be more attractive: How to Manage Your Finances

Personal financial management is a subject that is not taught in many schools, but is something that nearly everyone has to deal with in their lives later on. Here are some statistics: Some 58% of Americans do not have a retirement plan in place for how they'll manage their finances when they get old.^[1] While people generally believe they'll need about $300,000 to support themselves in retirement, the average American has only about $25,000 saved at the time of retirement.^[2] Average household credit card debt among Americans now stands at a distressing $15,204.^[3] If these facts are alarming to you, and you want to reverse the trend, read on for specific, targeted advice geared towards giving you a better future.

Steps

Make a Budget

For one month, keep track of all your expenses. You don't have to limit yourself; just get an idea of what you spend money on during any given month. Save all your receipts, make note of how much cash you need versus how much you expense to credit cards, and figure out how much money you have left over when the calendar turns.

After the first month, take stock of what you spent. Don't write down what you wished you had spent; write down what you actually spent. Categorize your purchases in a way that makes sense to you. A simple list of your monthly expenses might look something like this:
- Monthly income: $3,000
- Expenses:
  - Rent/mortgage: $800
  - Household bills (utilities/electric/cable): $125
  - Groceries: $300
  - Dining out: $125
  - Gas: $100
  - Emergency medical: $200
  - Discretionary: $400
  - Savings: $900

Now, write down your actual budget. Based on the month of actual expenses — and your own knowledge of your spending history — budget out how much of your income you want to allocate to each category every month. If desired, use an online budgeting platform, such as Mint.com, to help you manage your budget.
- In your budget, make separate columns for projected budget and actual budget. Your projected budget is how much you intend to spend on a category; this should stay the same from month to month and be calculated at the beginning of the month. Your actual budget is how much you end up spending; it fluctuates from month to month and is calculated at the end of the month.
- Many people leave significant room in their budget for savings. You don't have to structure your budget to include savings, but it's generally thought of as a smart idea. Professional financial planners advise their clients to set aside at least 10% to 15% of their total earnings for savings.^[4]^[5]

Be honest with yourself about your budget. It's your money — there's really no sense in lying to yourself about how much you're going to spend when making a budget. The only person you hurt when doing this is yourself. On the other hand, if you have no idea how you spend your money, your budget may take a few months to solidify. In the meantime, don't put down any hard numbers until you can get realistic with yourself.
- For example, if you have $500 dollars allocated to savings every month, but know that it'll consistently be a stretch in order to meet that goal, don't put it down. Put down a number that's realistic. Then, go back to your budget and see if you can't tweak it to loosen up cash somewhere else, and then funnel it into your savings.

Keep track of your budget over time. The hard part of a budget is that your expenses may change from month to month. The great part of a budget is that you'll have kept track of those changes, giving you an accurate idea of where your money went during the year.
- Setting a budget will open your eyes to how much money you spend, if they haven't been opened already. Many people, after setting a budget, realize that they spend money on pretty petty things. This knowledge allows them to adjust their spending habits and put the money towards more meaningful areas.
- Plan for the unexpected. Setting a budget will also teach you that you never know when you'll have to pay for something unexpected — but that the unexpected will come to be expected. You obviously don't plan on your car breaking down, or your child needing medical attention, but it pays to expect these contingencies to happen, and to be prepared for them financially when they come.

Spend Your Money Successfully

When you can borrow/rent, don't buy. How often have you bought a DVD only to have let it collect dust for years, without using it? Books, magazines, DVDs, tools, party supplies, and athletic equipment can all be rented for smaller amounts of money. Renting often saves you the hassle of upkeep, keeps room in your storage, and generally causes you to treat items better.
- Don't just rent blindly. If you use an item for long enough, it may be best to buy. Perform a simple cost analysis to see whether renting or buying is in your best interests.

If you have the money, pay a high down payment on your mortgage. For many people, buying a home is the most costly and significant payment they'll ever make in their lives. For this reason, it helps to be in the know how to spend your mortgage money wisely. Your goal in paying off your mortgage should be to minimize interest payments and fees while balancing out the rest of your budget.
- Prepay early up front. The first five to seven years of a mortgage are generally when your interest payments are going to be the highest.^[6] If you can, take your tax return and funnel a portion of it back into your mortgage. Paying off early will help increase your equity fast by lowering your interest payments.
- See if you can't make bi-weekly payments instead of monthly payments. Instead of making 12 payments on your mortgage in a year, see if you can't make 26 payments on your mortgage instead. This will allow you to save thousands of dollars, provided there aren't any fees associated with it. Some lenders charge significant fees ($300 to $400) in order to give you the privilege, and even then only apply the payment once a month.
- Talk with your lender about refinancing. If you can refinance your loan down from 6.7% to 5.7%, for example, while still making the same payments, go for it.^[7] You could knock off years on your mortgage.

