Life can be difficult, and our finances do not always work out the way we want. The cost of living is rising due to the current high inflation. As a result, your expenses are getting maybe too high compared to what you are making monthly.
Living paycheck to paycheck can be a challenge in today’s world. That is why I am bringing you 8 ways to get your finances under control so you can do a better job managing your money.
1. Start by understanding your current financial situation.
The first step for taking your finances under control is to understand your current financial situation.
Gather all your bills together. Log into your bank accounts and mortgage company. Look at your credit card and car payment statements to figure out how much you owe.
Once, you have gathered all your financial information, sit down, and take a look at it. Get a sense of your financial baseline:
- How much is your debt – credit cards, student loans, personal loans
- How much is your mortgage balance
- What assets do you have – real estate, pensions, stocks, bonds, bank account savings, retirement accounts, cars, boats, etc.
Then, bring all your information to one place by writing it down on a piece of paper, or in the spreadsheet document.
2. Make a budget.
Many people avoid dealing with budgeting, but the easiest way to get control of your finances is to make a detailed and realistic budget that you can stick to.
Do not set up unrealistic goals about how much you are going to save or how much extra money you are going to earn. Use your budget to follow your actual finances.
You can budget manually using a spreadsheet on a piece of paper, a mobile app, or PC software like Microsoft Excel or Google Sheets. Another great way to use budgeting tools is to download and print different types of digital products.
If you have not created any budget before, start by using Microsoft Excel or Google Sheets and put together a spreadsheet document. Write out your monthly expenses on the left side of the spreadsheet.
These could include fixed expenses:
- Mortgage/ Rent
- Car payment/ Car insurance
- Phone/ Internet
and variable expenses:
- Groceries/ Food
- Clothes/ Personal care
- Dining out/ Entertainment
- Activities/ Gym
- Travel/ Vacation
After that, divide your spreadsheet document and on the right-side type in the amount you are planning to spend each month and the actual spending on each category. At the bottom add up the total to make sure that you are not spending more than your income.
Spreadsheet software like Microsoft Excel or Google Sheets is designed for budgeting expense tracking. When you enter amounts in each category, the program automatically performs calculations and adds to the total. It’s easy to use and you do not have to have math skills.
Once you have created your budget, make sure you stick to it. Your budget is your financial road map. It shows the real picture of what you can live on and what you can afford to spend each month. If you are constantly going over budget, you need to cut your spending.
You should try to live on the popular 50/30/20 budget rule. The goal is to spend around 50 percent of your after-tax dollars on necessities, no more than 30 percent on what you want, and a minimum of 20 percent on savings and debt payments.
The important thing to remember is that budgeting helps to build wealth over time by freeing up extra money for savings.
To help you get started, here are a few useful articles you may want to read:
- 20 Easy Ways to Save Money Every Day
- 9 Ways to Organize and Simplify Your Finances
- 11 Tips for Fall Financial Checklist
- 7 Steps for a Mid-Year Financial Check-Up
3. Track your spending and know where your money goes.
I still think that “going on a budget” feels like “going on a diet” because you have to cut back on many things. That is why many people resist the idea. However, you can feel more in control of your finances know where your money is going and become a smarter spender.
The best way to track everyday spending is really simple. You just need to keep all your receipts for the day, then add up each type of spending by category. Add in the total for that specific day using your spreadsheet document or mobile app.
Ask everyone in your family who spends money track their spending for a few months. At the end of each month, look at your spreadsheet and see where your money is going. If your spending is going off the rails, you need to cut back your expenses.
4. Cut expenses and live within your means.
We all love to use credit cards for convenience but sometimes they make it too easy to spend more than we have.
If you leave your credit cards at home and go shopping only with cash in your wallet you will spend less money. If you try shopping with cash for a while, you will be aware of how much you spend regularly. People who do this typically spend 20 percent less.
One of the best ways to cut your expenses is to save on luxuries like dining, entertainment, and international travel.
Today we live in the world of high inflation and rising prices on food, housing, and energy. Many families may need to reduce their expenses in other areas to make ends meet.
If your budget is still out of balance, it might mean more sacrifices. To keep your budget on track, you may want to cut back on frequent expenses:
- Delivery memberships
- Streaming services like Netflix, Spotify, and HBO max
- Your cable bills
- Gym membership and exercise classes
- Data storage subscriptions like iCloud and Google Drive
- Unneeded insurance
- Costly gifts and seasonal expenses
- Pricey cellphone plan
- Takeout meals
- Full-priced items
- Playing lottery
However, do not try to remove all luxuries or things that make you happy.
