In our last post, we began discussing New Year’s resolutions that can actually change your financial future during the coming year. The Financial Guide to Life deals with managing, saving, investing, and spending your money, so I have recommended four personal finance resolutions that are achievable and can bring you financial security and peace of mind.
- Live within your means.
- Save by paying yourself first using auto-pay.
- Make investing easy.
- Avoid paying full price.
Today, let’s start with the potentially hardest, but most important: “live within your means”. This means spending less than you earn each month and is the foundation for all other personal finance principles. Failing to do so means going into debt and making your long-term financial situation worse — making your future worse. Debt for living expenses now means paying interest that increases your debt, makes it harder to live within your means, and causes you to use your future earnings to pay for today’s indulgences.
Not all debt is equally bad. Education debt invests in your future and some things are just so expensive, it is difficult to save for the whole cost such as a home or car. There are even months when stuff happens which prevents us from following this principle every single month — which is why emergency funds and savings account are very useful for financial security and peace of mind. Monthly expenses must also include paying off debts. It also includes funding our savings goals whether retirement, college, vacation, home down payment, etc.
If this is an issue, you need to either increase your earnings or decrease your spending. Paradoxically, many people find that increasing their earnings doesn’t necessarily solve their problem since spending tends to increase with earnings. Many families making $100,000 have just as much trouble living within their means as do families making $50,000. Most people find it easier to reduce their spending and we will cover ways to save money and spend wisely frequently in this blog and a planned book.
So this is worth doing, even with short-term sacrificing. But how do we turn this resolution from forgotten, to a way of life? Adjust your spending so it is less than your income. First, know what your spending is and where does your money go. Track your spending for at least a month, make adjustments as needed, and reward yourself when possible. It is important to know where you money is going, so make a list including those little expenses for coffee, soda, dry cleaning, eating out etc. But this doesn’t have to be an onerous task: use a spreadsheet, notebook, or smartphone; estimate, round off, and use broad categories; be honest; and do it for at least a month. I’ll cover budgeting in more detail later, but for now I’ll point you to finance tracking sites like www.Mint.com or www.smartaboutmoney.org. Smartphone users may value the growing list of money management apps such as “Mint”, “Quicken Money Management”, CoinKeeper, or “Pageonce”.
When you know where you money goes (including savings goals), compare it to your income, and use your spending list to see where to cut back if necessary. This could take several months to repeat and fine-tune. Review our spending wisely tips to make your money go further. Sometimes spending less doesn’t necessarily mean doing without, once you get in the habit of “avoid paying full price”. That’s why our four New Year’s resolutions go well together.