How to Manage Money (Basic Home Finances)

Manage Your Money

Talk to a parent or grandparent who has lived through the great depression and you will immediately realize these folks learned how to manage money - for one simple reason - they had to! They had little or no money. One would think that the basics of home finances would be taught to every student in school, but it is not. So for those who need help whether just starting out or well into your working life, these few steps will help you gain a level of financial control you may have never had before. It takes some work up front, but the rewards are plenty, most of all freedom from worry. So where do you start?

Things You'll Need

• Pay Stubs
• Other documents related to income
• Bills
• Receipts
• Paper
• Pen
• Small notebook
• Make a worksheet or use the Google doc referenced at bottom

Instructions

1. Step 1: Examine where your money is going

   I have often helped friends get a handle on their expenses in a very simple way: write down every penny you spend for an entire month - this means everyone in the family. At the end of that month, list everything and categorize it (Food, utilities, etc). It is a real chore to do but writing it down and looking at it brings the reality home quickly. Just doing this may show you where your money is being wasted.

2. 

   Step 2: Assess your resources

   Write down your monthly NET take home pay from your job (or alimony, child support, unemployment, or any other source of regular income.) Add these totals together. This is what you have to work with. [Make a worksheet like the sample attached or email me for a copy" [e-mail] or see Google link in Resources]

3. Step 3: Assess your costs

   Using the information from Step 1, write down the monthly amounts of all of your expenses. These will include mortgage/rent, HOA fees, food, utilities (water, gas, electric, telephone, cable, internet), entertainment (movies, dining out etc), credit card bills, clothing, child care, health care, car payment, charity (including church offerings), education, home maintenance, insurance (car, home, life), transportation. If some things are yearly or semi-annually then just divide the amount by 6 (semi-annual) or 12 (annual) to get your monthly cost. Financial Software such as Quicken, MS Money, or Ace Money is very helpful. (See Resources) You may also find some free software on Google.

4. Step 4: Good news/Bad News

   Total all of your monthly resources, and then subtract your total costs [Step 2 - Step 3]. If you get a positive number then you are not spending more than you bring in. [Good news!] If you get a negative number, then you are going to have problems if you don't already. [Bad news.] OK, so what do you do now?

5. Step 5: Divide your categories

   Some spending is absolutely necessary such as rent and utilities. (Called non-discretionary spending) and others are things that we buy but don't absolutely have to have (Discretionary spending). Make two columns on a piece of paper and write down your costs dividing them into the 2 types of spending. You could call these Necessities and Wants.
   [My parents grew up during the depression and made it clear to me and my siblings that Necessities are few: A roof over your head, food to eat, a few clothes on your back, and a job to pay for it all. EVERYTHING else is a Want (including an education).]

6. Step 6: Look for opportunities to trim waste

   Although there are ways to trim on the necessities, let's look at the Discretionary spending first. Look at all those expenses listed under Discretionary (Wants) spending. Do you really need to eat out at a fancy restaurant every week? Are you spending a lot on clothing that you could do without? Is someone spending a lot on books, music, movies and the like? Do you really have to have cable? My point is not to cut all those things out but if you scrutinize those costs and prioritize them, you may find many places where some things just really aren't that important. Cut them out and then do the math in Step 4. Are you still spending more than you bring in? If you are, then look again at those Wants.

7. Step 7: Credit Cards

   In our modern world, it is often very easy to pull out the plastic and charge a purchase. It doesn't even feel like you are spending money! But you are, and it can add up quickly. There are a couple of ways to deal with this.

   • Use cash! Nothing will make you more aware of how much money you are spending than to have to pull out your wallet or purse and fork over those hard-earned greenbacks. This takes discipline but becomes easier as time goes along. If necessary set an allotted amount of cash for the time between paychecks, put it in your wallet and don't go near the bank or ATM until the next pay arrives.
   • Don't put any purchase on the credit card unless you already have the money in the bank to pay for it. Every time you pull out the plastic, think to yourself, "Do I have the funds to cover this when the bill arrives?" If the answer is "No" then you can't afford it.

