Personal Finance in the New Year

My personal finance mantra is “Plan, plan, plan!” No matter where you are in your financial life: just starting out, paying off debt, saving for a home, or investing for the future the only realistic way to get there is to create a plan which fits your circumstances and can be maintained over a certain period of time. The most common mistakes in personal finance are failing to plan and being unrealistic about your plans. Below are a few excellent financial tools for achieving a variety of goals.

Avoid the Same Mistakes in your Finances Next Year

Did you go on vacation and use your credit cards? Or max them out Christmas shopping? You aren’t alone, but you can learn from your mistake. This year plan for those larger expenses. For instance, if you expect to take a vacation in July, start saving now. Project how much you’ll need for lodging, food, fuel, entertainment, etc. and total it up and divide by the number of months before you need the money. Maybe it’s an intimidating figure, but divided by 6 months it’s probably not so bad. If it still seems unrealistic and you’re honest with yourself, if you can’t save for your vacation with 6 months’ notice you’re probably taking a vacation above your means and you should consider dialing it back to something more affordable. You can use the same methodology for Christmas or any other anticipated expense above and beyond the norm of everyday life.

Grow Your Financial Assets

Most people start every year with roughly the same amount of money with which they started the previous year. For the first 30 years of my life, I was one of those people. One day I woke and asked myself “how can someone so good with numbers, be so stupid with money?” The answer, I didn’t think about it enough, I paid my bills and had some fun and then I got paid again and did it all over again. In short, no planning whatsoever. Today I budget for bills and allocate adequate spending money then immediately transfer the rest to an online high yield savings account. The reason I use an online account is access, it takes 2-3 business days to make a transfer so I have plenty of time to consider the cost-benefit ratio of whatever decision I’m making before it actually occurs. Quite often, I make the decision to forego the purchase by the time the transfer arrives and save the money. Next week as we begin 2013 I will have accumulated over 7% of my net income in savings throughout the year plus another 3% to my 401K and 3.5% to a conservative balanced mutual fund. I’m not wealthy, I don’t make a million bucks a year, I work for a living just like all of you, but I plan for my expenses in advance and typically am able to incur those expenses without getting into credit card debt.

Revisit your Current Finances and Expenses

Several years ago I was having trouble making my income exceed my expenses so I went through all our utility bills, bank statements, etc. looking for services we either weren’t using or wouldn’t miss so much if they were eliminated. What I found was $75 a month in extra income by bundling several services that I was already using and paying for separately, getting rid of movie channels we were not watching, and cutting superfluous services that we would not miss. Consider however that I was already pretty frugal and didn’t sign up for a lot of add-ons unless I felt they had significant value. What I discovered is my desires had changed since I began the services, having 40 movie channels didn’t matter as I had begun devoting my free time to other things and watching less television. I had a $10/month GPS fee for my cell phone that I never used so I eliminated these type of fees and acquired nearly a $1,000 per year in additional savings. For a more detailed look at this process, read my article Trimming the Fat off Your Budget.

Create a Budget for your Finances

This is the ultimate plan, plan, plan methodology. Most months, my expenses are fairly consistent however a few months a year (Christmas presents in December anyone?) I have extra expenses. To ensure I do not find myself in a difficult situation when it’s too late to react I create a monthly budget. Each month around the 15th I sit down and map out my income and expenses for the following month to ensure the right number (income) is the bigger number. If it’s not I’ve got a shortfall and I need to look at whether I have sufficient savings to cover the shortfall or if perhaps I’ve bitten off more than I can chew and I need to carve some expenses. Maybe I can’t afford to be so generous this year or maybe I need to eat-in more often to make sure I don’t run out of money before I run out of month. Want to read more on budgeting, or maybe “want to” is the wrong phrase but you need more information on budgeting, read Manage Your Money, Don’t Let it Manage You.

I know it seems like a lot of work, but it’s really not. I follow all of these guidelines and I spend less than an hour a week on my personal finances. The processes are simple: look ahead instead of backwards and know where your money is going before it goes. If you’re really in the dark, consider Dave Ramsey’s The Total Money Makeover or Eric Tyson’s Personal Finance For Dummies. In short, plan, plan, plan!

Please send any questions or comments to Jeremy Woods.

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