Are you at a place where you ask yourself “Where did all my money go?” A lot of people live paycheck to paycheck and never seem to get ahead. Is that you? Then this post will help you answer those questions and take action today!
Getting into the habit of budgeting can be a fun exercise especially if you have a short term achievable goal in mind. Achievable goals are the key to success when you first start out in your budgeting journey. If you have not already read “New Year – New You – New Goals” then I suggest that you read that first. It is all about Goal Setting.
Here is the first step in the process of setting a budget. This is also your first glimpse into how to gather your information for your big ticket items such as a car or a house so keep mind of this information for later.
Step One: Goal is to Set up a savings account at your bank or online
In order to set up a savings account you will need
- Social Security Number
- Email Address
- Home Address
- Phone Number
- Date of Birth
- Account and Routing numbers (for online if you have existing account you will be depositing from)
- Initial deposit (The amount can be small or large. It will be determined by which bank you are choosing)
There are many online places that will give you calculators that will allow you to plug in the amount you are planning to save on a regular basis and will project your balance after a year.
Here is an example offered by American Express.
For example an initial deposit of $25 and a weekly deposit of $5 with an interest APY of 1.9% will become $1,390 at the end of one year! Yay! That was painless – right?
Let’s double that now with a $50 deposit and $10 a week (let’s face it that is one Starbucks coffee and lemon bar a week) you will have $2,779 in a year.
Once you have it set up you will want to set up direct deposit from your paycheck or a set amount from your checking to savings. Doing this is a helpful way to get that money in there before you have a chance to spend it. Forget about it and just watch your savings grow over time. That is motivation to continue what you are doing!
If you already have a savings account, go ahead and set up that direct deposit today!
The important thing to learn about Saving and how your money earns money is understanding Principal and Compounding Interest.
What is Principal and Interest and how does that work?
Principal is the amount of money you put in the account and Interest is the amount you earn on the balance in the account over time and is deposited at a specified time each month. The compounding happened because when you earn the first interest amount it becomes part of the balance that is used to determine the next interest amount earned in the next month.
Step Two: Goal is to Create Your Monthly Budget Worksheet
This is a crucial part of Budgeting – Being Visual!
These free templates are on Google Drive. Once you click on the link, they will open and you can go to File and download them as a Word Doc or Excel Spreadsheet if you prefer.
If you can see where your money is going, it puts you more in control to make changes to your spending habits.
Regardless of where you are financially in this journey, the VERY first thing I want you to become accustom to is Paying Yourself FIRST! However small, get in that habit. You work hard for your money so pay yourself for it. Do this every month. Put that money in your new savings account every month.
If you have direct deposit, set it up to go there automatically every paycheck.
Trust me on this one. As much as you will fight it, I promise you this is important!
My husband started this many years ago. He has $200 put aside every month directly to a savings account that is not easily accessible and does not have an ATM card for it. Out of sight out of mind philosophy. It worked! When we were ready to purchase our home we were shocked when we called and there was over $10,000 available. Put us in a much better financial position to purchase that house.
I also want to point out that there is a place to set a budget on extra expenses. Don’t get so bogged down that you don’t treat yourself once in a while – just be sure to BUDGET it!
If you are discouraged because you have nothing left or in a deficit (negative balance) – Don’t despair I’m going to give you some ideas to help you earn fast easy money.
Give yourself a pat on the back! That was not hard was it? Did you see how fast your dollars can grow into a nice little nest egg?
Step Three: Credit Card Debt
Do you have Credit Card Debt that is holding you back from your dream of buying a house or saving for something else? You are not alone. Credit card companies make it very easy to pull you in but make it very hard for you to get out.
The reason Credit Card debt is hard to come out of is for the same reason you can grow your savings account based on compound interest. The credit card companies add the interest each month to your balance and then tack on more interest on top of that every month. If you are making your minimum payments then the compounding interest keeps you in debt longer.
Take a deep breath. You got this.
1) Cut up your cards except for the one with the lowest interest rate.
The reason for this is so you do not incur any more debt and you have one that you can keep and use for emergencies.
The reason for this is so you do not incur any more debt and you have one that you can keep and use for emergencies.
2) In order of highest interest rate first, you will focus your extra cash on this card first. The goal is to pay more than the minimum due every chance you get. Set a goal by first taking the balance and dividing it by the number of times you get paid in a year. So if you owe $10,000 divide that by 24 if you are paid twice a month. That equals $416.66 a paycheck. If you can swing that then do it, if not divide by two years and so forth. That sets a goal of when it will eventually be paid off. Note that down on your worksheet and keep that visible. Enter the payment amount and stick to it. Once it is paid off – CLOSE the account. We will discuss how this affects your credit score on another post.
3) The remaining cards, continue to pay the minimum balance until that first card is paid off. Now that you have become accustomed to paying the extra on the card that is now Closed. Take that and pay it on the next card. That’s right, the whole amount plus the minimum payment. That is the Snowball effect. You will keep doing this with each card until they are all paid off and closed except for the one.
This is a huge accomplishment and the sooner you are out of the Credit Card rabbit hole, you will be in control of your future in a much more rapid pace then ever!
If your goal is purchasing a car when you have enough by saving then I suggest you put in the amount of the car payment and insurance in your expenses now. This will solve two things:
1) you will get a feel for what you can afford payment wise
2) you can take those payments and put them in savings at the end of the month to grow it that much faster.
Step Four: Eliminate, Reduce, Reclaim
What does that all mean? Well, in order for you to meet your objectives with saving for whatever it is you are dreaming of, be it a house, a car, to be debt free, etc. you will need to make some short term sacrifices or in other terms eliminate unneeded spending, reduce what you can and reclaim your peace of mind!
