I read Get Rich Slowly pretty much every day and feel like I know its author JD. Awhile ago JD compiled a list to help people take control of their finances. These 9 steps are the model I use when advising others with their finances. It’s a lot of information but check them out…
1. Know where your money goes
The first step in mastering your money is to know where your money goes. An easy way to do this is to keep a small notebook that you carry with you to record every purchase. Every penny. If the notebook idea isn’t for you there are tools you can use such as Quicken Online and Mint or Software such as Quicken or Microsoft Money.
Tracking every penny allows you to know the places you can cut back and holes in your finances. This is always hard to get in the habit of doing, so find a method you are comfortable with and stick to it. Try for a month and be amazed at all the wasteful spending you aren’t even aware of.
Now that you know where your money is going, make a budget. Something you may not know is 55% of Millionaires and use budgets religiously, this according to Millionaire Next Door. Budgeting allows you to plan for monthly expenses, as well as vacations, car expenses, home repairs, and rainy days.
There are many types of budgets out there from the 60% budget, the 3 step budget, the balanced money formula, even a type of budget for those who can’t budget – the spender’s budget.
The 60% budget:
• 60% to Committed Expenses such as taxes, clothing, basic living expenses, insurance, charity (including tithe), and regular bills (including things like cable).
• 10% to Retirement.
• 10% to Irregular Expenses such as vacations, major repair bills, new appliances, etc.
• 10% to Long-Term Savings/Debt — money set aside for car purchases, home renovations, or to pay down substantial debt loads.
• 10% for Fun Money to be used for dining out, hobbies, indulgences, etc.
The 3 step:
• Destroy all your credit cards. – I don’t believe in destroying the credit cards but learning how to use them safely.
• Invest 20% of all that you earn. And never touch it.
• Live on the remaining 80%, no matter what.
The Balanced Money Formula:
• Needs are things you must pay no matter what: housing, food, utilities, transportation costs, insurance.
• Wants are everything else: cable television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.
• Saving comes last in this plan. Everything left after you take care of Wants and Needs is set aside for the future. Debt repayment comes from this too.
The budget for those who can’t budget : (This is more of a plan than a budget)
• Project income. How much do you bring in every month? Will you receive any windfalls soon?
• List fixed expenses. Write down those things for which you must pay every month: cable, telephone, gas, electricity, etc.
• List your debts. Make a list of everything and everyone you owe
• Plan ahead. Do you have any large expenses on the horizon?
3. Make your money work for you
Exactly how it sounds, make your money work for you. Online banks often give higher interest rates for savings and checking accounts than customary banks. By placing your money in these accounts you are earning money on the money you already have without doing much. Also, using rewards credit cards is another way to make your money work for you. Just use them responsibly and pay your balance each month. Rewards checking accounts have also begun being popular, here is a list to help you find the right one.
4. Save for Emergencies
Emergency funds help to ensure you are always prepared for whatever life throws at you, as best you can. It’s pretty easy to build your emergency fund using an online bank like ING. Using the online bank allows you to set up automatic deposits each month so you don’t have to even think about it. Simple. Start with a goal to build $1000 in your emergency fund before you really begin attacking your debt. You can easily do this by automatically transferring $50-$100 (whatever is comfortable for you) into the account and before you know it…poof…you have an emergency fund.
5. Get out of debt
This is the step many people try to do first, before they take the time to realize and correct why they are in debt. One way to pay down debt is what Dave Ramsey in his book The Total Money Makeover calls the Snowball Method. This method is very psychologically gratifying because it allows you to build momentum in your debt fight.
• Order your debts from lowest balance to highest balance.
• Designate a certain amount of money to pay toward debts each month.
• Pay the minimum payment on all debts except the one with the lowest balance.
• Throw every other penny at the debt with the lowest balance.
• When that debt is gone, don’t alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
This allows you to feel as if you are making progress and helps to keep you in the game.
6. Save for the future
Compound interest is your best friend. Put aside a little now and its worth a lot more later. 401k’s and Roth IRA’s are a great way to save for the future.
7. Automate your finances
Go paperless. Make payments automatically. Automate your savings. Link your checking account to a savings account for overdraft protection. Easy.
8. Earn more money
Some techniques to earn more:
• Ask for a raise.
• Switch employers.
• Take a second job.
• Use your hobbies.
• Volunteer for medical research
• Sell things.
9. Financial Education
Read, read , read about finance. Find financial blogs that meet your interest, read books, talk to anyone who may know something you don’t.
Know that you know how and what to do to take control of your money, do it.