Setting goals and getting organized
Start with setting goals. Financial goals are really just your life goals with a price tag identified. Some may be short-term (less than one year), some may be long-term (more than five years), and others in between. The important thing is to determine how much they cost, and when you want to achieve them, so you can determine how much you need to save each month. By writing down your goals and adding them to your budget, you’ll have a strategy to attain them no matter how busy your day-to-day gets.
Speaking of day-to-day, part of money management is organizing mail and financial documents so they are there when you need them (i.e. tax season), and properly destroyed when you don’t. Whether you decide on a paper or electronic filing system, keep important documents together in a secure location such as a safe deposit box or fireproof safe, and shred what you don’t need for tax or other purposes.
Do you have an emergency fund? This should be your next focus because having an emergency savings of three to six months of expenses will help you to stay on track to reach your life goals, even when the unexpected happens. There is no magic number; three to six months of essential expenses is ideal, but start small and build consistently.
Open a separate savings account for your emergency fund. A savings account is ideal because your money will earn interest/dividends, won’t be confused with your monthly bills, and also because it should be accessible in case you need it right away. It would not be wise to keep your emergency fund in a Certificate of Deposit (CD)/Share Certificate or other long-term account because there may be penalties for withdrawing early.
A common question is “when should I start my emergency fund?” The answer is “today!” Although you may be excited to pay off debt or save for other life goals, your emergency fund should take priority. Think of it as a safety net. Unexpected expenses will arise no matter how carefully we plan our budgets. Without an emergency fund, you may find yourself unable to pay the bill for a visit to the emergency room, for example. If your only option is to put it on a credit card, you’ll end up paying more in interest, which will set back all other savings goals and perhaps even jeopardize your ability to make ends meet each month.
The most important part of an emergency fund is to use it only for emergencies, otherwise you won’t have it when you really need it. An unexpected auto repair is a good reason to use your emergency fund if you rely on your car to get to work; routine auto maintenance or registration are not emergency expenses because you should be planning for them in your regular budget.
Do you know where your money goes? The only way to know for sure is to track your spending for at least one month. This is an important step before building a budget because it will identify your actual expenses.
- Cash – if you use cash, keep receipts and write down purchases without receipts
- Plastic – if you use credit or debit cards, all of your transactions are available in online banking or monthly statements
- Budgeting software or apps – these can be convenient for capturing receipts or importing transactions directly from your accounts
There is no one best way to track spending; the important thing is to choose a method and be consistent.
After you’ve tracked your spending for at least one month,
- Sort it into categories
- Add up how much you’ve spent in each
Build a budget
You are now ready to build a budget! Budgeting empowers you by telling your money where to go. By sticking to a budget, you will achieve the life goals that are important to you. The basic rule of budgeting is that your expenses should never exceed your income.
- Write down your net (after-tax) income each month
- Gather your expenses from the one month you tracked. Are there any periodic expenses such as auto insurance that are only due once or twice per year? Add these to the expense sheet and figure out the monthly average by taking the total for the year and dividing by 12. It’s important to include these so you have the money set aside when these bills are due
- Add “emergency fund” as a line item and decide how much you can contribute each month until you have saved about three to six months’ expenses
- Remember those life goals you wrote down? Add each one to the budget sheet, with the monthly amount you need to save in order to achieve them. It’s just as important to include saving in your budget as it is to include expenses
- Total all the budget items (expenses and savings). Subtract the total from your income. If you have money left over, that’s great news! You can decide where to put that extra money, whether it’s adding to a savings goal or your emergency fund. If your expenses exceed your income, take a look at your non-essential expenses first. Are there things that are “wants” and not “needs” that you can cut back on or eliminate?
For your long-term life goals such as retirement or your child’s college education, talk with a financial advisor about accounts that will yield a higher return than a savings account. Remember that by telling your money where to go and sticking to it, your money will work for you, not against you.
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