One of the biggest sources of stress and friction is in the area of personal finances. While your job ideally provides sufficient resources to maintain your lifestyle, too many people routinely overspend and get themselves into a financial bind. There are two tools that can help you get your personal finances under control.
A budget sounds like no fun if you think of it as something that tells you what you can’t spend your money on. But rather than viewing it as a tool of deprivation, look at it as a tool of freedom. The first step in budgeting is seeing where your money is actually going — not where you think it is going or where you know it should go. Are you spending $5 a day on coffee? Write it down! The tracking exercise is not to make judgments but rather to figure out exactly what you are spending money on and if that’s where you want it to go.
The second part of budgeting is writing down the expenses that you can’t change. These are things like savings (more on that later), housing, utilities, etc. Unless you are going to trade down to a less expensive apartment or sell your car, these things are “fixed” expenses. Once you get a handle on where your money has to go (fixed expenses) and where it is going (discretionary expenses), you can figure out if the discretionary expenses are what they should be.
That $5 on coffee? Do you like spending that? Maybe getting coffee is part of your ritual, and you like bantering with the barista and being part of a neighborhood hot spot. Then it’s a discretionary expense that is a good one. But if you realize that you’d rather spend that $35 a week on something else, now’s the time to invest in a good coffee maker and thermal travel cup.
Is cable important to you, or would you rather spend that $80 on going to a first-run movie each week? This is the place where you can look at your budget as “choosing” rather than reacting. If you have chosen that $80 cable package, then you’ll feel better about paying the bill each month.
The goal is to avoid debt, but also not feel deprived.
It’s easy to overlook savings when you feel that you are not making enough, but that is a mistake. Aim to have an emergency fund of three to six moths that will cover your everyday expenses. This ensures that you will have a plan should the worst happen — that you lose your job unexpectedly or even that your job situation becomes unbearable and you need some flexibility to job hunt. Once you have the cushion established, be sure to set up a regular habit of saving for the future. Think about short-term goals, like a vacation or down payment on a car or house, and long-term goals, like your retirement and kids’ education if applicable.
Look into tax advantaged savings vehicles, like your company’s 401(k), (especially important if they offer a match), and other things like IRAs. The right time to start saving is today — every year that your money has to grow can significantly multiply where it ends up.
A great way to tweak savings is to take a good chunk of any raise or bonus and put it directly into savings. You were living without it before, so no reason you can’t continue to.
Personal finances can be a subject that brings a lot of stress. But if you look at your financial planning as making choices rather than being deprived, chances are you will be much more positive about your situation.