A tiny snowflake is barely noticeable. Yet when enough snowflakes fall at once, they can create a devastating blizzard. Money is the same way. We spend a small amount here, make a few minor purchases there, and suddenly we are under an avalanche of debt we never expected. Managing money to avoid or overcome debt is all about making the most of what you’ve got.
Get the Picture
The first step to managing your money is figuring out how much you make. Look at your take-home pay and see what you are working with. If you get the same paycheck each period, this is easy. If you have variable hours, earn tips, are self-employed, etc., you’ll estimate your income based on past earnings adjusted for any future changes you know about.
The next step is to figure out what you’re currently spending your money on. Determine what sources of information you have to work with: old check registers, credit card and loan statements (some credit cards also have year-end spending summaries by category), receipts for major purchases, a computerized accounting program like Quicken, etc. To get a handle on cash spending — including smaller day-to-day purchases that can add up quickly — spend a month writing down each expenditure in a notebook. Then, pull all this information together and sort your expenditures into categories (the budget worksheet on page 41 includes common spending categories).
Based on your past spending, you can project how much you need to spend per month in the categories you have identified, based on your current habits and choices. You will use different methods to estimate spending in different categories — and a good bit of common sense. Certain monthly expenses, like your mortgage or rent payments, are already determined or fixed. Other monthly expenses are variable, like groceries or gas for the car. For those, you can take a few typical months of past spending and divide by the number of months to get an average monthly amount. Still, other expenses are periodic, such as bills you pay on a quarterly, annual, or as-needed basis. Make sure those are in the mix so you are not surprised. Figure out the total over a one-year period and divide by 12 to get your monthly average.
Make some notes about the assumptions you are making in different categories. This will help you later as you determine the right choices to meet your financial goals. It’s also helpful to understand which spending categories are essential (for example, rent/mortgage) and which are discretionary (for example, eating out), so you know where you can economize, if needed.
Also, be sure you budget for savings. Your first priority is creating an emergency fund of at least three to six months of living expenses (six to nine months for people with variable income). Keep this in an interest-bearing but immediately accessible account. Other priorities include saving for your retirement, children’s educations, and major purchases, such as a car.
Once you have an average monthly spending amount in each category, add them up to see your total expenses per month. Now do a reality check: How do your monthly expenses amount align with your income? If your income is higher than your expenses — congratulations! You can focus on debt repayment and savings/investment (see below). If your expenses are higher than your income, there are lots of ideas below about how to cut and control expenses.
Make a Plan — and Stick with It
Now that you understand your monthly income and expenses, you’re ready to create a spending plan (also known as a budget). In each of the spending categories you have identified, set a reasonable amount to spend each month.
Of course, there are some expenses that do not occur on a monthly basis, such as a semi-annual insurance premium. Use one of two approaches to handle this. 1) Do a month-by-month budget and slot in each periodic expense when it will occur. 2) Use a monthly average and set aside that amount each month so when the bill comes due, you have the funds to pay it.
Create a budget that allows you flexibility to borrow from different categories if you need to. One option is to open up different online accounts through an online bank. A similar tool would be to have different envelopes with categories written on them. There are also several tools online to help, such as Mint.com. Online bill pay, available for free from some banks and credit unions, is a great way to manage your finances and reduce your risk of paying bills late. If you do get off-track in one of the categories, you’ll need to adjust spending in other categories to make up for it.
You can stay on your budget by reviewing and updating it monthly. Keep track of what is due when and how much you owe, and be sure to pay your bills on time. This will be easy if you keep all your bills in a binder. Each bill for that month is inserted into a clear plastic sheet. At the front of the binder is a list of all the bills owed, the minimum amount to pay, and when it is due. You can check off each bill you pay and write the date and the amount paid. If you pay by phone or online, you should write down the confirmation or transaction number as well, in case there are any problems.
This system can help you keep your finances all in one place and also serves another important purpose: If the money manager in the family is incapacitated, another person will need to take over the finances. He or she should know the name and amount of each debt, the minimum payment due, the due date, the account number, and how to contact the company. Keep login information and passwords handy in the same place as well. (But store it somewhere secure so no identity thieves have access to it!)