Being too strict with yourself can cause depression which leads to budget frustration. If your budget leaves no wiggle room, it is impossible to follow it for a long period of time. Do not set up yourself for an overly restrictive or unrealistic plan.
5. Build an emergency fund to keep finances under control.
Everyone needs an emergency fund. Your emergency fund should give you peace of mind because it helps you cover large or unexpected expenses.
Once you have your spending under control you can start building your rainy-day fund.
Many experts recommend aiming for an emergency fund with 3 to 6 months of living expenses. Sometimes you need to increase the fund up to 12 months of living expenses. Even though your emergency fund cannot cover everything, it can still reduce the money you have to borrow from your family or use credit cards and increase your debt.
You should never tap your emergency savings for expenses like leisure travels, holidays, or wedding gifts. These expenses are non-emergency expenses.
A true emergency is a situation that demands immediate action:
- Major car repairs
- Health emergency co-pay or large deductible
- Unexpected home repairs
- Emergency travel
As I said before, having enough money to fall back on means that you do not need to rely on family or credit card debt to cover emergency expenses.
Most people hold their emergency funds in bank savings accounts for easy access.
To start your emergency fund, you can use automatic savings plan to stash some money. If you do not already have a savings account, open one at the same bank where you have your checking account. Then link your savings and checking accounts, so you can transfer money between the two.
The checking account is for your everyday spending to cover the bills and any extras.
The savings account is where your savings will grow over time. Set up automatic withdrawals to pull the amount you need each week from your checking account into your savings.
However, if you want to use online banks like Capital One 360 or Ally Bank you can get a better interest rate than your local retail bank.
Also, you can open high-yield savings account that you cannot dip into it often.
6. Reduce or pay off your debt.
If you look at your budget and do not know how to make headway, it’s time to be honest with yourself.
The hard truth you have to face is that you cannot take your money under control because you are probably in debt. That means that you are spending more than you are earning.
Why is it so important to reduce debt?
Debt is always a slippery slope -the interest will eat massive chunks of your spending money, making budgeting difficult. When possible, avoid debt by paying it off fast and not creating new debt.
When you carry high-interest credit card debt it affects your credit score and your financial progress. Once your debt is paid, you can focus fully on saving, investing, retirement planning, and other financial goals.
There are two strategic and popular methods to get out of debt faster:
- The Avalanche method helps to reduce the debt that carries the highest interest rate.
- The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.
The way the snowball approach works is you arrange all of your debts from largest to small ones. Pay off your smallest debt first. Then once the smallest debt is paid off, the money you were paying toward it will be applied to your next smallest debt.
With the avalanche approach, you will start paying off the debt with the highest interest rate and then move to the next highest.
Debt is always a big weight on your budget. The faster you can get rid of it, the faster you can get ahead.
Here are other strategies to help you reduce or pay off debt faster:
- Refinance a home loan, student loan, or a personal loan
- Negotiate for a lower interest rate on credit card debt
- Transfer credit card debt to a 0% balance-transfer credit card
- Negotiate for a lower interest rate on a home equity line of credit (HELOC)
- Make bi-weekly mortgage payments
The process of paying down your debts can be satisfying. It will work as a big boost to see progress on your payments.
7. Invest your money and save for retirement.
We all know that it is important to save money in your bank account for emergencies. Having enough money to cover unexpected issues is critical. However, we do not want to keep all our extra money in bank accounts because interest rates are not high enough even to keep up with inflation.
Investing allows us to set aside money that grows steadily and can increase over time. While we might not see great gains in the short term, this is a great way to prepare and save for retirement.
If you have a workplace retirement plan like a 401(k), use that for your retirement savings with automatic withholding. If you do not have a workplace account, consider alternatives like IRA, Solo 401(k), and after-tax money accounts like Roth IRA.
- Different Types of Retirement Accounts
- 6 Steps Guide to Organizing Finances for Retirement
- Should I Pay Off My Mortgage Before Retirement?
8. Stick to your financial goals.
When you are trying to get your finances under control you need to stick to your goals and give them time.
Keep a close eye on the progress you are making. Keep in mind that paying off debt, tracking spending, or reducing expenses is not going to happen overnight. Take small steps toward the final outcome.
Each person’s financial goals are different. Start your process by identifying your top priorities. Then figure out how much money you need for each goal and how much time you need for reaching it.
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