Save, Spend, Give
Save some, give some, spend some. Not always in that order but that is the common concept for most of us when it comes to money. A simple strategy. Spend less than you make. It is not as easy as it sounds. Just like cooky diet plans, odd ball financial management plans are equally unreliable. Just like with most unsustainable diets, foolish financial strategies also fail. The challenge with smart, better money management is that it involves delayed gratification. If we want to be secure in retirement then we must deprive ourselves of certain spending habits now.
A Simple Strategy
Avoid becoming a member of the statistic known for over spending and not planning smartly for retirement. No magic diets, no slick plans are needed. The fundamentals of smart living which applied 100 years ago still apply today. Follow these smart, better money management steps for a better shot at a secure financial future.
- Conduct Financial Inventory
- Track Monthly Expenses
- Pay Off Debt
Taking an inventory of your financial situation means developing a budget. That budget should include a balance sheet like the one in this example at Investopedia. We will not go through the details of the entire balance sheet here but there are a few basics to get you through the relatively painless process. Cash is easy, you simply count what you have. Assets might be more challenging. Assets are generally anything of value which you own. Assign a fair value to each asset. Fair value should be considered through what current market value is like what similar items are selling for on Craigslist. Your debt is self explanatory. Simply subtract all of the money you owe from your assets.
Expenses are almost always higher than we expect. Fact: Small business owners often find that their start up expenses are twice what they expected, yikes! There are always unexpected personal expenses. Expenses are generally divided into two types: fixed and variable. Fixed expenses are those which you cannot change much. Items like rent and car note are fixed, unless you sell your car. Variable expenses are those which you can manipulate without too much effort. Food, fuel, entertainment, clothing are all examples of variable expenses. List everything you spend money on in a month. Categorize that list into things like food, fuel, rent, utilities, etc. Avoid misc. category and the temptation to shove everything into that column. Give every dollar spent a name or category.
Let us be clear. To the smart person wanting better money management, debt is a bad idea. Debit is also a reality of American life, the working professional, the student, and the small business owner. Avoid debt where you can. If you must borrow money then borrow money for items which provide an income or for items with stable equity. Do not borrow money to buy a Mercedes for your weekend drives. Borrow money to buy a delivery truck for your moving business. Pay off debt starting with the items of highest interest first. You can negotiate with credit card companies for roughly 30% of what you owe if you are tough enough and persistent. It is not likely that you will negotiate with Federal Student Loans or IRS debts because those guys simply do not care, they do not need your money, and they can wait forever. Get it?
Better Money Management Bonus Step
Once you conduct that inventory, develop a budget, manage your expenses, and pay down debt then it is time to relax, right? No, not yet. Let us remember the goal we set at the beginning of this long snoozer of a post. Our goal was financial security in retirement. Now it is time to invest. The common wisdom is that the best path to financial independence is to pay yourself first. Make the first payment from every paycheck a payment to a retirement fund. That action can often be done automatically with your bank. Trust me, your bank will be all too happy to take your money and put it in a saving account for investments. A nerdy but fun investment calculator can be found at Investopedia. Play around with that calculator. Learn how just a small amount of money saved can yield big returns by the time you retire.
Spend some, save some, give some. Nothing revolutionary here folks. No crazy diet plans and no silly, difficult budgets to follow. Just the same dumb thing our grandparents knew every day of their lives. Spend less than you make. Save more than you earn. Give to others in need. What a wild concept!
What is money? Odd question is it not? Better money management cannot happen if we do not the definition and purpose of money. If you assume your finances are in order then read this before you answer with confidence. The steps in this smart process will challenge your thinking of your idea of better money management.