Below are fourteen important tips on how to manage your finances effectively and achieve financial security.
Do whatever it takes to eliminate credit card debt
Consider your credit card as if it were a demon, a temptation from hell. A credit card invites you to put yourself in debt. It encourages instant gratification and irresponsibility. When you use a credit card, it does not feel like you are spending real money so it devalues what you spend.
Do not buy something if you don’t have the funds to purchase it outright. Being in credit card debt is disastrous. Once you do in many cases the amount you owe spirals out of control and the interest rate you will pay on that balance is so ridiculously high. If you are in credit card debt then it should be your top priority to get out of it as quickly as possible. Once you’ve achieved a zero-monthly balance but if you are not disciplined enough to pay the full amount each month then I highly recommend shredding your credit card. You are allowed one card for emergencies and for things like ordering necessities over the Internet.
Set realistic financial goals
If your finances are a mess don’t set outlandish goals that you wouldn’t have a chance in hell to accomplish. Initially, take baby steps. But before setting goals make sure you document your expenses—all of them, which is the foundation for creating a budget. Once you have a good snapshot of your expenses then establish realistic goals. Start small i.e., start a savings account and deposit a nominal amount each month or automatically deduct from your paycheck every two weeks.
Establish common goals with your partner
If you have a partner, then you should establish common goals. After there is agreement, then you and your partner should discuss how to achieve those goals. Harmony is created when both parties agree on common goals and agree on how to achieve them. Also, it will be important to establish roles:
Simplify bill payments
I pay my bills automatically via one credit card, which provides me with cash back for every purchase and via my checking account for those vendors who do not accept credit cards. It’s important to keep things simple. Using only one or two methods will make managing your finances easier and quicker. Also, for those irregular bills that come in the mail always put them in the same place.
Monitor bank and credit card accounts daily
Managing your expenses are just as important as making more money. Unfortunately, most people don’t even know how much they spend each month, yet they know how much they earn. Eventually your expenditures will creep up higher and higher and you will be upside down and even go into debt. One of the biggest mistakes people make is not monitoring their bank accounts and credit card purchases daily. It’s important to know your numbers (i.e., how much you spent on your credit cards and how much is in your bank accounts) and to validate all transactions that were posted overnight. Checking your accounts online daily should be noted on your to-do list so you don’t forget.
Pay Your Bills Immediately
I am frequently asked “why should I pay my bills immediately? They’re not due for several weeks. Doesn’t it make more sense to accumulate all my bills for the month and pay them at one time?” There are no advantages to paying your bills at the end of the month however, there is one huge benefit to paying your bills immediately. One of the biggest advantages is to know your real balance as quickly as possible. Once I receive a bill, I typically make my payment within 24-48 hours unless I’m away on business. Let’s say your current balance is $5000.00 and you have $4800.00 in bills to pay, waiting until the end of the month may cause you to forget how many bills you’ve accrued and the total amount owed, which may trigger you to make unwarranted purchases. Knowing the real balance in your checking account may cause you to think twice before making purchases you don’t need.
Train your mind to always be frugal
Establish negative phrases that promote an image of going broke. Repeat those phrases several times each day until you begin emulating this lifestyle. For example: “In case I lose my job, do I have enough money in my account to support my family for at least one year?” or you can go one step further and use hard-core negative phrases like: “I am going to lose my job any day and I won’t be able to support my family.” This is my preferred choice, I felt that hardcore phrases were more impactful. It helped me save more by withdrawing additional funds from my paycheck and depositing it directly into my savings account, which meant I had less disposable cash each week for expenditures.
You may argue that the odds of losing your job are minimal, especially if you’re a high performer and maintain a good relationship with management. You can also argue that being this negative would cause you to be so stressed out and depressed that you could lose focus on getting the job done in an efficient manner. I was laid off in my prestigious and long IT career—it was a harrowing experience. It had nothing to do with my performance. It had everything to do with the economy and the company closing its doors for good. After the layoff, I wanted to make sure that if it ever happened again, I had a large savings account to support my lifestyle and pay my bills for at least one year. Being negative internally did not change my personality, no one knew the internal war that was brewing, but it made me work harder, smarter and more efficiently to excel in my career and the more I made the more I saved.
