The best thing I have learned is to concentrate on the high level, overarching pieces, of your financial situation. In finance it can be so easy to stress about detail, as I am prone to do, especially with investments and cash flow, but at the end of the day think about what really matters. What are the big rocks that are going to get you where you want to go?
Live within your means by spending less than you earn, save 15% of your income if feasible, and invest for retirement. I am pretty happy with those three statements. Stressing over the details of a budget can be useful, and may be necessary, especially if you have no clue where your money is going, or need to change some bad spending habits. That said, most of the time you just need to keep things simple. Listed below are five things to keep track of for success. This is common sense stuff but good reminders.
#1. Know Your Income – How much money do you have coming in?
If you have a consistent paycheck coming in then creating cash flow projections is pretty straight forward. If you are self-employed or freelancing then this gets a little more complicated. Figure out how much money you will have coming in net of taxes and retirement contributions. Know exactly how much and when your checks are hitting your bank account. This will help you determine when funds will be in the account in relation to bills coming due. This will also help you feel in control. This is your starting place.
#2. Know Your Expenses – What are your basic living expenses?
Write out your monthly expenses. These are BASIC bills and expenses such as, groceries/food (not restaurants and drinking money), cable/internet, gas, mortgage/rent, cell phone, etc. Take this number and subtract it from your income number. This is your net discretionary spending number. Now I understand everybody has variable expenses and things come up from time to time. The point of this exercise is to raise awareness and think through your spending habits. If you have $1,500 left over but nothing to show for it then there may be a problem. Do not forget about your credit cards either.
If you’re already saving, great! I love the rule of thumb, save 10% to 15% of your gross income. I always encourage people to save more if possible. These five tips can help you understand your capacity to save. You can think of your monthly savings as an expense for budgeting projection purposes as well. Always pay yourself first.
You do not want to back into savings by saving what is left over after expenses or end of month. The left over is usually spent on something. We are very good at finding things to spend money on. If this process is not automated, or done on the front end, it puts your entire savings and retirement in jeopardy. That being said, if you are not saving, running simple income and expenses number as stated above can be useful. This helps you determine a realistic number to work with.
Automate, automate, automate….Make saving as EASY as possible. Utilize resources available to you like your employer’s retirement plan and paycheck deductions, as well as your bank’s auto-draft capabilities. Set up multiple accounts for savings goals, if that will help you. Keeping a simple spreadsheet of savings goals can be helpful too. I use google sheets and pull it up on my phone for convenience.
Monitor your progress. Check your accounts regularly. I monitor my checking account on a daily basis. You always want to have a good idea of what is going on with your spending. This is prudent for fraud as well. Once you have a set savings plan in place this process should be easy to keep up with and you not have to think about. Monitor your progress on a regular basis to make sure your long term savings and investing goals are being met. If you get off track, review your spending habits, and see what needs to be fixed. This is trial and error.
What works for some people does not work for others. Many times we are changing habits that have been formed over many years. These habits and ways of thinking do not change over night, so be easy on yourself and others involved.
If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER at Applied Capital. Email him at [email protected]
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