If I went out and asked people for their opinions, I think most would agree that living in today’s economic environment has become a great challenge. The media’s primary focus is on the health of the economy, and strength of the job market. The thing is, each one of us have our own personal economy. The stability of that economy depends on our ability to maintain a steady income, and have the wisdom to make prudent financial decision.
WHAT’S THE PROBLEM?
Many Americans realize they’re not where they want to be financially. They live day-to-day in fear and frustration. Afraid that even the slightest change in income could have a devastating effect on their lives. They are frustrated that the increased costs of taxes, debt, and daily living expenses are making it incredibly difficult to save toward having a sound financial future.
Over the years, I have personally witnessed families suffer as a result of their struggles with money matters. These harsh realities lead me to asking myself, why? Why are there so many American families struggling with debt? Why do so many families hope and pray that the car doesn’t break down, or the air-conditioner doesn’t give out. Why too, do so many Americans have little or no savings; not even an emergency cash fund.
WHAT’S THE ANSWER?
At first the answers to all my “whys” wasn’t apparently clear. Then it hit me, and the reasons were suddenly clear as day. When you consider that most Americans have little to no financial education, the severity of their money woes should come as no surprise to anyone.
Now, when I say financial education, I’m not talking about going to college. You certainly don’t need a college degree to become smart about managing your money responsibly.
Families make the money decisions they do because they’re in an economic rut; they simply don’t know it. They don’t realize that there are other options available to them. No one has ever sat them down and shown them that there might be more productive ways for them to approach their personal
To offer a bit of guidance, I’ve listed 10 important steps you can take, and why you should take them. It’s all about improving your money IQ. Don’t worry, anyone with a pencil, paper, calculator, and a little time can complete these 10 easy steps.
10 EASY STEPS
- Map your spending – Each month we all have expenses that remain consistent. These expenses are commonly referred to as fixed expenses. These are the bills you have month after month; mortgage payments (rent), car payments, and utilities are good examples of fixed expenses. You may combine and group these expenses if you like. An example of grouping could be the combining of car and credit card payments and labeling them, debt expenses, or labeling rent and utilities as household expenses. Remember, this is your plan, so feel free to list your expenses in whatever way makes the most sense to you.
- Tracking your discretionary expenses – Unlike fixed expenses, discretionary expenses are “nice to have” items, which we are likely to spend money on each month. Remember, discretionary expenses are those expenses over which you have complete control. One big problem that many individuals face, is when they come to the end of the month and have no idea where all their money gone. Discretionary spending is frequently the culprit. It is easy to spend more than we realize on nonessential items. Trips to the coffee shop, going out each day for lunch, buying lottery tickets, visiting a casino, or simply purchasing items we don’t need are great examples of discretionary expenses.
- Involve the family in discussing family goals – Involving children helps them to understand, and it makes them feel as though they are taking an active part in the decision-making process. Children will often resent parents for not spending money on the things they want. They don’t understand what it takes to run a household. They don’t associate working with income (money). To a child, your pay check is an enormous amount of money. They have no idea that it takes a great deal of money just to keep the lights on, put food on the table, and provide a roof over their head. Of course as the parent, you will undoubtedly have the greatest amount of input when it comes to formulating a family fiscal plan (which I like to call a financial blueprint). On a side note, the discussion does not necessarily have to revolve entirely around
finances. This might also be the perfect opportunity to take advantage of the togetherness, and improve the family bond.
- Evaluate your debt – Once you have listed out your expenses, if you find that you have more debt than you are comfortable with; it is important to create a plan for paying down (paying off) that debt. Debt is frequently easy to obtain, but it can be extremely difficult to pay off, especially credit card debt. It’s not that unusual that a credit card is being used to supplement a family’s income. The problem is you see, at some point; you’re going to reach your credit limit. Bye, bye supplemental income, but you still have to make those payments, and to make matters worse; the interest rate on a credit card is typically quite high. Go back through your credit card statements. In the past year, how have you been using your credit? If you find that you are relying on credit cards to pay for everyday expenses, such as groceries, or fuel costs you need to make so changes. It’s within your control to change how you are using your credit. Try curtailing your credit card usage and develop a plan for paying off this debt. Just imagine the extra money you will have at the end of each month if you no longer had to make this payment.
