When you think about the financial details of your life, what comes to mind? Do you know how much you have in savings, how much you bring home each pay period, and how much you owe? Or, do you draw a blank, unsure of how much you have coming in, how much you have saved, or even where those savings accounts are housed?
If your answer is the latter, getting your finances organized can seem like a major undertaking, which might be why so many people avoid doing it. But the benefits of financial organization far outweigh the hassle. For one thing, when you get your finances in order, you’re able to set goals and work toward them. You’re also able to figure out where you can make changes and how those changes will affect your life, financially and otherwise.
The trick is to break down the undertaking into manageable stages. Focus on one area of your finances at a time, and you’ll eventually be able to get everything in order. Here’s how you can get started.
When you create a budget, you essentially make a plan for spending and saving each month. You determine how much money you earn monthly and where that money goes. If you have additional money left over after you pay for your needs, you can use your budget to decide how to spend the extra cash, whether saving it, putting it toward your debt, or spending it on a hobby or other non-essential.
Some of the benefits of budgeting include:
Creating a budget does require a bit of preparation and planning, but it often isn’t too difficult. There are a couple of steps you can take to ensure your budgeting process goes smoothly.
To create a budget, you need to know how much money you have coming in and going out.
First, you want to figure out how much you bring home during a typical month. If you have a job, you can look at the net payment amount on your paystub to see how much you actually bring home in a month. You’ll need to add up the monthly totals of each of your paychecks if you’re paid more than once a month.
Next, add up the total amount of your monthly expenses. You can review your bank and credit card statements to see how you spend your money each month. Your statements can also give you an idea of any irregular expenses you have, such as a quarterly car insurance payment or biannual tuition payment.
Now that you have an income amount and an amount for your monthly expenses, it’s time to compare the two. Ideally, your income will be the same as or more than your expenses. If your expenses are higher than your income, that means you’re spending more than you’re earning and might end up in debt.
The next step in budgeting is to create categories for your expenses and assign a value to each one. Some people find that it helps to separate their expenses into fixed and variable categories.
Fixed expenses typically include:
Variable expenses typically include:
Fixed expenses are often the easiest to budget for — simply record how much you spend on them monthly. You might have to use a bit of guesswork when figuring out how much to budget for variable expenses. Looking back over your statements, however, can give you an idea of the average amount you spent on clothing, groceries, and other variable expenses over the past few months. You can use that average as a starting point and adjust as needed.
Once you know how much your variable and fixed expenses are, or are likely to be each month, you can make adjustments. For example, if you have debt you’d like to pay off, look for expenses to cut back on, then direct that money to your loan payments. The same is true if you’d like to save more, whether it’s for an emergency fund or retirement.
Remember that a budget isn’t written in stone. You should adjust your budget as your goals and situation change. For example, if you get a pay raise or pay off debt, you can work those changes into your budget and find another use for your excess funds.
Once you’ve got a budget in place, you can turn your attention to other areas.
Even with a budget in place, it can be challenging to stick to it and to work on your savings goals. Let’s face it — putting money aside for a rainy day just isn’t as much fun as going on a weekend getaway, enjoying a night out with friends, or purchasing a stylish new outfit. Before you know it, though, the money you meant to set aside for your emergency fund, down payment, or other savings goal, is gone.
One way to “trick” yourself into setting money aside is to pay yourself first. When you pay yourself first, you choose an amount you can comfortably set aside from each paycheck and set up a direct deposit of that amount. Instead of landing in your checking account with the rest of your pay, the amount you want to save gets safely diverted into a savings account. After you’ve set up the direct deposit, you don’t have to think about it again. Over time, you can build up your emergency fund or work toward your other financial goals with little, if any, friction.
You have a budget in place, and you’re setting aside money for savings each month. The next step is to keep track of your spending. Doing so will give you a good idea of where the remainder of your money is going, and you can make sure you stay on track to reach other financial goals.
There are a few ways you can keep track of your spending each month:
Tracking spending doesn’t just help you avoid going over your budget. It can also give you a more realistic idea of how you use your money each month. After tracking your spending for a month or two, you can go back to your budget and make adjustments to make it more accurately reflect how you’re living.
Getting your finances in order doesn’t just mean determining what’s going where and how much you want to save. It also means finding ways to make the most of your money when spending.
Shopping smarter can mean any of the following:
5. Build Good Credit
Your credit score is a three-digit number, usually ranging anywhere from 300 to 850, that can determine whether or not you get approved for a loan, whether or not you get the best rate on that loan, and the spending limit on your credit card. Credit isn’t something you’re born with. It’s something you have to build up.
However, five factors typically influence your score. They include:
Building good credit can seem like a challenge, as it’s often a bit of a catch-22. In some cases, it might look like you need to have already established credit to get credit in the first place. However, there are ways to build your credit from scratch. Depending on your circumstances, your options for building credit include:
Debt can be a downer, but it doesn’t have to control your life. If you have debt, organizing your finances can help you determine the best way to tackle it and pay it off. Tactics to consider when attempting to minimize your debt include:
After you’ve planned for paying down debt, created a budget, and determined your typical monthly expenses, it’s time to start saving for retirement. How much should you be saving? It all depends on your current situation and your retirement goals, but somewhere in the neighborhood of 10 to 15 % of your monthly income is usually a good place to start. If you don’t have 10 to 15 %of your income available, begin by setting aside what you can and make sure to take advantage of any employer matches.
Your retirement account options can vary based on your employment situation. Some employers offer 401(k) or 403(b) plans, but others don’t. If your employer doesn’t offer a plan or if you’re self-employed, you can open an individual retirement account (IRA) to start saving for retirement.
It helps to use the “pay yourself first” method mentioned above to get started with retirement savings. Choose an amount to save each month or pay period, then have that amount automatically taken from your paycheck if your employer offers a plan or have the money transferred to your account if you’re saving in an IRA.
Another important piece of getting your finances in order is to organize your paperwork. It’s important that your financial paperwork and documents be kept in a spot that’s easy to access and secure. You can get to it when you need to, and it’s safe from prying eyes.
You can organize your files using physical copies or digital versions. If you keep physical copies, it’s a good idea to store them in a fireproof, locking filing cabinet or a secure spot such as a safe-deposit box.
If you’re going to go the digital route when organizing your documents, make sure you have a backup of your files, using a USB drive or external hard drive. Keep the backup in a secure location at home.
A few of the files you’ll want to sort and organize include:
Here’s one last piece of the puzzle when it comes to organizing your finances: Find a financial institution that’s going to look out for you. Unlike banks, credit unions are member-owned, which means they’re committed to serving the best interests of their members.
When you join PSECU, you can take advantage of the following: