If thinking about money keeps you up at night, you’re not alone. With Wall Street doing loop-de-loops, mortgage rates tightening and gas prices up, who is able to stick to a budget these days? But one of the biggest stresses out there, is not knowing exactly what you owe, what you have, or what things truly cost. You need to get your brain around your debt, no matter how painful it is. Only then can you start working on a game plan to get back on target.
Step 1: Talk it Out and Set Goals
This is the icky part, but it’s well worth it in the end. Get a babysitter, or leave the kids with your mom, and sit down with your significant other. Make sure neither of you are hungry or distracted. Talk honestly and openly about your wants, needs and goals. Remember, you are a team and you need to be in agreement about a plan. Don’t play games or expect your partner to read your mind. Talk it out and vent in a positive way, about each other’s spending habits. Talk about your parents’ spending habits and what you grew up with. It’s important to recognize that money and material are very emotional things for people. Until you embrace that, you aren’t going to get very far.
Step 2: Understand your Family’s Budget Needs
First, you need to sit down and figure out your real needs. Break it up into two categories, variable and fixed costs. For example, rent, car insurance or your mortgage is pretty much the same each month, so that’s fixed. Food, clothing, maintenance and vacations change from month to month. If you can, try to figure out what you spent over the course of the last few months and average it out. Give yourself a little padding as well. Don’t forget the little expenses like Friday pizza night and DVDs from NetFlix.
Step 3: Use Money Tracking Tools
To stay on top of where your money is going, start using a journal, financial software, such as Quicken or Microsoft Money, a personal data assistant (PDA) or even a big white board. “It’s a wake-up call to see how much money you’re really spending on those lattes,” says Denver-based financial adviser Judith Briles, author of Money Smarts: Personal Financial Success in 30 Days. “One a day at $3 a pop adds up to a whopping $1095 a year.” Try using as little cash as possible, since it’s hard to track. If you aren’t charged extra for it, use your debit card for even the smallest purchases. This way, you’ll be able to see it in a bank statement, or download it into Quicken. In Quicken you can create categories, so if you are diligent and categorize every little debit purchase, it should give you a clear picture of how you are spending your petty cash.
Step 4: Get Organized and Automate What You Can
Do you travel and find it’s hard to keep all of your bills in one place? Is it difficult to sit down and write out check after check or look at statements? In this day and age, you don’t have to do that anymore. Consider using online tools such as Paytrust.com, Wepayyourbills.com, or your local bank’s online bill payment services. Paytrust is a few dollars a month, however it has some definite advantages. When you open an account you are given an address where all of your bills should be mailed. Your payees will either set up ebills or mail their paper bills to Paytrust, The paper bills are then scanned in and you can see an image online. When a bill comes in, you get an email telling you the amount and date the payment is due and you can pay it online. If you know a bill will be a certain amount every month, you can also set the system to automatically pay it. At the end of the year you can also purchase a CD of all of your bills and payments for the year. One other bonus is that it cuts down on junk mail, since most of it goes to that billing address.
Also, don’t forget to take advantage of your bank’s online services. Being able to send a check out online can be very handy. And viewing your statements and balances will keep you on top of things. Make it a habit to check your balance often. Consider doing it once a day until you feel you are back on track.
Step 5: Create a Money System
During your sit-down with your partner, agree upon a set of rules on how and when you will spend, and what is considered a petty cash expense. For example, if one of you needs to make a purchase over $200, that person gives the other a call to make sure you are both on the same page about it.
Everyone does things a little differently so adapt this idea to work for you. Consider having multiple bank accounts to help you stay focused on your spending. Keep one bank account where your paychecks go and fixed expenses get paid out of. Keep another account just for variable and petty cash expenses.
Once you figure out a budget for things like groceries, entertainment and dining out, decide what you should spend for a week. Then, set your bank account to automatically transfer that amount into your “variable and petty” account once a week, and use the debit cards attached to it for making those purchases. As the week goes on, you’ll be able to tell when you are getting close to your limit. Don’t supplement with your credit card or you won’t really be sticking to your agreed upon budget. The only time to consider breaking that rule is if you are buying a big ticket item and want the extra protection a credit card can provide.
Step 6: Take Charge of Your Credit
If you have outstanding balances on your credit card, Briles suggests calling the 1-800 number on the back of the card and telling them that you’re being inundated with offers from other companies to transfer your balance to their cards. Then ask what they’ll reduce the interest rate to if you stay with them. “If you pay your bills on time, 80 percent of the time they will reduce your interest rate.”