Let’s talk about Eliminating expenses. The biggest freeing phrase I taught myself not to hate but to embrace was this:
“Do I WANT this OR Do I NEED this?”
That’s it. The next time you are at the store and pick up a blouse you really love, ask yourself that question. Do you already have a blouse that you can wear? Most likely the answer to that is yes. So is that blouse worth keeping you from financial freedom? Probably not. Will it give you short term satisfaction – of course it will. But, what if you set up a goal to purchase that blouse by saving the money to buy it? That is an attainable short term goal that won’t break the bank. Put it back for now. Walk away. Chances are You WILL NOT go back to get it later because you did not NEED it.
I am one that loves to buy things for others, but one time my daughter said “enough”. Stop buying me things. I don’t need them. Wow was that ever an eye opener. I wasn’t even doing it for myself. Now we somewhat jokingly walk through the stores and say “Yah, No you don’t NEED that” to each other. I did get into the habit of taking a quick pic of something and sending it to her and saying, I’m thinking of you! She loves that more than anything and it did not cost me a dime!
This is by far the biggest thing you can do to eliminate unnecessary spending and gain control. It is freeing I promise you!
Next what exactly can we Reduce? Well, it does take some time and effort but that’s most likely all you have at this point right? Then what better way to spend that time making yourself some money by looking at what you are currently spending. You have the list already. Take that worksheet and go down the expenses column and start doing some research to see if you can lower your monthly nugget.
Be sure to discuss these things with advisers or other people you trust will know first.
- Shop for insurance. Make sure you are not spending money on coverage you don’t need.
- Can you lower your car payment by possibly refinancing at a lower rate. This my extend the loan time but if it is at a lower rate than credit card debt it may be worth it.
- Utilities for the home are not set in stone. There are many programs out there offered by companies to set a fixed amount each month and that makes it easier to budget. Call or research online to see what your options are.
- Cable TV and Internet. There are always new packages out there being offered. See if you can change yours without penalty. Maybe go with a lower package for now for cable TV or eliminate that expense and get Netflix, Hulu or Amazon Prime at a fraction of the cost. Keep internet of course!
- Cell Phone. Yikes, this one I have not even been able to tackle myself. If you are not already committed or are at the end of your current contract then consider changing to another company. Many offer big incentives and even some offer cash for a switch.
Let’s talk a little about Student Loans. Briefly let me mention that if you have a student loan, you most like are receiving a lot of offers to refinance them. DON’T Do it. At least not for now. Having the loan with the original institution that was assigned to the loan gives you the opportunity to work with them to lower your payments based on your current situation or even go into forbearance if you can’t afford payments now. Yes, this will cost you more in interest in the long run but Does NOT affect your credit score in a negative way.
If you refinance with another institution those options do NOT exist and it will negatively affect your credit score if you miss a payment. I am not claiming to be an expert or financial adviser on this topic, I just want you to be aware of the options.
Now that we Eliminated and Reduced – Look at what you have Reclaimed! Make a list of how much money you have saved yourself each month by making these small sacrifices with a little bit of your time and energy!
Step 5: What’s left?
What else can you possibly think of that you haven’t already achieved or set yourself on a path towards achieving? Well I can think of a few things that will help catapult you into achieving success faster and I’ll share those with you at the end.
The dreaded Credit Cards and your Credit Score. These two things are so important in determining how hard it will be for you in your future to obtain your financial goals. These two things will solely determine exactly what types of interest rates, what types of loans, what kind of offers will be available to you. So it is very important that you understand their impact on you. Once you have the knowledge you can make better decisions for your future.
Credit Card debt as I alluded to earlier in this course can be difficult to get out of but if you use it right you can reward yourself. Let me explain.
There are a lot of companies that offer incentives for paying off your full monthly balance (or even carrying a balance, which I do NOT recommend). Let’s look at American Express. They offer a few different Personal cards that offer reward points which you can then apply as cash to purchase in places like Amazon or use them in their own reward system to get things.
They also have a cash back reward which is a statement credit. Capital One has a cash back reward where you can get it in actual cash or various gift cards. There are many out there and can pay off but only if you plan to use it without going into debt. So for example, I can pay my monthly cable bill with credit card. So I set it up as a recurring charge and then I pay the credit card off each month. I am not incurring any additional expense (except if there is an annual credit card fee which you will then need to take into consideration) and I am getting a reward for using the card. That is one reason I said to keep one card earlier on. You will also want a card to use in case of emergency or to make online purchases that require a credit card. AGAIN – with the assumption you will pay it off in full each month!
Now a few things to know about what credit cards do to your credit score. If you have a credit card that has a limit of $10,000 with no balance due this still affects your credit score and it is a win-lose situation. On one hand it shows you are creditworthy, but on the other hand, the $10,000 is seen as potential debt and creditors look at that when determining whether they will give you a loan and what interest rate they are willing to give you. If you have high balance credit cards, you will most likely pay higher interest whether you owe on them or not. So now what happens if you close them? Well this to goes negatively against your score, however, the balance no longer weighs in on future loans. See what I mean.
The good, the bad and the ugly. I have closed all my credit card accounts except one. Yes it did affect my score short term but when we were ready to purchase our home, my score had recouped and my debt worthiness improved. In fact the last time I checked, my score had gone up considerably because I was under the 35% threshold for credit card debt. If you are over that, meaning you owe more than 35% of your credit limit, than your score is lowered.
I hope this information has helped you to see a light at the end of the tunnel and hopefully with some extra dollars in the bank!
I’ve created a Facebook group (click) for you to join if you have any budget related questions. It is a support group for people who read through this article and would like to ask questions, share their adventure, just get some support!
Hope to see you there!