Straightening out your finances: Part 1
This is the first part in a multi-part series about getting a handle on your finances.
Image Credit: http://www.cs.miami.edu/
Everyone needs a starting point
If you’re just starting to try and get a handle on your finances it can, at first, seem overwhelming. The best first step you can take is to step back and examine your finances. Get an overview. If you don’t already use online banking, this is the perfect time to switch over. With online banking you’ll better be able to track your spending rather than writing down every expense in a register (do people even still do that?!), or just waiting for a monthly report to be mailed to you. An added benefit of online banking is that you can transfer funds between accounts at the click of a button. Even better though is the capability of interfacing with some of the best financial programs out there, such as Mint, Wesabe, and Quicken Online. While I won’t be doing a full review of all of these services at this time (I can’t say I’ve used them all), but I will say that you should look at them and the reviews that are out there and see what works best for you. Sign up, add your accounts, they’re all safe so don’t be nervous, and start to get a feel for your actual spending. I guarantee you’ll be surprised at where your money goes. Of course this only works if you regularly pay by credit or with your debit card.
What to look for
There are a few specific things you should be looking out for:
- Total income
- Total expenses
- Spending habits/categories
- Net worth
Hopefully, you should already know what your total income is each month. If not this is a great way to see everything going into and out of your accounts. I want to highlight spending habits. This is the most important category you’re going to be looking at as you start to examine your funds. Are you eating take out for lunch at work every day? I’m guilty of that one, currently. Are you an impulse buyer who ends up spending several hundred dollars a month on stuff you don’t need, or aren’t planning on buying? What you’re ultimately looking for are the areas that you’ll be cutting down on in the future. Take some time and go in depth. Look at which merchants are getting a large portion of your money. Is this something you need? Can you cut back at that store now without budgeting?
Next you should look at your net worth. Are you spending more than you make each month? Are you dipping into your savings to uphold your current spending habits? Are you saving money each month? If so, what is happening with that? Is it sitting in a checking account? Is it going to a high yield savings account? 401? Roth IRA? Take the time to account for all of your money. It will make optimization much easier later.
Break down fixed and semi-fixed spending
It’s now time to play with the budgeting options in Mint or which ever soft where you are using if it has these tools available. Otherwise, use excel for this task. I use both. Take a few minutes and list each utility, credit minimum, loan payment, rent or mortgage payment, and recurring payment you currently have. This is going to show your base for expenses before all of your variable payments such as food and nights out on the town. Get a feel for what is roughly left over each month. Chances are you can’t cut back on these listed expenses, some you probably can, like Netflix. Regardless, from here you’ll be able to start creating a budget for yourself. But that is a battle for another time. But at least you know it, and that’s half of it right there…
