and retirement accounts.
Under the 60% method, all your essential and recurring expenses get lumped into one category. You’ll rely on 60% of your income to pay housing, food, utilities, and monthly debt payments.
What happens to the other 40%? Most of it goes toward savings, with 10% devoted to retirement, 10% to short-term funds, and 10% to long-term accounts. Think of short-term savings as your emergency fund contributions and long-term accounts for things like a new furnace. The last 10% is for discretionary or entertainment spending on travel and eating out at your favorite restaurants.
Depending on your income streams and necessary expenses, you might find one of the budgeting frameworks easier to work with. However, these methods may prove more challenging in locations with higher-than-average housing costs. They might also be less realistic for entry-level professionals or individuals with lower incomes.
Smart Money Management
No one wants to stress out about money. But getting smart about it and knowing how to plan out your finances aren’t skills that come naturally. It takes a combination of experience and learning from those who’ve mastered money management.
Limiting borrowing and determining your yearly goals and budget will help set you up for financial success. With a good road map in place, you’ll be able to navigate around the twists and turns life often presents.