5 Steps to Managing your Money like a Responsible Adult
The dreaded topic of money. When we don’t have it, life simply stops. But with the state of our economy, wages staying the same while cost of living is increasing, and large and small companies doing lay-offs, how can we ever keep our financial heads above water?
Here are 5 steps to managing your money and learning more about personal finance so you can start to finally take control of your financial future.
Know your Credit Score
Do you have dreams to buy a house, start a business, get a new car, apply for a credit card, or even buy a new cell phone on installment payments? Your credit score is the backbone of your financial health, and a low credit score can slow down the ability to get all of the mentioned needed things of life (plus things like applying for a new apartment or even applying for a store card at the mall). If your score dips very low, you will be forced to pay cash for everything you need to live because companies will not offer you the ability to use their credit.
The first step to managing your money like a real adult is to know your credit score. It’s not knowing the number itself, but your credit score and credit history is a way for you to track your financial “performance” over time to see if you’re making responsible financial decisions.
A budget is a must-have no matter how much money you make. If you don’t tell your money where to go, your money will go anywhere without you knowing. Lacking a budget is the #1 way that people go broke, because you don’t know how much money you need and you don’t know how you’re spending the money you have. Even if you’re living paycheck to paycheck, a budget is your tool to responsibly organize your money.
If you say you’re so broke that you can’t save, it’s not the amount of money you make that’s the issue, it’s your lack of a proper budget that keeps you from saving (more on this later).
Lower Your Interest Rates
If you have debt of any kind including a mortgage or credit card debt, negotiate with them to decrease your interest rate. High interest rates is what keeps you in debt until you die, because you will never be able to pay the debt off when interest is building month over month. You would literally have to win the lottery to have a chance at paying off high interest rate debt.
A rule of thumb that people typically don’t talk about is that you can carry debt for longer periods of time if it’s below 4% interest rate. This means to keep paying the minimum monthly payment on all debt that is below 4% interest rate until you pay off the entire debt.
If you have debt that’s over 4%, you must call the company to figure out a way to minimize the rate. This could mean refinancing your house, or going on a Debt Consolidation Program with your high interest rate credit card to decrease the interest rate.
If you try to decrease the interest rate and the company won’t negotiate with you, consider a personal loan that has a low interest rate below 4% in order to consolidate the debt. This will give you a glimmer of hope to eventually pay off the debt.
High Interest Rate = Paying the Debt Until You Die
Emergency and “Sinking Funds” Savings
Even if you’re broke and living paycheck to paycheck, a savings fund is necessary to build. Debt happens when you don’t have enough cash on hand. The lack of a savings if what makes people go into credit card debt in particular.
When doing your budget, have a slot for an Emergency Fund and a “Sinking Fund”:
Emergency Fund: If you follow Dave Ramsey, he suggests a starter emergency fund of $1000. Save a little bit of your paycheck each time for the Emergency Fund until you get to $1000. Even if this takes you months to build, it’s important to have cash on hand in case of a true emergency such as a car repair or paying for a plumber.
“Sinking Fund”: A “sinking fund” is separate from your emergency fund that’s another savings bucket where you can dip into for necessary payments that are not monthly recurring or consistent. This includes quarterly car insurance payments, dentists and doctor co-pay, annual homeowner’s insurance payment, and vet appointments. All of these payments are necessary yet it will be difficult to pay these bills out of your regular budget. The first step is to figure out these types of non-consistent payments, total them for the year, then divide by 12 to figure out how much you need to save each month into your sinking fund.
If the idea of savings completely overwhelms you, the easiest way to start is to build each savings bucket to $1000 each as quickly as possible. This means you need to cut spending in your regular budget to put the money into these savings funds (more on this later). Or make more money on the side by having a garage sale, selling old items from your house, getting a second job at the mall on the weekends, making money through survey sites in your free time, or even starting a side business.
Aggressively Cut Your Daily Expenses
We really don’t need that much money to live comfortably. Once you create your budget, look at areas you can cut expenses in order to build your emergency and sinking funds.
If the idea of cutting your expenses makes you cringe, then go the opposite direction by making more money in other ways than your normal income. Both ways are difficult, so simply pick your poison (ideally you do both).
Here’s some categories of your budget to cut:
Entertainment: Entertainment includes going out to movies, events, concerts, drinking at bars, clothes and makeup shopping, and vacations and trips. Start by minimizing your entertainment down by 50% then by 25%. For example, if you go out every week, cut by 50% and go out every other week. Then go out only once a month which cuts your entertainment down to 25% of what you normally do.
Food: No, you don’t need to spend $100/week on food for one person. And you don’t need to order Postmates every day or eat lunch at a restaurant daily unless you’re a celebrity. If you complain about money at all, no matter how much income you make, then cutting your food budget is the easiest way to save. Once you think of food as a necessary tool for survival versus trying to become a foodie or wannabe chef, you’ll be able to eat healthy meals for $5 per day very easily. Search for “budget recipes” or “$1 meals” to get ideas.
Impulse Purchases: A random lipstick at Target, a new top at Nordstrom on your lunch break, or late-night Amazon Prime shopping are all considered impulse purchases. If you buy an item the same day (or same hour) that you saw the item, that’s an impulse purchase. The best way to beat impulse purchases is to budget for them beforehand. I personally put $40 per pay period to a “Play Money” bucket, so that if I really want to buy something then I have $40 to play with. You won’t feel so broke and you won’t feel guilty if you assign Play Money in your budget.