As the recession deepens with no end in sight, many people are coming up against some simple, hard truths about saving and spending money. Although the value of these principles has always been acknowledged, you could probably benefit from reviewing them to see how well you use them in your own life.
The two most important rules when it comes to managing your money wisely are:
- Live within your means.
- Pay yourself first.
When you live within your means, you can pay for all of your regular expenses without going into debt. Most people do have to take out a loan in order to buy a house or invest in a business. These are considered good debts, however, as long as they are undertaken cautiously. For almost everything else, you shouldn’t buy what you can’t afford. And when you pay yourself first, you put a portion of your earnings into savings to cover unexpected or irregular expenses. Simple, right? But how many people forgot these rules over the past decade?
Let’s look at a few basic steps that will help you to live within your means. First, you need to figure out how much money you actually make and spend every month.
- Begin by calculating your true income. Here’s the catch: your true income only includes money that comes in every single month, guaranteed. It doesn’t include money that you might make if everything works out the way you hope. Only current steady income should be considered.
- Next, determine your monthly expenses. The only way to figure this out is to carry a small notebook with you for the next month. Write in it every single dollar that you lay out over the next 30 days, whether this is in the form of cash, debit payments, checks or credit card purchases. Add to this all the automatic deductions that get subtracted from your bank accounts to get a picture of your total monthly expenses.
- Once you have documented your expenses over a 30-day period, you can figure out your annual expenses by adding in all the money you spend on a quarterly or yearly basis, including taxes; subscriptions; tuition payments, seasonal clothing purchases; vacations, etc. Then take your total annual expenses and divide that sum into 12 months. Now you have your actual monthly expenses.
- Compare this sum to your monthly income. Do you come out with a loss or a surplus?
This can be a very sobering exercise for many people. If your monthly expenses are higher than your monthly income, then you are actually going deeper into debt every month. You may not be aware of this if you are charging some expenses to your credit cards and then only making minimum payments on the amount owed each month. But as painful as it is to realize that you’re living in the red, it’s better than closing your eyes to this fact and just hoping that somehow things will straighten themselves out.
With an accurate picture of your expenses and income, you can now figure out how to live within your means. But this can be an almost insurmountable challenge if you, like many people, confuse what you need with what you want. The secret of financial security lies in knowing the difference. We have to meet certain needs in order to live and survive: we need a home to live in and we need food; we need clothes and shoes, we need to get to work and we need to educate our children. But we want a bigger house and more interesting food; we want better clothes and nicer shoes; we want expensive cars and fancy cell phones and special vacations and all the products and amusements that our society has only been too happy to encourage us to purchase. It’s the endless pursuit of more that leads us to not having enough.
In order to rebalance your income and your expenses, you must learn to distinguish a desire from a necessity. Any time you can postpone a purchase, find a less expensive substitution or manage with something you already own, you’re probably looking at a “want,” not a “need.” Even if you do decide to buy a “want,” the fact that you’re consciously doing so will help you make a better buying decision. Here are a few tips that will make it easier to find your new balance:
Wait 48 hours You may be surprised to discover how many purchases that seemed so essential become less urgent if you just wait a day or two.
Set a spending limit When you decide to buy something non-essential, do it consciously. You can say to yourself, “I am going to spend money on this because I really want it, but here’s my limit.” Then stick to your spending limit, or wait to save up more money.
Get the most for your money Now that you can tell a “want” from a “need,” you should take the time to look for the best deal. The fact that you can wait gives you the upper hand in negotiating for a better price.
Pay yourself first In order to achieve financial security, you must put away a certain percentage of your earnings into a secure savings vehicle and let it compound over time. This will provide you with a passive stream of income. You can then use this interest to make purchases, knowing that you have the capital as a security if you lose part or all of your income.
Cut up your credit cards When you use debt to pay for immediate desires instead of living within your means, you are giving up your future financial security for the pleasure of buying and owning what you want today. And as the current recession has shown, this can be a very short-lived and expensive pleasure.
QUOTE OF THE WEEK
“Today, there are three kinds of people: the haves, the have-nots, and the have-not-paid-for-what-they-have.” Earl Wilson
© 2009 – 2011, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.