Create your own phrases. If you prefer to use positive affirmations then establish phrases that promote an image of being successful by having a hefty savings account. If you train your mind effectively you will be frugal, which means you will question every purchase repeatedly and be very selective about making that purchase.
Train your mind to think that you’re barely making enough to pay your monthly bills. The most effective way to help you be frugal is to believe that you’re broke. Just telling yourself to manage expenses prudently does not work. Below are tips on how to train your mind to manage expenses effectively:
Don’t buy the latest and greatest
Question yourself repeatedly. Do you really need to buy that item right now? You’ve survived without it all these years. The more you question yourself, the less likely you are to buy it, which means you probably didn’t need it to begin with.
If you own a business train your mind to believe the economy will crash any day
Even in the best of times, because you know eventually everything must come down. You should operate your business like the economy will crash any day. This doesn’t mean you stop investing in necessary programs and functions—it just means managing your expenses 365 days a year. It’s a big mistake putting sound financial management practices on the back burner during the best of economic times. One of the stupidest things that businesses do is to reduce expenditures only during economic downturns. They have layoffs, curtail spending and ask everyone to do more with less. Why wait until it’s almost too late?
Extrapolate expenditures throughout the year
You don’t think about how much you spend on any given day. “What’s $5.00 here or a few dollars there…it’s all incidental expenses, right?” Wrong¾it all adds up. If you don’t have a vague idea of how much you spend throughout the year it will sneak up and blindside you but, by then it’s too late. Calculate your expenses. For example, how many times do you go out to eat? Let’s say you average two outings for lunch in a week at a cost of $10.00 each, and the same number of outings for dinner at a cost of $25.00 each. If you look at it from that perspective you might think it’s no big deal however if you forecast it over a month’s period = $240.00 per month and even more eye-opening = $3360.00 a year. I’m not saying to cut out the fun in your life (dining out, entertainment, etc.), rather forecast your expenses and see if it fits into your yearly budget, the sticker shock may frighten you enough to start budgeting appropriately. Just limiting your outings to one lunch and one dinner a week will save you $1680.00 a year. That’s a substantial savings. Did you just spend double for a movie ticket taking your wife in the evening instead of going to the Saturday afternoon matinee? With the money you saved from evening movies throughout the year, you could buy her a nice gift. Always extrapolate recurring incidental expenses throughout the year—wake up and shock your system.
Stop spending on small insignificant things to save and purchase important items
If you keep wasting your hard-earned money on nonsense your odds of making those larger purchases like a home, new car, etc. diminishes significantly. Remember managing expenditures, especially the small insignificant stuff, should be given equal attention as your income, savings and investments. There are many ways to be more prudent and help avoid flushing your hard-earned money away. Below are a few examples
- Daily lunch outings quickly become a waste of time and money. Bring your lunch and save precious resources. If you must go out to break up the monotony, then once a week should be sufficient.
- Not picking up the entire tab at the bar for all of your buddies. This is stupid!
- Roll your own coins. Before taking that big jar of coins to the machine at Wal-Mart and paying that hefty fee to automatically count. Roll them yourself while watching a movie.
Manage utilities:
- Turn the lights off immediately when leaving a room.
- Don’t leave the shower running while taking a shower. Turn the shower on to wet yourself down, then turn it off while lathering, then turn it back on to rinse thoroughly.
- Set your AC to somewhere in the 76-78 range in the summertime and your heater no higher than 68 in the wintertime. If 68 is too cold where some extra layers around the house
- Don’t run your pool pump for eight hours a day, four hours a day is sufficient.
- Don’t pay for cable packages not utilized; only purchase what you use.
Being frugal doesn’t mean you can’t have fun. My daughter and I go out to dinner at least once a week. We don’t spend much, a typical bill averages $25.00. We don’t purchase beverages. I taught her to avoid ordering drinks from restaurants because that’s where most establishments make their biggest profits. The $5.00 + we save on sodas or coffee each week will net us a few hundred dollars at the end of the year, which will allow us to dine out more frequently. If she feels like drinking a soda, we always have a 2-liter bottle of Sprite (her favorite) at home which we bought on sale at Wal-Mart for $1.00.
