Staying on top of your finances can be a real chore. Some are great at it, some are not so great. Not adequately managing your finances can lead to a lack of cash flow when you need it most, not saving enough for retirement, and can just cause a pit in your stomach from uncertainty. Here are four simple habits that will help you stay organized and manage your finances more effectively.
#1) Prepare a household budget.
This is probably the biggest one where I see people fall short. Creating a budget is a tool that provides the roadmap for managing your spending. Put together a simple spreadsheet that can be reviewed monthly so that you can see where you are at. It doesn’t have to be complicated process either. Create simple categories to track where you can see on one page how your actual expenses are comparing to your budgeted expenses. You will want to include both fixed expenses and variable expenses so you can understand the full picture of your cash flow. Some basic categories include:
- Income
- Mortgage/Rent
- Utilities
- Insurance
- Grocery
- Gas
- Savings (try to shoot for 10% of your income)
- Entertainment
Take a look back at your prior spending to find all of the different categories that will help you make meaningful decisions. Analyze your actual expenses each month to see where you may be overspending and need to make some lifestyle changes.
#2) Reconcile your accounts every single month.
Reconciling your bank and credit card accounts is not only key to the above budgeting process, it also helps you uncover patterns such as a subscription you forgot about, errors, and even fraud. By going through this exercise every month, you are almost certain to spend less and you will have greater peace of mind knowing that everything balances out.
#3) Create a cash allowance each week.
The Consumer Financial Protection Bureau released a study in 2017 that came to the conclusion that when people use cash they are more mindful of their spending habits. Seeing that finite amount in your wallet makes you think more about your purchasing decision in the moment. After you have taken all of your mandatory (fixed) spending and savings into account, break out your remaining monthly discretionary income into a weekly cash allowance. I’m not saying you should never use credit cards. Those points are nice. But you are likely to see more savings by using cash than from the rewards.
#4) Pay your credit cards off every month if possible.
Speaking of credit cards. If you are able then absolutely pay them off every single month. Life happens and sometimes debt needs to be utilized to make ends meet. But the interest rates on credit cards can leave you in a revolving door of debt that becomes harder to pay off over time and can negative impact your credit score. By doing your reconciliations each month, you can start to see how much interest you are really paying and can make a conscious decision to limit your credit card spending.
If you need help managing your personal finances, reach out to our professionals at High Impact CPA and we will get you organized.