Understand that owning a credit card may be very important for establishing credit. A credit score of 750 or above may unlock significantly lower interest rates and opportunities for new loans — nothing to sneeze at. Even if you rarely use the credit card, it's important to have one. If you don't trust yourself, just lock it in a drawer.
- Treat your credit card like cash — that's what it is. Some people treat their credit cards like unlimited spending devices, running up balances they know they can't pay off and only making the minimum monthly payment. If you're going to do this, be prepared to spend significant amounts of your money on interest payments and fees.
- Shoot for a low credit utilization. A low credit utilization means that the debt you put on your credit card is proportionally low to your overall limit. In plain English, that means that if you have an average monthly balance of $200 on your credit card but your limit is $2,000, the ratio of your debt to your limit is very low, about 1:10. If you have an average monthly balance of $200 on your credit card but your limit is $400, your credit utilization is going to shoot through the roof, about 1:2.

Spend what you have, not what you hope to make. You may think of yourself as a high earner, but if your money doesn't back up that statement, you're shooting yourself in the foot acting like you are. The first and greatest rule of spending money is this: Unless it's an emergency, only spend money that you have, not money that you expect to make. This should keep you out of debt and planning well for the future.

Make Smart Investments

Familiarize yourself with different investment options. As we grow up, we realize that the financial world out there is so much more complicated than we envisioned as children. There are literally options to trade imaginary items; there are futures to bet on things that have not yet happened; there are sophisticated bundles of stock. The more you know about financial instruments and possibilities, the better off you'll be when it comes to investing your money, even if that wisdom consists only of knowing when to back away.

Take advantage of any retirement plans that your employers offer. Often, employees can opt into a retirement 401(k) plan. In this plan, a portion of your paycheck is automatically transferred to a savings plan. This is a great way of saving, because payments come out of their paycheck before it's cut; most people never even notice the payments.
- Talk with your company's HR representative about employer matching. Some larger companies with robust benefit plans will actually match the amount of money you put into your 401(k), effectively doubling your investment. So if you choose to put in $1,000 each paycheck, your company may pay an additional $1,000, making it a $2,000 investment each paycheck.

If you're going to put money into the stock market, don't gamble with it. Many people try to day trade in the stock market, betting on small gains and losses in individual stocks every day. While this can be an effective way of making money for the seasoned individual, it's extremely risky, and more like gambling than investing. If you want to make a safe investment in the stock market, invest for the long term.^[8] That means leaving your money invested for 10, 20, 30 years or more.
- Look at company fundamentals (how much cash they have on hand, what their product history is, how they value their employees, and what their strategic alliances are) when choosing which stocks to invest in. You're essentially making a bet that the current stock price is undervalued and will rise in the future.^[9]
- For safer bets, look at mutual funds when buying stocks. Mutual funds are bundles of stocks collected together to minimize risk. Think about it like this: if you've invested all of your money in a single stock and the stock price plummets, you're screwed; if you've invested all your money equally in 100 different stocks, many stocks can completely fail without affecting your bottom line. This is basically how mutual funds mitigate risk.

Have good insurance coverage. They say that smart people expect the unexpected, and have a plan for what they'll do just in case. You never know when you'll need a large sum of money during an emergency. Having good insurance coverage can really help tide you over through a crisis. Talk with your family about different kinds of insurance that you can purchase to help you in the event of an emergency:
- Life insurance (if you or a spouse unexpectedly dies)
- Health insurance (if you have to pay for unexpected hospital and/or doctor bills)
- Homeowner's insurance (if something unexpected harms or destroys your home)
- Disaster insurance (for tornadoes, earthquakes, floods, fires, etc.)

Think about getting a Roth IRA for retirement. In addition to, or perhaps instead of, your traditional 401(k) plan — which is usually an employee retirement plan — talk with a financial advisor about getting a Roth IRA. Roth IRAs are retirement plans that let you invest a certain amount of money, and extract it, tax-free, after you turn 60. (Well, technically, 59 ½.)
- Roth IRAs are invested in securities, stocks and bonds, and mutual funds, giving them the opportunity to grow significantly over the course of many years. If you invest in an IRA early on, the compound interest that you earn (interest on top of interest) will create significant increases in your investment.