Train your mind to save and to always beat your previous number
It’s not only fun to watch your balance grow, it’s also very addictive. Even if it’s a small amount view it daily. After a short period of time you’ll be hooked to saving more. Savings must be a priority. Consistently save and never withdraw funds from your savings account unless it’s for an important purchase like a car or home. It should not be used for vacations or purchasing Christmas gifts, it should only be used for significant necessities and investments. You should set an amount and deposit those funds into your savings account each time you’re paid. Even if you can only save a minimum of $10.00 every pay period, the actions taken to constantly save are more important than the actual balance. Also teach your children how to consistently save. My daughter gets tips from work, typically a few dollars. All coins and bills go into a jar, at the end of the month she rolls up those coins and deposits it into her bank account. That’s my little girl!
You should try and increase the amount you’re depositing periodically. Perhaps after several months you can increase the amount to $15.00 per pay period, etc. Increasing the amount, you are saving and watching your balance grow feels great and will give you peace of mind. Once you have a substantial amount saved, in case of a major emergency, you will feel like you are standing on solid ground. Saving will become habitual. Your mind will always want to see more—to always beat your previous number. Train your mind (Refer to Chapter One) by conversing with yourself repeatedly, for example:
- I can’t touch this; I have to find another way.
- This money is only for emergencies. Don’t touch your savings, an emergency will occur one day and you won’t be prepared.
- Do I want to live in an apartment and pay rent for the rest of my life?
These thoughts may sound harsh but, they will help combat all the temptations you are being subjected to daily.
Be risk-averse
Do not invest in the stock market to make a quick buck. It’s for long-term investments. Do not get involved with any ‘get-rich-quick’ schemes. If it sounds too good to be true, then it probably is! Do not lend money to associates or friends, odds are 50/50 that you will never see your money again and your friendship will deteriorate or potentially end. You have worked hard to earn these resources; you have a duty to conserve them.
Have multiple sources of income
Do not have all your eggs in one basket. If you rely on that one work-related paycheck, it’s a formula for a future disaster. The bills will always be there, but your job may not. You should never be satisfied with one source of income in case one dries up. In this Internet business-conducive era it’s easier to have a side business or a second job. Never be complacent and constantly strategize for supplementary career and/or business opportunities. The sooner you can achieve a second source of income the better!
Making lots of money needs to be a priority—everything continuously increases in price (food, gas, education, clothes, rent, etc.) say it dozens of times each day—I need to make more money—never settle!
Keep good records
It’s crucial to maintain good records throughout the year especially if you own a business. Don’t wait until the end of the year and try to make sense of all your undocumented business expenses. Establish a simple spreadsheet and maintain it! If you don’t have your own business remain organized and maintain your receipts, especially during tax time.
Establish a budget
Create a budget¾sure it’s an effort but it’s well worth it. If you don’t know how much you spend throughout the year then how can you manage your resources effectively? A budget is a summary of expected expenses for a certain period of time (typically monthly). Create a simple spreadsheet. Start by first listing absolute necessities—those expenses you have to pay in order to live (i.e., rent, food, transportation, utilities, medications, etc.). Second, don’t forget to include the amount deposited into your savings account, as part of your overall expenses. Third, list all of your bills—there are your monthly bills, such (i.e., credit cards, rent, utilities, etc.) and then there are others. Which ones need to get paid? If you have little to work with and have to choose which bill to pay, think carefully of the consequences of not paying that bill. In other words, which bill will have the least impact on me if I delay it for a month? Lastly, if the income required is met to pay all the bills, you can now list the extra things you would like to purchase. These are desirables (i.e., dinner out, a new purse, etc.). Voila! You now have a budget for the month.
Contribute into your company’s 401K program
If offered and you’re not in credit card debt sign up for the maximum amount of your company’s 401K program it will be a smart, sound and safe investment. If you are in credit card debt you should still take out the minimum amount. It’s a good habit to initiate. They are an excellent way to invest, especially for your elder years. Don’t rely solely on our government for retirement.
Initiate and maintain a Will and/or a Living Trust
If you have dependents, no matter how little or how much you own, you need a legal document. Don’t think about yourself, think about your loved ones.
Eventually purchase a home
Purchasing a home is still one of the best and safest investments despite the collapse of the US housing market in 2008. Only purchase a home if you have enough resources to make your monthly mortgage payments on time. You must also establish an emergency fund (in your savings account) to pay your mortgage payments for at least six months, preferably one year in case you suddenly lose your job.
