I know I promised this Friday night, but in my infinite wisdom, I forgot to email myself the draft of my post. It was therefore trapped on my computer at work all weekend.
I started my responsible spending challenge update post about a week ago, and it evolved in to something so much larger. Once I started typing I just wanted to share so much of what I’d learned. Then I realized since a lot of what I did came from tips (or assignments) Laura had given me, it seemed only right to have her write a guest post. I apologize now for the fact that these will probably be fairly lengthy and wordy posts, but it’s full of super helpful information on getting financially organized.
From Laura: Financial Responsibility
Money is a taboo subject, meaning it’s uncomfortable to talk about with others and that makes it uncomfortable for us to think about! If money is mentioned, it’s always something positive, right? We are all proud of the big purchases we make like homes, cars, jewelry, etc. Having these items has become a way for people to establish their status. Telling someone you are having trouble financially is a way of lowering your status and no one wants to do that. I believe that people tend to only think about the positive aspects of their financial situation and ignore the negative impacts that we all face. Finances are one of the main forms of undue stress for a lot of individuals, which is totally unnecessary because it’s one of the easiest parts of life to manage! I think a wide majority of people do not feel like they are in control of their finances. I know that I used to feel this way and it took me a lot of hard work and diligence to get my financial life under control.
Recently, Stina was looking for advice on how to reduce her financial stress. She recently bought a house and mentioned to me that since then, she has been has been a little nervous about her finances. Here are some broad tips that I gave her for ways to remove financial stress from her life. You’ll notice that we didn’t talk about anything too deep – there wasn’t talk of 401Ks, life insurance, etc. I basically gave her some advice for those people that feel out of control of their finances. Getting in control is the FIRST step. After you master the first step, you can move onto long-term planning.
From Stina: My Introduction
What started as a “responsible spending challenge” aimed at curbing my spending on unnecessary stuff has really evolved into more of a financial responsibility challenge. I’ve taken a lot of action to get myself more financially organized which will lead to saving more money and controlling my spending. As I said, Laura has been an invaluable resource to me. We’ve gone back and forth in emails over the course of the last month, and we’ve work together to put together an awesome series of posts for you all.
Obviously everyone is in a different situation so you may have to tweak her ideas or find something totally different that works for you, but I think the broad concepts here can apply to almost anyone.
From Laura: Steps 1 & 2: Know Your Situation and Make a Plan
1. Know your situation. Do you know how much money is in your bank account right now? How about how much money you owe on your credit cards, student loans or car loan? When is the last time you checked your credit report? Do you feel stress from me asking you these questions? If you don’t know the answer to these questions, you should but there is no reason to feel stress about the answers. You just need to make a plan and stick with it. The first step is knowing what you are working with.
A. Write down right now how much you make and how often that income is coming in.
B. Next write down the obligatory bills that you pay every single month. These will be your housing expenses, insurance, car payment, cell phone, etc. Write down next to those bills the date they are typically due.
C. Write down how much debt you have and write down ALL of your debt. Next to the debt, write down the interest rate you are paying on all this debt.
Optional (this can be done now or much later) D. Now write down all the other bills you pay throughout the year. Do you have magazine subscriptions you pay annually? Do you have a home owner’s association fee you pay once a year? Write down the month that you typically pay these bills. Can any of these bills be eliminated because you don’t use them? Or can anything that is paid in a lump sum be paid monthly “back to yourself” (more on this later) and then you will be slowly saving for this purchase?
I’ll warn you, this system works for people with steady paychecks. In the examples, I use getting paid twice a month. If you work a commission or tip-type job, you’d definitely tweak this system!
2. Analyze and plan for your situation. The hard stuff is done right? We know what we have and we have faced it! But now, we make a plan.
A. Your first priority is paying your monthly bills. Split up your bills into arbitrary time periods based on your paychecks. Each paycheck should always pay certain bills and this will never change. For example, if your cell phone bill is always due on the 25th of the month, set up a system that allows you to pay this bill with your first paycheck of the month. If you have any large bills, split those in half and pay half the bill with one paycheck and the other half with the next paycheck.
B. Your next priority is to pay off your debt. If you have credit card debt this will be the first debt you pay off because it will probably have the highest interest rate. To make this easier, you have to STOP spending money on credit cards. That might seem really hard to do, but the goal here is to have $0 in credit card debt. If you feel like you can’t do this, you are living beyond your means and really need to cut something out of your life that is not necessary! If you are CC debt free, try paying a little extra to your principal on your other loans like mortgage, student loans or car debt.
C. Saving is the next priority. Saving is really hard for some people to do. Try setting up an automatic transfer between your checking account and savings account to occur with your paychecks. Then you won’t be tempted to spend the money on something else. Savings should be used for emergencies or big purchases for enjoyment (vacation, furniture, TV). It should not be spent on daily necessities that you can’t afford this pay period. Again, if you can’t afford your lifestyle, you’ve got to cut back somewhere! Ideally, you should have at least 3 months of your living expenses saved before you should spend your savings on your big fun purchases.
D. Plan your personal budget. Your personal budget will be dependent on all of the three above. It’s the easiest to control but it can also be the first thing to get out of hand. Write down all the things you typically purchase in a month – like gas, clothes, food and miscellaneous expenses. Now cut out anything that you don’t need, or things you can cut back on. Again, if it’s a reoccurring purchase – it should go in the monthly bills pool. Give yourself a certain amount of money to spend every paycheck (or month) and make sure you are staying in that limit. Depending on how important paying down debt or savings is to you, you may have a pretty strict personal budget for a little while.
From Stina: How I Used Steps 1 & 2
Luckily, I started from a much better place that a lot of people who are stressed about their financial situation. My parent’s have always been fairly financially conservative, and as such, I was brought up that way. I’m good at making sure my bills get paid before spending money on other things. I didn’t have credit card debt or student loans. My car loan and my mortgage were (are) the extent of my debt. I used credit cards because I get great cash back rewards, but I always kept the balances low enough that I can pay them off at the end of the month. Answering Laura’s questions wasn’t my problem. My problem was not knowing where to go once I answered them. I had a lot of trouble applying the things I knew I should be doing. Thankfully Laura gave me “assignments” to help me get things in order.
My first “assignment” from Laura was to create a log of all of my bills and their usual due dates. I divided my bills into three categories: housing expenses, personal bills, and monthly credit card charges. (I have some bills, like my gym membership, that get charged directly to my credit card each month. These amount don’t change I did this very quickly in a Google spreadsheet. From this I started working on a budget spreadsheet which is kind of like an electronic version of my check register. I used an example sheet Laura sent me. I really liked the set-up and decided to use the same thing. I’ve set it up as an electronic check register to help me keep track of all my spending. Right now I’ve been working on getting my bills set up to be paid one paycheck in advance. Once I receive my tax refund money and my bonus from work, I’ll definitely be able to get this working. However, if I didn’t have these two substantial checks coming in the near future, I would be transitioning one bill at a time until they were all paid out this way.
My second “assignment” was to open a second checking account, but we’ll talk more about that in Update Part II which will be posted later this week. Keep your eyes out for more tips from Laura and how I applied her tips!