   Follow these two rules and you will be delighted when the credit card bill comes and you don't owe anything more than you did.

8. Step 8: Paying down Debt

   It should be obvious to nearly everyone these days that the banks have been making a fortune off our money and giving us nothing in return except more debt. At current credit card interest rates, paying the monthly minimum will have you paying the bank for many years on money you borrowed a long time ago. So how do you get rid of it?

   Pay off the credit cards with the smallest balances first and work your way to the largest balance, regardless of the interest rate. Of course, you will still have to make the minimum payments on all of your cards. Although this will cost you a bit more than paying higher credit card balances first, psychologically it is beneficial because you can see the progress you are making which gives you greater incentive to continue tackling the credit card balance issue. Nothing beats success like success. To see those bills drop one by one is a great boost to keeping you on track.

   Eventually you will have NO Credit Card Debt if you stick to this method. Remember - no new purchases on the cards. If you absolutely MUST put something on a card, use the one with the lowest rate and pay for that particular purchase when the bill arrives. (Remember you are not putting purchases on cards unless you already have the money.)

   Your other sources of debt are likely mortgage and car payments. If after trimming your discretionary spending, you find that you are on the plus side in Step 4, then pre-paying a car note or mortgage would be the next logical step. The savings are enormous. (I may explore this idea in a future article.)

9. Step 9: Pay Yourself

   Whether you are doing well or struggling financially, find a way to save on a regular basis. Add a small amount of savings to your Necessities costs and never touch it unless you are on the verge of being thrown out onto the street! We all need a cushion for unexpected emergencies, not to mention wanting to go on well-earned vacations. Don't go into debt, save for what you want!

   If you don't want to be eating dog food in your old age, put some money away for retirement. If you are employed, put what you can into your company's retirement system. You won't miss money that comes straight out of your paycheck and many companies match a percentage of your contributions. Free money! Start early and keep at it.

10. Step 10: Trimming your Non-discretionary (Necessities) costs

    Let's put off the harder to do things like refinancing mortgages and car loans and look at some simple ways to cut the costs of those Necessities.

    • Food. Before shopping, make a list. Buy more fresh fruits and vegetables and actually cook meals instead of relying on pre-processed pre-packaged foods. Simply put - They cost more! Also, use coupons but use them wisely. They are good for saving but if a $1 OFF coupon for a brand name cereal still costs more than the store brand, it isn't useful. Buy the store brand instead. (If you've tried the store brand and can't stand it, then use the coupon.)
    • Electricity. Turn the lights off! If you are not using a room, turn off the lights. In fact, turn off all electrical appliances you aren't using. Install a few CFLs or better yet, LEDs where appropriate. You'd be surprised how much less energy you use. Keep your air conditioning to what is necessary.
    • Water. Install a low flow shower head and limit showers to the minimum time necessary. (In military boot camps, they get about 2 minutes.) Only use the dishwasher when it is full. Do wash only when you have full loads. Collect rainwater in barrels for watering the garden.
    • Heating. Buy and install a set back thermostat. Why are you heating/cooling the house when no one is home? Thermostats can be at 68 in the winter when you are home (60 at night) and at 78-80 in the summer (again, when you are home). These temperatures are not uncomfortable. Weather stripping around doors and windows is cheap and very effective.
    • Look for many other ways you can trim your costs around the home. Some things may seem small and trivial but together they add up to great savings.

11. Step 11: A Change in Thinking and Lifestyle

    This article is really about changing the way you approach money both in your thinking and actions. Don't fall in love with money or the things it can buy you. They can't buy you happiness. Eliminating debt and having money are tools to give you one of the most important things in life: Freedom!

Tips & Warnings

• One of the best ways to keep track of your expenses and know at any moment where you stand, is to use some kind of personal financial software such as Quicken, or Microsoft Money. See resource links for several of these reasonably priced tools.

Resources

• Google Templates for making a budget
• Quicken
• Microsoft Money
• Ace Money