Welcome to “Fiscal Fitness,” a four-week crash course covering financial planning, money management, credit repair and loan management. Once a week, we’ll be posting a blog entry on a new topic. This week, we’re discussing money management.
Money management is the process of knowing where you are spending your money daily and establishing a thorough plan for where you want your finances to be in the short- and long-term future. While managing your funds can be an overwhelming and monotonous task, there are several exercises you can do to work out your finances. Start here:
What’s Your Current Financial State?
Start from the beginning. Think of it as stretching! Head to AnnualCreditReport.com and get your free copy of your credit report. Do you like what you see? Are there errors or room for improvement? After you have evaluated your credit, take a look at your recent transactions over the past 30 days. Separate those transactions into three categories:
- Bills – Rent/Mortgage, House Bills, Car Payment, Credit Cards, etc.
- Monthly Expenses – Groceries, Gas, Clothes, etc.
- Entertainment Costs
Where Are You Losing Money?
Now that you’re warmed up with the state of your finances, start peeking at your accounts to determine where you’re losing money. What small adjustments can you make that will make a difference? You can do that in two ways:
Lower Your Interest Rates
Are you overpaying on your credit card interest rates? If you are, look into getting a balance transfer credit card. This will allow you to move all of your credit card debt onto a card that has 0% APR for a short period of time. Take advantage of this time to lower your level of debt.
Automatic Bill Pay
One way to hurt your credit score and rack up overdraft fees is to miss your payments. To avoid this, set up automatic bill pay when given the option. Not only will it benefit you in the long run, it’s also better for the environment because of the lack of paper bills!
How Can You Keep Improving?
Once you have started building muscles with your money, you have to keep practicing and implementing your new management skills. The golden rule of money management is to spend less than you earn. While that seems simple (and obvious), you can also add the following exercises to your financial routine to help with your long-term management:
Set Up a Budget
Now that you have separated your transactions into three categories and gotten into the habit of tracking your spending, you can begin setting up your budget. To do so, use the following four categories:
This should be 50% – 60% of your budget.
What costs do you have every month? Think rent, utilities, groceries, cellphone and all other recurring bills.
This should be 10% of your budget.
While you’re building your savings, you will likely want to invest some of your money. Especially if you have a 401(k) or retirement fund!
This should be 5% – 10% of your budget
What are your short-term and long-term savings goals? That is what this category is dedicated to! This includes saving up for a vacation, large home purchases and an emergency fund.
4. Guilt-free spending
This should be 20% – 35% of your budget.
This money is your “fun money” to do whatever you want! That means you can enjoy a meal with your family or go see a movie guilt-free because you already prioritized your other funds!
Make Monthly Transfers
Every month, transfer money (any amount that you’re comfortable with) to a separate account that is dedicated to paying off your debts. To be certain that you actually deposit funds into it, set up automatic transfers. Not only does paying off your debt feel great, it helps improve your FICO score.