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Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.
Part 1: Tracking Your Spending
Record your spending. Record all purchases that you make in a month.[1] Write down the amount spent, the day, and the time. Some of the more popular methods include:
· Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.[2]
· Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.[3]
· Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.
· Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.[4] [5]
Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following:[6]
· Rent or mortgage
· Insurance
· Car payment
· Utilities
· Debt repayment
Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on.[7] Break out the amounts spent on the following:[8]
· Groceries
· Eating out
· Gas
· Clothes
· Hobbies/entertainment
Pay attention to when you spend the most.[9] Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?
· You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.
· If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.
Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.[10]
· The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.
Part 2: Looking Closer at Your Debts
Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following:[11]
· Name of the account
· Total current balance
· Monthly payment
· Interest rate
Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.[12]
· You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.
Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:
· You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.
· Call up your credit card companies and ask for a better interest rate.[13] This will lower your monthly payment and your overall debt.
· Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.
Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:
· You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.
· If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance.[14] When you get back on your feet, you can begin making payments.
· Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.
Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:[15]
· Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.
· Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.
· Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.[16]
Part 3: Reducing Your Expenses
Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck.[17] This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.
· If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.
Reduce your spending on food. Stop eating out and instead cook at home.[18] Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.
· Clipping coupons will help reduce the amount you spend each week.[19] Find coupons in your local newspaper or in the circular at the grocery store.
· Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.[20]
Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:
· Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.[21]
· Get your library card and check out books and DVDs instead of paying for them.
· Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.
Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.[22]
· You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.[23]
Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:
· Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.
· Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.[24]
· Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.[25]
Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you.[26] If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.
Part 4: Saving for the Future
Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses.[27] Start small, by putting aside whatever extra money you can spare.
· Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.[28]
· Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.
Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.
· For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.
Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:
· IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.
· Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.[29]
Reference:
1. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.
2. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.
3. ↑https://www.saveandinvest.org/military-everyday-finances/track-your-spending
4. ↑http://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html
5. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.
6. ↑https://www.nerdwallet.com/blog/finance/what-are-fixed-expenses/
7. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.
8. ↑http://www.getrichslowly.org/blog/2014/04/24/how-to-track-your-spending-and-why-you-should/
9. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.
10. ↑https://www.forbes.com/sites/trulia/2016/07/11/new-to-budgeting-why-you-should-try-the-50-20-30-rule/#46feb3b632e9
11. ↑https://www.thesimpledollar.com/10-things-you-can-do-to-tackle-your-debt-right-now/
12. ↑https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report
13. ↑https://www.credit.com/debt/5-steps-to-reduce-your-debt-diy-debt-reduction/
14. ↑https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance
15. ↑https://www.forbes.com/sites/robertberger/2017/07/20/debt-snowball-versus-debt-avalanche-what-the-academic-research-shows/#562363641454
16. ↑https://www.nerdwallet.com/blog/finance/debt-snowflake/
17. ↑https://www.backstage.com/advice-for-actors/backstage-experts/7-point-checklist-analyze-your-current-financial-situation-part-ii/
18. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.
19. ↑https://money.usnews.com/money/personal-finance/articles/2014/03/07/9-steps-to-drastically-reduce-your-spending
20. ↑https://www.consumerreports.org/cro/2013/08/best-coupon-apps/index.htm
21. ↑http://www.experian.com/blogs/news/2012/12/19/fixed-expenses/
22. ↑https://www.thesimpledollar.com/trimming-the-fat-forty-ways-to-reduce-your-monthly-required-spending/
23. ↑https://energy.gov/public-services/homes/home-weatherization
24. ↑https://www.thesimpledollar.com/trimming-the-fat-forty-ways-to-reduce-your-monthly-required-spending/
25. ↑http://www.experian.com/blogs/news/2012/12/19/fixed-expenses/
26. ↑https://www.csmonitor.com/Business/The-Simple-Dollar/2011/0225/Freeze-your-credit-cards-in-ice-cubes
27. ↑http://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html
28. ↑https://www.thesimpledollar.com/is-suze-right-do-emergency-funds-now-trump-debt-repayment/
29. ↑https://www.nerdwallet.com/blog/investing/roth-or-traditional-ira-account/
