A new year is almost here. If you’re already frugal and making good progress towards your long- and short-term goals, congratulations! If not, maybe you can make 2013 the year you start to get your finances under control. I’m not really a resolutions type of gal, at least not as far as new years resolutions go. If there’s something I want to change in my life, I do it when I think of it, not when the calendar flips to a new month or year. But I get the idea that there’s something about a fresh year, a brand-new start, that’s appealing in terms of making changes and starting over. It’s also a good way to measure progress, since you can see where you are at the start of the year and compare that with where you are at the end of each passing month, or at the end of the year.
When we set goals or make plans for ourselves, we tend to be more successful if we’re specific and if we break the big goals down into smaller, measurable chunks. So, for example, we’re more likely to succeed if we set a goal like “eat at least five servings of fruits and veggies every day and walk at least two miles per day” than if we set a vague goal like “get healthy.” With that in mind, what can we do in 2013 to make our financial situation better at the end of the year than at the start?
The list will be different for everyone, since we’re all starting from a different point and we all have different overall goals. But I think that there are some basics that can benefit almost all of us. In my opinion the three most important aspects of improving our financial lives are:
- Keep track of what you’re earning and spending so that you know what you have, where it’s going, and can identify areas for improvement, both on the income and expense side.
- Find places to cut back on your spending (or add to your income if possible). You want to increase the difference between what you’re earning and what you’re spending.
- Save and invest wisely. The difference between what you earn and what you spend is what you use to get you a little bit closer to your financial goals each month. Make sure it’s diversified and working for you, but most importantly, don’t let fear of making the wrong decision keep you from making any decision at all: just start setting the money aside, and you can make changes along the way.
1. Keep track of what you’re earning and spending. If you only have a rough idea of how much money comes in and goes out in any given month – but there never seems to be enough money at the end of the month – you can’t really know where to start in terms of setting realistic goals or making improvements. In the past (when we were in debt), I kept detailed records of every penny we spent. I found it a bit tedious, and gradually shifted to the system I use now: Every penny we spend in our business, I track carefully in Quicken (I have to do that, for tax purposes). But for our personal spending, I use our credit card statements to keep track of our spending, since we put everything on our card and pay it all off at the end of the month. I check our credit card balance online every couple days, making sure that I recognize all the charges (sometimes several days go by with no spending at all, so the balance tends to only change a few times a month, with several transactions on the day I go to town to run errands). For us, the most important aspect of our cash flow is that we continue to meet or exceed our monthly goal in terms of how much we’re contributing to our mortgage payoff fund. As long as we do that, we’re not concerned with small fluctuations in our day-to-day spending. We keep our spending well below our income, which means that a good chunk of our income (at least 40 – 50% of our take-home pay) goes into that mortgage payoff fund. We do that first, before any other spending happens in the month, and it basically forces us to meet our goal. Different strategies work for different people. Figure out what works for you (do you need a strict written budget? Can you just automatically transfer your savings each month and live off what’s left?) and then follow that strategy. Don’t try to mold yourself to a system that works for someone else – keep your own personality in mind. But one way or the other, you have to keep track of your money somehow. That’s the only way you’ll be able to measure your progress and see where you’re succeeding and where you need to focus more. And don’t get bogged down in the details. Keeping track of your income and spending doesn’t have to be a tedious, time-consuming process. You can do it on your computer or your phone, or you can write everything down in a little notebook. You might even find that just knowing you have to write everything down keeps you from making impulse buys, since it’s a bummer to have to record them and then see them there in your “spend” column.
2. Find places you can cut back on your spending (or if possible, look for ways to increase your income, either by getting a raise, getting a better job, or adding a side job). Again, this will be different for everyone. Even though we’ve been on a frugal track for many years, we’re just now in the process of switching to a $10/month cell phone plan and ditching the $50/month one that we’ve had for years. I’ve been reading the Laura Ingalls Wilder books to our son for the last several months. They’re a constant reminder of how little we actually need, and how most of what we buy is a want instead. Don’t get me wrong – I’m not saying I want to live in a shanty covered in tar paper, eating nothing but bread for a whole winter. I’m thankful that I was born when and where I was, and I’m grateful for the comforts we have. But I’m also very aware of the fact that when it comes to stuff, we need almost nothing else (new clothes and shoes for our older son as he outgrows his, but that’s about it). And there’s an almost endless list of great experiences we can have as a family that are free or nearly free. This perspective makes it easy to limit our total day-to-day spending. The other part of spending is fixed expenses: things like mortgage or rent, car payments, student loan payments, utilities… things that you can’t easily change from one month to the next without making some sort of significant life change. Of course, these are also where the big savings can be had. If you can move from a big house to a small one and cut your rent or mortgage by $500/month, that adds a lot of wiggle room into your budget (and hopefully leaves you with $500 to put towards your financial goals). Take a look at all your expenses – big and small, fixed and variable – and figure out where you can make changes. Then commit to actually saving the money you save. There’s no point in going to all that trouble if you just end up increasing your impulse buys and day-to-day spending by the same amount that you’ve saved by moving into a smaller house. I find that it helps to automatically stash the money somewhere outside of our checking account, as soon as we get paid each month. That way it’s out-of-sight, out-of-mind, and we can’t accidentally spend it. The main point here is to make sure that the amount you’re spending each month is less than the amount you’re bringing home each month. And that brings us to number three…
3. Save and invest wisely. The money that you’re saving by living below your means is the money you use to bring yourself closer to your financial goals. Having money in savings – even if it’s only growing a little at a time – means you’ve got a cushion to protect you from financial setbacks, and it’s an excellent place to start. In terms of long-term goals, if you have an employer-sponsored retirement plan that includes an employer match, make sure you’re taking full advantage of it. Utilize individual tax-advantaged retirement accounts options too. Check into Roth and Traditional IRAs, as they both have pros and cons. And really, if you’re struggling to decide which one is better for you, just pick one and go with it. Either one is better than not saving for retirement at all. You can make changes later on, once you learn more about investing. But getting started is half the battle, and time is a valuable ally in our efforts to grow enough of a nest egg to retire. We were in our 30s before we had enough money to have any investments outside of our retirement accounts, but once you do have enough to max out your tax-advantaged accounts, look around for other investment opportunities. You can set up a municipal bond fund like we did (for our mortgage payoff account) and avoid federal tax on the earnings. You can buy a rental property (be aware that rental properties are active investments – you’ll put in plenty of time and/or money in a property and that needs to be included in the costs and earnings calculations that you’ll do before buying a rental property) or choose the passive-income real estate option by going with a REIT. You can invest in gold at Bullion Vault or set up a regular taxable brokerage account and buy mutual funds, individual stocks, bonds, or ETFs. There are always ways to spend your money that will bring you closer to your goals, but you have to start somewhere.
Your financial action-plan might include some of these ideas, or it might be completely different. As long as you’re spending less than you’re earning, there’s a lot of flexibility with the rest of it. Whatever you do, now’s a good time to commit to making 2013 your best year yet, financially. If you get there by simplifying, down-sizing, living more frugally, etc., you’ll probably find that it turns into a great year in general, since those things often go hand-in-hand with a happy, lower-stress lifestyle.
Happy Holidays to all my readers!
Brought to you in conjunction with Bullion Vault.