It's not hard because you're not smart enough to understand the ideas. No, there is just too much confusing information out there. In an area as personal as personal finance, everyone has an opinion. Usually, that opinion will be completely backwards from the last one you learned. I want you to know that managing your money only has to be as complicated as you make it.
So, I've come up with three simple rules that will keep anyone out of trouble and feeling confident making money decisions. Even you.
Rule #1: Never Spend More Than You Make
What it means: You need to control your spending.
Why it works: In order to know if you're spending too much, you need to know what you're spending. Tracking your cash gets you more involved when you make a purchase. When you're paying attention to where your money is going, you can make smarter decisions.
How to stop over spending:
1. Make a budget.
For one month record all the money you earn and all the money you spend on stuff, debt repayments, or savings. Group your expenses together to get a total for the month for restaurants, groceries, gifts, etc.
You want to see more money coming in than going out of your pocket. If you're spending more money than you're making, you've got some work to do. You won't get ahead unless you get your budget to balance.
If you use debit or credit for all your purchases, your last month's statements will have all the information you need to get started today!
2. Stop paying something for nothing.
Do you have a regular payment for something that you didn't even use?
Maybe you have a monthly gym membership that you bought as part of your New Year's Resolution that you haven't used since February. Maybe you pay a monthly subscription to an online game that you don't play anymore or a magazine you don't have time to read.
If you pay for something you don't use, you've got an easy way to keep more of your money! Do yourself a favour and cancel your service. You can always sign back up later if you decide to use it again.
3. Find ways to reduce your costs.
If you're motivated to get your costs under control: take a look at your monthly totals.
Do you think you spend too much money in any category? Are you embarrassed by any of your spending? Are there any luxuries that don't feel special anymore? Great! You already know some great places to cut back your expenses.
Lower the amount for those categories and try your new budget out for a few months to see how it feels. Your budget isn't set in stone and it's great if you can constantly improve it. Who knows, maybe you'll want to cut more!
4. Make more money.
You can make a budget balance by either cutting your costs or raising your income. If you've been having trouble cutting your expenses, try bringing in more money!
If you want your new income to make a difference, keep your expenses where they are. Don't increase your expenses to match your new income.
Can you think of any ways to earn more money? Would your boss give you a raise? Could you start a side business? Even a little bit of extra income will start to add up.
5. Consider making big changes.
Housing and transportation are usually the biggest items on a budget. But, they're also the items that people will overlook because they're "fixed".
Be bold and question EVERY expense category on your budget. You may find that you could be happy with less and that you could fast track your financial goals by making big changes that will have a big impact.
Rule #2: Don't Pay With Credit If You Can't Pay In Full
What it means: You need to control your spending, really.
Why it works: Paying off your credit card balance each month will let you use your money for something better than paying interest.
When the full balance on a credit card is paid off each month, credit cards can be a smart choice. They are a convenient way to pay and can offer benefits like cash back rewards, replacement of lost or stolen items, or even travel insurance.
With most credit cards when the balance isn't paid in full, interest is charged on the current balance and all future purchases until the card is fully paid off. If you plan on having credit card debt at an 18% interest rate for the next ten years: a $100 purchase will end up costing you $596.93.
How to deal with debt you already have:
1. Call your creditors.
If you have consumer debt, call your creditors and ask to speak to a person. Tell them you are making a plan to pay your debts, then ask if they can do anything to help you.
Credit card companies have been known to slash interest rates, to stop interest for months, or even to write off some of your balance if you can pay in full.
You might be surprised at what they could offer you, but you'll never know until you ask.
2. Never skip a payment.
You may think missing a $10 payment won't make much of a difference. But, missing payments can mean pricey penalties, higher interest rates, and a hit to your credit score. Avoiding this trap is easy by making a payment each month.
3. Acknowledge you don't need to be in debt forever.
Often the biggest obstacle when you are trying to gain confidence in a new skill is you. If you've been deluding yourself with lies like, "debt is just a part of life that everyone deals with," now is the time to get out of your own way and acknowledge the truth.
Not everyone carries debt around. Not everyone lives pay cheque to pay cheque. Not everyone has an empty savings account.
I really want it to sink in that there is a better way. You CAN change your financial situation.
Rule #3: Make Your Goals A Priority
What it means: You have to take steps towards your goals to reach them.
Why it works: Having clear goals with a clear plan for success will give you the motivation to make positive financial changes.
How to make your goals a priority:
1. Identify your financial goals.
Do you want to be debt free in three years? Do you want to save up a down payment to buy a house in the next five years? Do you want to be able to take a sabbatical from work? Do you want to retire in your fifties? Forties? Make a list of all the financial goals that are meaningful to you.
Figure out how much money it will take to reach each goal. Be as realistic as possible about any extra costs involved. For example, if you want to buy a house, you won't just need to save up for a down payment. You'll also have to cover closing costs, moving expenses, and you'll probably want to set aside some money to decorate your new home to make it yours.
At this stage don't worry about having exact numbers. You'll have plenty of opportunities to update your rough numbers over time as you gather more information.
2. Calculate the amount you need to set aside each month to reach your goals.
Divide the total amount of money needed for each goal by the number of months left between now and its deadline. Add these amounts to your list of goals.
For goals that involve paying down debt or saving over many years, this quick calculation will give you a rough amount you can use for now.
Just know that over time interest really starts to add up. For long term goals, you'll probably need to put away more money to meet your debt goals and less money to meet your savings goals that you'd calculate with the quick formula.
3. Work your goals into your budget.
Take the amount you'll need to set aside each month for your goals and add them into your budget. Your new budget won't balance right away. Here's when you discover where your real priorities lie.
Will you choose to increase your income to not give up anything? Do some expenses no longer seem important when you know they're blocking you from your dreams? Maybe you'll realize that some goals aren't very important to you after all, and you'll put them on hold or add a few more years to the time line.
You are the only one who can make these changes. No one else know what really motivates you. No one else knows what will really make you happy. Only you know what you're capable of doing to achieve your dreams.
It's a life changing exercise, and once done, your spending will support how you want to live your life and which goals you truly want to achieve.
Every financial expert out there was once a beginner too. If you've read through this WHOLE article, then you're now ahead of the game. These three simple rules will keep you living within your means, out of consumer debt and working towards the financial goals that matter most to you. All you need to do to get started is write down what you make and what you spend for just one month! If you stick with the rules, you'll never need to worry about your money, because you'll have everything under control.
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