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10 ways to manage your money in 2010
Community Contributor | 1-15-2010 | Comments |
By Shay Oliverria. Attend Shay's book signing on Saturday, February 6th at Smiley's bookstore in Carson.1. Think about the big picture.
This is the year to begin thinking about your life as a whole and look at the big picture. Start looking at your income, expenses, goals, etc. from a yearly perspective. Many people think that we don’t have any money, when the reality is that it’s not how much you bring home that counts, it’s how you spend or save it. The first step toward thinking about your income from a big picture perspective will be figuring out your net worth. Add up all your assets (home, car, 401k, IRA, savings bonds, mutual funds, etc.) and subtract them from your liabilities (mortgage, car loan, credit card debt, etc.) to get your net worth.
Many people decide if they are doing well financially by how big of an income they bring in. This is a mistake. The true litmus test is your net worth. You may realize that you are in much more debt than you thought or you may realize that you are doing better than you thought. Either way, being aware of what your whole financial picture looks like will get you off to a great start.
Once you have an idea of where you are starting from, you can start thinking about your money in cycles. We all have some bills that are due yearly, some monthly, some weekly. Instead of thinking about your money in terms of how much you’ll bring in with this check and what bills you have to pay, think about over the whole year how much you’ll pay for each bill and how much you’ll bring in. Seeing the yearly numbers will help you understand how much money you’re really making, how much goes to bills, how much you’re saving, and how much you’re wasting.
2. Keep $1,000 available in an emergency fund.
Making sure that you have access to between $500 and $1,000 will save your financial life. You know as well as I do that your car will always need to be fixed, you’ll have to make an unexpected trip, or you’ll have to take on some new bill. Instead of leaning on family or taking out a payday loan aim to have your own emergency fund. The money should be put in a an account that is easy to access and gives you a decent interest rate. My suggestion? Find a money market account that limits you to make less than three withdrawals, by check, a month and earns at a rate of at least 1% and has 1% Annual Percentage Yield (APY). Make sure that the minimum balance to earn that rate is $0. Only use the money in your emergency fund for true emergencies and pay the money back to yourself as quickly as you can so you’ll have it available for the next inevitable emergency. 3. Start saving for, or add to, your retirement account automatically.
Most of us think about saving as something to do once all the other bills have been covered and we figure out what money we have left over. This is folly. Most people realize that after paying bills, and buying a few treats, you have no money left over to save. Using this method you probably never will.
The best plan is to build your savings into your plan as a bill. Most retirement accounts have an option to have you invest money on an automatic schedule, say every paycheck or once a month. Once you have your 401k or Individual Retirement Account (IRA) set up to transfer from your checking account to your retirement account automatically you won’t have to worry about coming up with the money to save.
Shoot to save 15% of your pre-tax income for retirement. If you can’t commit to 15% right now start with whatever amount you feel most comfortable with, as long as it’s not zero, and increase the amount at least once a year.
4. Change the way you bank.
Banks make more money on overdraft fees than on account maintenance fees. What can you do about it? Use your ATM card with the PIN number and attach your savings account to your checking account to create your own overdraft protection fee. The first thing is to only use your ATM card with the PIN number instead of using it like a credit card and signing for purchases. The reason is that when you use your PIN number the money is transferred out of your account in real time. When you sign for it, the money takes a few days to transfer out of your account making it more difficult for you to manage your bank account online.
The second thing you can do is to attach your savings account to your checking account to automatically cover overdrafts. Most banks will still charge you, however the fee will be significantly less.
5. Have a garage sale.
Use the "designer’s editing rule" -- if you haven’t worn it or used it in the last year, it has to go. By recycling items that you no longer use you are bringing money into your home, emptying the house to have a healthier living space, helping the environment by requiring less consumption, and clearing the mental cobwebs that physical clutter creates. Put the money you earn towards your emergency account.
6. Live on $50 worth of groceries per week for every 2 people that live in your home.
How much money do you spend on food per month? Many of us spend too much on boxed and frozen foods that fatten our middles, clog our arteries, and cost us too much money. Try incorporating more fresh meats, fruits, and vegetables into your diet by buying food that is seasonal. You’ll find that you’ll save money while improving your health.
