Money management can be difficult. There are lots of opinions on how to manage your money successfully, but sifting through all that can be a challenge. We have boiled down our 7 top recommendations for managing your finances.
1. Do: Plan Your Spending Before the Money Arrives
You are the CEO and CFO of You, Inc. Think about running your personal finances like a business. Companies plan their revenues and expenses well in advance. Budgeting gets a bad rep, but successful, profitable businesses formally plan their finances and make decisions in advance of their spending.
Money is like a toddler. If you don’t monitor it carefully, it will wander off and disappear quickly!
2. Do: Aggregate Your Accounts and Track Your Spending
Aggregating your accounts, allows you to see the big picture and a number we highly recommend you track regularly – your net worth. It can be difficult to make tough choices if you don’t have the bigger picture in mind. Tracking is also important. You cannot change what you do not measure. In order to make meaningful change, know exactly how much you spent last month versus the month prior. Guessing doesn’t work well with personal finances. Once you build a habit of tracking your finances, making smart decisions about your money becomes much easier.
3. Do: Understand and Deal with Your Impulse Purchases.
For some it’s the mall, for others it may be online shopping. Have you ever gone into a store planning to spend $50 and come out spending $300? Evaluate how and why that happened. Keep in mind; it is a marketer’s job to turn a “want” into a “need.” Notice on television commercials, often the product or company isn’t revealed until the very end of the commercial. Instead of selling a can of soda, they are selling happiness. Instead of a gym shoe, they are selling peak athletic performance. Instead of selling their own product, they may have a celebrity endorse it as if it is heaven-sent. Companies hire social scientists who study how to influence human behavior, emotions and decision-making to get an edge in selling their products and services. Here are some examples to protect yourself and your wallet:
- 24-hour rule – Wait at least 24 hours before making purchases over a certain amount
- Do not go grocery shopping on an empty stomach
- Deconstruct advertisements: what are they really selling?
- Use cash for non-regular expenses
- Don’t fall for terrible excuses (“I deserve it”, “it’s on sale”, “I’ll pay it off next month”)
4. Do: Develop a Habit of Saving and Automate It.
Even if you start small (i.e. $25/week), put systems in place that force you to save. The government understands this very well, which is why employee payroll taxes come out of your paycheck even before you are able to touch it. Apply the same strategy for your savings. Some employers will allow splitting your paycheck to different bank accounts (i.e. 75% checking, 25% savings). Another idea is to set a recurring transfer from your checking account to your savings on the same schedule as your paycheck. There are other automatic features to consider such as:
- Auto escalating your 401k contributions – some employers with a 401(k) offer an option to automatically increase your retirement savings by a certain percentage on a regular basis (i.e. increase 1% annually)
- Keep the change features in checking accounts – Some checking accounts will round up your purchases and put the change in your savings account. It is the e-version of the piggy bank. If you purchase an item for $5.60, it will round up to $6.00 and $0.40 will be deposited in your linked savings account.
5. Don’t: Ignore Your Credit Score and Credit Report
A credit score is very important to be aware of and to know how to improve. Credit scores have traditionally been used to evaluate credit-worthiness for extending loans (e.g. personal loans, mortgage, car loans, credit cards) and the higher the credit score, the more financially credit-worthy one is. The reality now is that both credit scores and credit reports are being used beyond financial transactions. Credit scores and reports are being used for employment decisions, housing, insurance premiums, and even utilities such as cell phones and cable. The challenge is credit reports often have mistakes which can negatively impact your credit. Check out our Resources Page for resources on checking both your credit report and credit score.
6. Don’t: Ignore Your Workplace Benefits
If you work for a company and do not understand the full scope of your employee benefits, it may be time to check out your HR Benefits website or set up a meeting. Particularly with larger companies, there are often benefits that go underutilized that can save you hundreds if not thousands annually. One of the largest ones is the 401k match. For most people, this is a no-brainer to at least invest as much to maximize the match as it is a 100% return on your investment. Wellness Initiatives can often mean big savings as well. Many companies are offering rebates on health insurance premiums for wellness activities, such as physicals or wearing fitness trackers. Let’s think about that for a second, companies are paying additional cash to employees to be healthier. There are several other types of benefits, and we’ve created a FREE Guide to help you maximize benefits that are offered to you.
7. Don’t: Keep up With the Joneses
Most people are familiar with the term ‘Keeping up with the Joneses,’ but just so we are all on the same page, it refers to making material comparisons to your social circle. The idea that if your neighbors or friends buy a new car, you should too. We call this the comparison trap and its one of the lessons we learned paying off our student loan debt. Part of the problem with comparing your financial status with others is that it is very difficult to know someone’s complete financial picture. Money is still a private topic and everyone has different income, expenses, debt obligations and assets. The people you are comparing yourself to could be completely up to their eyeballs in debt or fund their lifestyle through an inheritance. Making comparisons, not only could be comparing apples and oranges, but it also casts your own possessions in a negative light.
“Comparison is the thief of joy” – Mark Twain
A few reasons why keeping up with the Joneses is a bad idea:
- The Joneses are broke! According to a recent Bankrate survey, 76% of Americans are living paycheck to paycheck with little to no emergency savings. Why keep pace with people that are one emergency away from financial catastrophe?
- When you compare yourself to others, it’s much easier for wants to become needs. Wanting a car becomes needing a brand new SUV. Technology like smart phones, that didn’t exist 10 years ago, are a now a need. We have a desire to show off and have our success validated by others.
- Companies are spending billions of dollars to market their products and services to you. Many luxury brands are selling a temporary feeling of exclusivity in exchange for premium pricing. For example, a luxury shoe could be made in the same factory as an off brand shoe, but once they slap the logo on, they can charge five or ten times more. Luxury and quality are not the same. It is easy to get sucked into the consumerism culture. Happiness from possessions is always temporary and fleeting.
This leads us to the fundamental challenge of managing your finances. We live in a consumerism culture and an economy fueled by consumer spending. On one hand, we have many of the influences we described (social, corporate, psychological, economic) with a clear mission to separate you from your income. Those influences contend with our own goals to keep our income and grow it for the future. These recommendations will help you be better equipped to keep more of your income to reach your financial goals.