Ways to Cut and Control Spending
After you understand your current spending habits, you can rethink priorities and cut back as needed. Can you make lifestyle changes that will save you money? Have you considered the savings if a parent or family member stays home with the kids? You may save on commuting costs, car insurance, business wardrobe, professional lunches, child care, etc. How about sharing child care duty or trading services with neighbors or friends? What other areas can you cut back on? Tobacco products, liquor, and prepackaged foods are all expensive. Is your cable or satellite TV necessary? Would switching your cell phone plan or company save you money? Can you cut your home phone and just use your cell? Can you brown-bag lunch at work?
Look for easy ways to save money every day. There are many ways to reduce utilities costs, for example, from unplugging chargers and appliances (like coffee makers and computers) when not in use to investing in compact fluorescent bulbs and low-flow showerheads. Secondhand shops are a reliable way to save money, but there are also swap meets, yard sales, rummage sales, overstock stores, and dollar stores. The Internet allows you to comparison shop to ensure that you are getting the best deal on a new purchase. Learn when things go on sale, and plan your purchases for those times. Check Consumerreports.com for advice on when and where and what to purchase. Take care of what you have. Routine maintenance helps your car run better, last longer, and get better fuel economy. Depending on your location, you can recycle cans and other materials to earn money, help the environment, and possibly reduce trash collection costs. Every little bit of money saved will help you improve your finances.
How can you stay within the limits you have set? Be creative! Save money on food by pre-planning meals. Buy milk and bread in bulk and freeze the extra. Some top readers’ tips include nursing, rather than formula-feeding, your baby when you can; wearing your baby in a carrier to save on strollers; making your own baby food; using websites to find items people are giving away or selling for cheap (for example, on Freecycle or Craigslist); using cloth diapers; making more food than necessary and freezing the extra; and taking turns babysitting with friends. Even buying a smaller size of a grocery staple will cost more in most cases than the economy size. Maybe you can find someone to split the cost with. Sometimes, all you really need is a change of attitude or a different perspective. For example, “Children really don’t need lavish toys, junk food, or fine clothes,” says Sarah Quintanar of California. “They really only need parents who love them.” Kathy Sheehan of Maine tells us that consignment shops helped her earn extra money, and they are a great place to find nice clothes, some with tags still attached.
Another way to save some money is to evaluate your tax situation. You may need to adjust your tax withholdings so that you are only claiming the deductions you need. Don’t give Uncle Sam a free loan — keep your money instead and put it into an interest-bearing account, or use it to pay down your debts. It feels good to get a big tax rebate check, but that’s a year’s worth of interest you are giving the government for free. (Don’t expect the IRS to give you that same courtesy if you owe them!) Tax mistakes are expensive. Be sure to use a reputable preparer. Also, make sure to take the correct deductions on your taxes where applicable. If you get audited and end up owing back taxes, pay your tax bill before anything else, because IRS interest compounds daily. You may lower your tax bracket by taking pre-tax deductions like certain insurance or retirement policies. Also, look into a flexible spending account for child care expense reimbursement.
Once you cut back, if you are still spending more than you make, you can figure out additional ways to save money. Maybe it would help to switch your bank accounts to a credit union, which often has exceptional rates on borrowing as well as certificates of deposit. You can try to refinance all your loans, negotiate lower interest rates, or consolidate your debts.
Have you looked into the governmental help available in your area? What about state health insurance or county medical clinics? Have you checked to see if you qualify for low-income assistance with rent, utilities, or other local programs? Have you researched local religious congregations and charities to see what services are available? Governmental grants, loans, and free scholarships are often easy to find on the Internet or at a good library. There are also many pregnancy resource centers that will provide assistance with diapers, clothing, and baby food for free. The federal government also provides the special supplemental nutrition program for women, infants, and children (also known as WIC) to help low-income moms. If you’re still not where you need to be, consider selling some of your household goods, building a home business, or getting a second job.
Not All Debt Is Created Equal
There is good debt and bad debt. Good debt is debt that you take on with a purpose in mind. A mortgage is typically considered good debt, because a house is a lifelong investment that will continue to pay dividends and possibly increase in value. A student loan can be good debt if it allows you to improve your standard of living in the future. If you choose to take on debt, it should be for something that will appreciate in value or provide you with increased income.
Avoid getting into debt on items that depreciate instantly, such as computers, televisions, clothing, and other goods that you couldn’t quickly turn around and sell for full value if needed. Who wants to be paying three years from now on an outdated computer? For such items, pay cash as much as possible and avoid credit cards unless you are extremely self-disciplined. Paying off the credit card bill every month helps.