- Create savings goals – We often place everyone ahead of ourselves. What I mean by this is, if you hope to have any savings, it must come out of what’s remaining at the end of the month. This may be a very modest amount, and in some cases nothing at all. Get yourself in the habit of paying yourself first. Treat your savings account like any other bill. If all you are able to budget for savings is twenty-five dollars a month, then make sure you transfer that amount into your savings account each month. Many banks give you the ability to set up an automatic transfer into your savings account. One advantage to having this transfer made automatically is it helps you to become better at managing your money. Pay yourself first, and you will quickly learn how to live on what’s left.
- Evaluate spending – Believe it or not, just about every household has spending that they can reduce, or in some cases do away with altogether. This frees up money for other more practical uses; such as reducing your debt. If you are struggling, then you’re likely looking at having to make some tough choices. There are only two ways to increase your available cash flow. You must either earn more income, or sacrifice some unnecessary expenses. Sacrifice is difficult, and no one looks forward to making those decisions; unfortunately, this is often the only way you are going to get your financial house in order. How you trim your spending is of course entirely up to you. Frequently, a small decrease in several areas of spending is sufficient enough to free up more money than you might think.
- Create a budget – Here is where I will typically lose people. To many, the thought of creating a budget sounds like such a daunting, time-consuming task. In order to make my point, what comes to mind when you think of a budget? Let me guess; things like restrictive, depressing, it’s a waste of time, and impossible to follow are probably at the top of the list. Well, you’re not alone. A realistic budget is, however, a critical tool in helping you to achieve financial success. A personal budget should serve as a guide. If you want to control spending, how else are you going to track your progress? With a written budget, you can rank your spending. By keeping a record, you will be able to see exactly how your actual spending compares with the amount you have budgeted. If you’re spending gets off track, a budget will assist you to more readily identify and correct the problem.
- Be sure to have a financial safety net – Try to set aside three to six months of income into a savings account. This money can be used for unexpected expenses, or to make a cash, rather than credit purchase. Just look at the amount of interest you could save. Another important part of this safety net is deciding how much life insurance you have and need. Life insurance can provide cash if a working parent dies. It might replace this income for a period of time. In addition, you might also want to consider disability income insurance. A good place to start is by checking with your employer. Many employee benefit plans offer short and long-term disability income coverage. If this coverage is not available through your employer, you might want to consider purchasing an individual policy. A heart attack, or illness such as cancer could prevent you from working for months. Disability income coverage is not for everyone, but it is certainly worth considering. Most of us don’t like having to pay for insurance, but the protection it provides when things go wrong can be invaluable to say the least.
- Consider working with a financial coach – A Financial Coach will be able to guide you through the process of analyzing your spending. They can suggest ways to trim your spending, and help you to create a viable budget. By having professional financial help, you won’t feel so alone, and it provides you with a resource for getting your questions answer, as well as receiving helpful advice.
- Don’t put it off – Procrastination is a financial killer. Individuals often want to wait until they are in better financial shape before sitting down and taking a serious look at their affairs. The problem I see with that is; if you continue to do as you have always done, what makes you think your situation is going to improve? Putting your financial house in order is all about learning and changing your approach to handling your money. If you are unhappy with your current financial state, now is the time to take action.
I hope the information I have provided has helped you to think differently about your money matters. Taking a few simple steps, and focusing on your
Regardless of whether you decide to do-it-yourself, or work with a professional (which I recommend). The time is now. Take that first step today, and start to regain control of your
ABOUT THE AUTHOR
Barry S. Taylor is the managing partner of Integrated Planning Solutions and Phoenix Financial Coaching. Seeing the need for better financial education and a genuine desire to help everyday families to improve their financial health. Barry is passionate about helping people to discover a better way to approach their
Through Integrated Planning Solutions, we can help families with affordable protection to build a financial safety net. Phoenix Financial Coaching offers one-on-one coaching to develop financial strategies based on the family’s goals and values.