You can choose to make 2011 the year you gain control of your finances and begin living your dreams.
This is the fourth in a series of columns about how to change your money habits for the new year. My three previous columns addressed identifying a dream, creating a budget and managing discretionary spending. Today, Ill bring all of those ideas together.
Learning how to manage your money requires changing your behavior. Building new habits takes time and effort. You need to balance the rational mind (saving) against the tug of emotional desire (spending).
So strong motivation is essential to meet the challenge of actually living by new habits. That motivation is a dream. I know you may be dreaming of escaping the burden of debt, but I am looking for deeper motivation: What would you do if you didnt have any debt?
This dream whether it be traveling, a vacation or more time with family must be powerful enough to change your day-to-day financial behavior.
Once youve identified your dream, its time to create a budget to make that dream a reality. First, determine how much money your household brings in every month after taxes. To get an accurate figure, take a look at recent pay stubs.
I have three rules when creating a budget: it must be written down (in any form that works for you); it must be written before the start of the month; and your spending must follow your plan.
There are only four things that you can do with money: spend it, pay off debt, save it and give it away.
Lets focus on spending first. When building a budget, divide your spending into obligatory and discretionary categories. Obligations are expenses like your mortgage or your credit card or car payments. Discretionary spending includes items like groceries, gas and miscellaneous purchases.
Add up your monthly spending. Is it smaller or larger than your take-home pay? If expenses exceed income, reduce or eliminate some spending.
Now, your debt. Add up your total debt those monthly obligations, not including your mortgage. Then divide by 12. This is the amount you would need to pay to be debt-free in 12 months. If that number seems too large, try 18 months.
Saving must be part of your budget, too. You should save each month for future expenses like insurance, car repairs and holiday gifts. And remember that dream? Begin setting aside money so you can realize it. Yes, making savings a regular budget item may mean reducing your spending again. I didnt say this would be easy.
Lastly, giving. Dont forget to budget for your generosity. If paying off debt and saving are your top priorities, you can increase giving once you are debt-free.
With your dream in focus and a written budget in place, you are ready to build new money habits in 2011 that will lead you toward financial independence and personal fulfillment.
To view earlier columns in this series, visit durangoherald.com and search Money Savvy.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.DebtFreeTribe.com.