If you have fallen into debt, there are fixes available, but many are expensive — and not all of them are legitimate. There are lawyer-assisted debt services, debt settlement companies, loan modification companies, “credit repair,” credit counseling, debt consolidation, etc. Some of these services run about $35 a month, while others charge a fixed, one-time fee of $3,500 or more. If you do use any of these services, be sure to check their reliability through the Better Business Bureau or local Chamber of Commerce. Also, make sure that you understand all the conditions of the plan you are agreeing to. Some companies make you promise not to open another credit card while you are in their program. Other companies will harm your credit score simply by doing business with them. Some programs limit your ability to purchase a home.
You can fix your debt yourself by slowing or stopping your credit card spending and making a plan for paying it off. Some experts recommend paying down your highest interest rate cards first; others say you will feel more empowered if you get rid of all the smaller balances first to feel a sense of accomplishment. As you are working on eliminating your debt, it may help to switch to cash to better track and control your purchases.
Protect your future and the future of those you love by creating a will and/or living trust. Also, begin investing for retirement in a 401(k), Roth IRA, or 403(b) as soon as possible so that you can benefit from compound interest. (If your employer matches retirement fund contributions, count your blessings and take full advantage!) Low-cost index funds are also a predictable way to slowly build wealth. As noted earlier, you should also build up an emergency fund worth about six months of income. This cushion will help with unexpected expenses. You can do this by having money automatically transferred every month from a checking into a savings account. Another way to plan for the future is to buy the most life insurance you can afford. Term life insurance is the best value for the money, but compare whole life policy prices and see what works best for your situation.
Pay off all your debts and start saving for your own retirement before saving for your child’s college education to protect your children from having to finance your standard of living in your old age. Help your children learn good money management when they are young. Teach them about saving and responsible spending — and be a good role model.
Invest in your child’s education. The good news is that parents who are involved in their children’s education and provide them with learning opportunities are more likely to have kids who do well in school and succeed. Your child’s development and education are keys to a successful future, so it is a good idea to invest in the strategies that help him or her develop. Research points to inexpensive or free things parents can do to help children learn: having books available; giving children opportunities to see adults reading; reading to children; limiting children’s television viewing and Internet time; taking them to museums, zoos, and libraries; being involved in their education; helping them with their homework; or even just talking with them about their day.
Don’t Fall Victim to Predatory Lending Practices or Other Self-Driven Mistakes
It is important to know that some organizations and institutional practices can worsen a weak financial situation. For example, check-cashing institutions charge fees far outside the acceptable range for traditional financial institutions. Pawn shops and rent-to-own stores also may charge excessive fees or interest.
Be aware that with modern credit reporting, missed or late payments can have serious consequences. Companies can increase your interest rates for no other reason than a late or missed payment to an unrelated company. If you fail to pay a utility bill, providers may require a deposit in the future, and insurance rates may be higher for more economically depressed areas. Educate yourself on your options and research them before making a choice that could negatively impact your finances.
Coming in from the Cold
When you start to feel control over your spending and know what money you have and where it is going, you start to see that your financial goals are possible. Remember that money management is mostly organizing your finances and keeping them updated. You can accomplish your goals if you just take one step at a time. Once you conquer one debt, you can move on to the next one.
Also check your attitudes and assumptions. Remind yourself that you will not always have your bills and debt, but you will always have the time you shared with your child to look back on. Your child is a joy, not a burden, and you are doing your best to assure that he or she grows up responsible, happy, and successful. You don’t have to spend money to show love. Amy Ekblad of Michigan understands the emotional and financial strain of raising a child alone, but she reminds us that this situation is only temporary: “As a once single, teenage mother, [I can tell you] that though it seems like you will never get out of where you are, you will. Life will not always look like this. I look at my 17-year-old son now and am so glad he is here with me. We had a few rough years, but we survived.”
Just as the effects of a winter blizzard eventually disappear, your financial picture will improve by making small adjustments and sticking to your goals. The hardest thing about shoveling out after a storm is taking the first step outside. Similarly, the hardest thing with managing finances is just taking that first step: figuring out where you are and how to get where you want to be.
By Celina Tinsley
Celina Tinsley is a high school English teacher in the tenth year of her career. She lives with her family in Lake Elsinore, California, where she enjoys attending church events, spending time with her daughter, drawing comics, and writing.
How can you stay within the limits you have set? Be creative! Save money on food by pre-planning meals. Buy milk and bread in bulk and freeze the extra. Every little bit of money saved will help you improve your finances.
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