Build Your Savings

Start by holing away as much of your expendable income as possible. Make savings a priority in your life. Even if your budget is small, tweak your finances so that you save around 10% of your total earnings.
- Think of it like this: If you manage to save $10,000 per year — which is less than $1,000 per month — in 15 years, you'll have $150,000. That's enough money to put a kid through college, start a nice nest egg, or put a significant down payment on a wonderful house.
- Start saving young. Even if you're still in school, saving is still important. People who save well treat it more as an ethic than necessity. If you save early, and then invest that savings wisely, a small initial contribution can snowball into a significant sum. It literally pays to be forward-thinking.

Start an emergency fund. Saving is all about frittering away expendable income. Having expendable income means not having debt. Not having debt means being prepared for emergencies. Therefore, a rainy-day fund can really help you out when it comes to saving money.
- Think about it like this: your car breaks down and you suddenly have $2,000 in extra payments. You didn't plan, so you have to take out a loan. Credit is tightening up, so your interest rates might be pretty high. Pretty soon, you're paying 6 or 7 percent interest on a loan, which cuts into your ability to save for the next half-year.
  - If you had an emergency fund, you could have avoided bringing on the debt, and the associated interest rates, in the first place. Being prepared really pays.

When you've started saving for retirement and put money in your emergency fund, put away three to six months' worth of expenses.^[10] Again, saving is all about being prepared for the uncertainty of it all. If you're unexpectedly laid off work, or your company reduces your commission, you don't want to take on debt in order to finance your life. Setting aside three, six, or even nine months' worth of expenses will help ensure that you're in the clear, even if disaster strikes.

Begin paying off your debt once you're established. Whether it's credit card debt or debt left on your mortgage, having debt can seriously cut into your ability to save. Start with debt that has the highest interest rate. (If it's your mortgage, try paying off larger chunks of it, but focus on non-mortgage payments first.) Then, move onto your second-highest rate loan, and begin paying that off. Move down the line, in decreasing order, until you've paid off your entire debt load.

Begin really ramping up for retirement. If you're getting to be that age (45 or 50), and you haven't started saving for retirement, it's really important to start ramping up right away. Make your maximum contributions to your IRA ($5,000) and your 401(k) ($16,500) every year; if you're older than 50, you can even make so-called catch-up contributions if you want to pad your retirement savings.
- Put a high priority on saving money for retirement — even higher priority than saving for your children's college education. Whereas you can always borrow money to help pay for college, you can't borrow money to help fund retirement.
- If you're totally in the dark about how much money you should be saving, use an online retirement-savings calculator — Kiplinger's has a good one here — to aid you.
- Consult a financial planner or advisor. If you want to maximize your retirement savings because you have no clue how to start, talk with a licensed professional planner. Planners are trained to invest your money wisely, and usually have a track record of return on investment (ROI). On the one hand, you'll have to pay for their services; on the other hand, you're paying them to make you money. Not a bad deal.

Sample Budget and Budgeting Help

Sample Family Budget

Budget Tips and Tricks

Sample List of Expenses

Tips

When there are increasing foreclosures it is not yet the best time to buy a home because the law of supply and demand will be forcing the prices down more as banks become motivated.
- Then, when foreclosures are completely sold off by banks the law of supply and demand will force prices back up.
- As long as there are not many foreclosures, hold your property, because prices will rise.

Upgrade your qualifications. Take time to upgrade your knowledge and skills so that you will stay ahead of competition. It will enhance the chances of you making more money in future.

A debit card is a poor substitute for a credit card. It gives others direct access to your bank account without having the credit card issuer as an intermediary. Plus, temporary holds done by merchants are keeping you from accessing your money, even if you don't end up buying anything (For example, some gas stations will put a $100 hold on your account as soon as you put your card in, regardless of how much gas you buy. No problem with a credit card, but this can be bad for your checking account).

Use money jar saving. Have six jars, one each for: necessities, entertainment, charity, savings, investment and education. Allocate a percentage of your monthly income to the jars. For example, 60% for necessities, 10% for savings, 10% for entertainment, 10% for investment, 5% each for charity and education. Categorize your daily expenses according to the jars. Record your daily expenses. (The jars can be real or online savings accounts.)

Warnings

When you receive calls from banks and they say you are over by a million pounds and then invite you to sign up for a credit card, do not accept the offer to increase your debt, no matter how exciting. Nothing will bother you more than having a bank chase you for overdue payments that you cannot afford.