7. Start using money management software.
Having your bank account download directly into money management software is the easiest way that I know of to track your spending. Once you connect your online account to the software, you can see each deposit and withdrawal and place it in a category. There is nothing like seeing all those fast food expenses in a pie graph to make you realize you’re eating out too much.
8. Create a plan to pay off debts.
Make a list with five columns of all the debt that you owe, and I mean all the debt. Write down your credit cards, store cards, installment loans, money you owe your cousin, and the five bucks you borrowed from your brother. In the first column write the name of the person or business that you owe the money to. In the second column write down the amount of the debt. Make note of what, if any, interest rate you’re paying on the debt in the third column. Write down the contact information for that debt in the fourth column. Lastly, write down what the next action step is in dealing with that dent responsibly.
Start by figuring out which debt has the highest interest rate and put them in order from most to least. Pay the minimum on every debt, however put as much money as you can toward the debt with the highest interest rate. Once that bill is paid off, pay the most toward the next highest interest rate, and so on.
9. Create spending guidelines.
It doesn’t have to be a written account of every penny you ever spent. Write down the monthly bills that you have that are fixed (rent/mortgage, car loan, car insurance, tuition) and the bills that you have that are varied (food, gas, electricity, entertainment), how much you’re saving in an emergency fund, how much you’re saving towards retirement, and how much money you bring every year from all sources. Multiply the monthly totals by twelve to get your yearly amounts.
Whatever you spend or save, use wisely or throw away, all depends on you. When you think about buying a soda seventy-five cents doesn’t sounds like that much, but buy one soda per workday and that seventy-five cents balloons to $180 a year! Small, unplanned expenditures can quickly eat up your money. If you have an expectation of how you want to spend your money, you’ll have a benchmark to know if you’re on track or not. If you don’t have any guidelines, how do you know if you’re on your way to where you want to be?
10. Resolve not to get a tax refund next year.
The average US tax refund is around $2,300. If you are looking forward to your tax refund think how you would have felt if you had that money over the course of the year! Essentially, a tax refund is the government returning the money that you overpaid them. Imagine this: you owe your friend $1,000 and you promise to pay it back over 12 months. Would you set up the payment plan so that you pay $100 each month and trust your friend to return the extra $200 at the end of the year? It sounds crazy doesn’t it? That’s what you’re doing with your tax payments if you’re getting a tax refund. Most of us have a pretty steady tax situation. We bring in about the same amount of money every year and we make the same deductions every year. That means that you have an idea of how much you’ll owe in taxes and about how much you’ll receive as a refund. Why not adjust your withholding to take out as much money as you need to pay what you owe and keep the rest. Put the extra funds in your emergency account or retirement savings.
You can find out the amount of taxes due, approximately, on your income by looking at your previous three years of tax returns, if your income is about the same, or having your tax professional run a projection for 2010.
Conclusion: Stop hiding from debt.
It doesn’t matter if you owe money to a bank or your mom. Owing money feels bad. Make 2010 the year you stop hiding from your debts. Remember that list of debts from figuring your net worth? Take a look at it and think about if you’ve been avoiding creditors, or friends, due to your inability to pay.
The first step is to contact the creditor and be honest. Tell them what your situation is. Let them know when you expect to be able to pay. You might be surprised how much people are willing to work with you once they understand the situation.
Let’s start 2010 off on the right foot and look forward to prospering this year. A little bit of knowledge, clarity, and work can get you to where you want to be.
PEACE,
Shay Olivarria
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Shay Olivarria is a speaker, financial literacy coach, former foster care youth and author of Money Matters: The Get It Done in 1 Minute Workbook. As an ambassador for financial freedom, Shay travels all over the country to educate people on responsible financial decisions. Her financial workshops focus on a number of topics, including money management, credit scoring, credit reports, net worth, investment accounts, and retirement accounts. She has partnered with several community organizations including Independent Lens, Promise House of Dallas, Texas, Los Angeles Urban League, and the Latino Student Business Association of the University of Southern California. Shay writes a “Money Matters” column for SquareRootz.net, and she is currently finishing her second book “7 Money Rules to Help You Lead a Happy Life”. Shay earned her Bachelor of Arts degree (Anthropology major, Business Management minor) from California State University – Dominguez Hills. For more information on Shay and her organization, go to www.MakeMoneyManagementSimple.com.
