Following these tips can help you manage your money more effectively
If you haven't made any New Year's resolutions yet, think about committing to this one: getting and keeping control of your finances.
It is not always easy to stick to a budget, track spending habits, and make sure that every bill is paid on time. According to a recent consumer financial literacy survey conducted by the National Foundation for Credit Counseling, less than half of Americans made a budget and tracked their spending closely in 2016. Twenty-two percent of those who took part in the survey had a hard time staying current with their credit card payments.
If you decide to try to get your finances in order this year, it may take some trial and error. Keep in mind that you have not failed if one method doesn't work. You simply need to try a different approach.
Below are some tips for managing money that will help you stay ahead of your bills and stick to a budget.
- Spend only money that you have.
- Start every month with a clean slate.
- Target certain bills first and use autopay.
- Keep yourself accountable using automation.
Making a budget the traditional way requires you to predict what both your income and your spending will be. However, according to You Need a Budget founder and CEO Jesse Mecham, you will get more control over your finances when you focus on the amount of money that you have in your checking account today.
"A lot of times people are spending money they haven't earned yet," he says. "We want people to be in a situation where a dollar they spend today was earned at least 30 days ago."
It is not hard to switch your spending habits to spend only what you have instead of what you will be paid soon. You can start by setting aside every single dollar currently in your checking account. "Write down what that money needs to do, how much it will cost, and when that money runs out, stop," explains Mecham.
The principle behind this exercise is simple: if you can't pay for an item right now, do not buy it until you can. This will help you to get ahead—and stay ahead—on your credit card bills rather than always playing catchup.
It can be tedious to keep track of every little detail of how you spend your money, especially if you make several individual charges over the month. You might be tempted to give up completely if you fall behind for a few weeks. You can take this pressure off yourself by thinking in terms of months.
Pay off your credit card in full on the last day of every month. This means that you will start each month with a clean slate, a balance of zero. Set a monthly limit for how much you spend, and put all of your transactions on your card.
Monitor your balance through the month to make sure that you do not go beyond your maximum spending limit. If you spend 80 percent of your limit after two weeks, you know you won't be able to spend as much for the rest of the month.
One common method that people use to pay off debt is to pay a bit extra whenever possible without having a solid strategy for how to get rid of debt altogether. Certified financial planner Kristen Euretig calls this approach the "sprinkle effect" and advises her clients not to use it.
Instead, she says, you need to make a plan for paying off debt that targets certain credit card bills first. "It could be the ones with the highest interest rates or those with the smallest balances to build confidence," she says. It is not likely that paying off a little bit here and there will have much effect on the debt, and it may actually lead you to become discouraged over time.
For all other bills, Euretig recommends setting up autopay to make sure you don't miss any payments. "That way even if a bill slips your mind, you won't get slapped with a late fee or dinged for a late payment on your credit," she says.
Some people find it easier or even necessary to use pen and paper when keeping track of bills and spending. For other people, automation works better.
Many automated money management tools, such as financial apps, already exist. These are expected to continue to improve and offer more helpful features. For example, account aggregators provide an overview of all of your accounts in one place in real time, a feature that many people find particularly convenient.
Regardless of the money management approach you decide to try this year, keep in mind that mistakes and adjustments are part of the process. "You can change the plan at any time. That's part of planning and it's a positive thing," says Mecham.