To pay your credit card balance down, always pay more than the minimum payment. You only need one or two credit cards: if you have more outstanding balances consolidating them into a home equity loan can work if, and it’s a big “if”, you don’t run up the debt again, says Briles. “The stats are against people; they usually start charging again and then the problem gets worse.” Experts call that “reloading.” If you’re likely to go down that path, consider talking to consumer credit counselors, where you can get advice on improving your credit. One thing not to do is close out all of your cards right away. The rules are always changing but generally, it could affect your credit score negatively. If you don’t trust yourself, consider taking your cards and putting them all in a safe, tucked away out of site.
Step 7: Find Ways to Tighten the Belt Painlessly
Are you really getting the best rate on your car insurance? Your mortgage? Homeowner’s insurance? Life insurance? Are you getting a multiple policy discount? Did you take a defensive driver course? If so, you should be getting a break on your car insurance. Are you paying for a DVR box on the extra TV that no one watches? How much are you paying for that magazine subscription when you haven’t even looked at it in awhile? Should you think about changing your phone plan? Are you filling out your company expense forms diligently? You could be paying finance charges for that sales trip that you took two months ago and haven’t submitted yet.
Are you buying books at the local retailer and renting DVDs, or could you stop by the local library and borrow the same things for free? Are you paying full admission for museums and events? Ask your library if they have a family fun pass or offer a discount card. Do you look at the prices in the supermarket or do you just pick up what looks good. If you did a little more cooking and freezing, could you eat out less? An excellent book to help squeeze out hidden savings is called Miserly Moms, by Jonni McCoy.
Also, talk to your accountant to make sure that your W2 withholdings are just right. The idea is not to owe too much, or get too much back. You may think it’s great to get a big, fat tax refund each year. But what you actually did was give Uncle Sam a loan—interest free! That’s money that should have been in your pockets all along, or sitting in your account earning interest.
Step 8: Start Saving
Start working on putting away a little each month. Your goal should be to have the equivalent of six months of your salary in an emergency fund, explains Briles. But forget about sticking it in a run-of-the-mill savings account. Instead, put it in a money market fund, which will earn more interest. Consider putting it in a separate bank than your checking accounts. In other words, make it a little difficult to get to, so that you won’t be tempted. ING Direct for example, has typically good rates and allows you to save in various buckets. So you can save money separately for emergency, vacation or a new baby. To compare mutual funds, check out Morningstar.com or visit Bankrate.com to see return rates.
Step 9: Get Insured
“You buy insurance to protect those who are dependent on you. If you have no one who is dependent on you, you don’t need it,” says Briles. “Mothers of children need coverage. If you’re a stay-at-home mom and something happens to you, there is still a huge cost to replace you.” Opt for a term life insurance policy (10 or 20 years depending on the age of your children), which is cheaper, she suggests. Not sure how much coverage you need? The common number that is used is seven times your gross annual earnings. And remember, rates go up as you get older.
Step 10: Put it in Writing
It’s also prudent to update or write your will. “Too many families don’t have a current will,” says Briles. You want to make sure you answer questions such as “who will take care of my kids” and “who will take care of my assets after I am gone?” Consider selecting one person to care for your children and another to oversee the funds. You can download legal forms at Socrates. It costs a few dollars to notarize papers like these and if you have an account, some banks do it for free.
Step 11: Take Care of Your Future
Talk to a financial planner about creating an investment plan. Keep in mind that you can make changes when you need to. Some financial planners charge a flat fee, others do it for free so that you will invest in their products, for which they get a commission. You can get a decent planner either way but you want to make sure his suggestions are in your best interest, and not the one that offers the best commission rate for him. Don’t be afraid to ask what’s in it for him. A great tool that will help you get an idea of what knd of help you need depending on what stage of life you are in, click here.
Financial Planners of America is a good place to start looking. Click here to find a planner. Other things to think about are your 401K, which is a great way to save for retirement. If your company matches a certain amount, try to at least put in that much since it’s free money. Don’t forget to talk to a planner about other investment and savings tools such as an IRA, and Roth IRAs. Click here for a great short course on retirement planning developed by Purdue University.
Step 12: Save for the Kids
If you want to save for your child’s secondary education, contribute to a 529 plan. “Open it up to the masses,” says Briles. “Tell relatives who want to give your children monetary gifts that they can contribute to the child’s 529 plan instead.” Anyone can contribute to a 529 plan, which is processed through a broker. Visit Savingforcollege.com for more information.
Keep in mind that socking money away for the kids’ education should come second to savings for your own future. “Women are always more focused than men on setting aside money for kids and school,” says Briles. “Just like on a plane, you put on your oxygen mask first, then your child’s—it’s the same with money. Put aside money for you first. There are always ways to get funding for college.”