Freeze your spending, pay off debt, balance your checkbook, open ignored bills, consolidate loans, refinance your mortgage, start paying off that student loan.
There can be so many choices when sorting out your finances. How should you start?
Each of these items is just a symptom of financial overwhelm. To make a difference, you must treat the cause, not just the symptoms. Not addressing the source of your financial problems would be like bailing water out of a sinking boat without fixing the leak.
Let’s repair the leak in your finances by starting with the basics: money in and money out.
Money in: Your incomeHow much do you make? Do you know, exactly? If you don’t, you’re not alone. Most people don’t, and that’s a leak. To plug this leak, get your pay stubs for the last month and add up your take home pay after taxes and deductions.
If your income fluctuates, pick an amount you realistically expect to make in a month and consider that your income. With each paycheck, you will update your budget with the actual amount earned.
Your budgetStart simple. Using a piece of paper or simple spreadsheet, make a column for expenses and a column for income – this being every time you get paid. If you and your partner get paid on the same day, add the checks together.
Remember, you can’t spend more than you make during a single pay period or month.
Money out: Your spendingOn a separate sheet of paper, make a list of everything you purchased during the month. Include necessities, debts, obligations, less-than-monthly expenses and small luxuries.
Then categorize each expense into four categories:
Living expenses such as rent/mortgage, groceries, utilities, gas.Debts and obligations.Less-than-monthly expenses such as insurance, car repairs, medication, gifts. This can be a long list. Keep it to a minimum as you get started. For each item, divide the cost by the number of months until you need it. This way, you’ll know how much to save each month.Small luxuries are the least important items in your budget, such as restaurant meals, entertainment and miscellaneous spending money.Now, start with the 1’s. List them on your budget in order of priority. Determining these priorities will be relatively easy. Priorities will get harder with levels 2, 3 and 4.
Once you’ve established your priorities in each level, add up your expenses. If your expenses are greater than your income, you have some leaks to plug. Start by cutting small luxuries and less-than-monthly expenses until your budget is balanced.
Next time, I’ll show you how to put a money management system in place so you can stick to your newly created budget.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. Visit his website, www.personalfinancecoaching.com.