I am often asked for financial advice from friends who know that we have been successful with our money, so I thought I might do a few posts on my Dave Ramsey inspired advice.
For the record, Dave has seven "Baby Steps" as a part of his plan, and if you're looking for a Big Picture idea of what the plan is all about, here it is in a nutshell:
- Start an Emergency Fund by putting $1,000 in the bank for EMERGENCIES ONLY! ($500 for low income situations)
- Pay off all debt except mortgage if applicable
- Finish the Emergency Fund by saving a total of 3-6 months of expenses
- Begin saving 15% of your income for retirement
- Begin saving for kids' college/higher education
- Pay off your house
- Give, give, give!!!!
In my opinion, before you can do ANY of this, most people need to have some kind of working budget. The reason I say most people is, I guess for some folks, $1,000 may not be all that hard to find. Have a big garage sale, sell some stuff on ebay, move your existing money around a bit, and boom, $1,000. Lucky you! It was not that way for me. I had to figure out how I was going to make the mental leap from "living paycheck to paycheck" to "living well within my means". So, here we go!
Task number one: Identify the problem!
Is your income the problem, or is it the outgo? For most people it's primarily one or the other. Sure, we could all stand to spend less AND make more, but that's not always feasible. It's best to focus your efforts and figure out whether you ned to be clipping coupons and cutting off cable, or whether you need to be delivering papers and pizzas.
So, gather up all your financial info. Pay stubs, bills, all that good stuff. Grab yourself a legal pad or open an excel spreadsheet and basically start two columns: income and outgo. List it all: the amount of money you bring in each month, and the amount of money you spend each month. When it comes to credit cards, car payments, and other bills that have minimum payments versus a total balance, let's focus on the minimum for now. You should probably go ahead and list out the grand total of all those balances on a separate document for later use, but that big number may not figure into your monthly budget.
With regard to income, try to think about a "typical" month. I am not in this situation, so I don't have personal experience with this, but if your income varies greatly from month to month, this is not the time to be optimistic. If anything, go with the lowest monthly income you've had recently. The opposite is true with expenses. List everything and rack your brain (or check the family calendar, previous financial records, etc.) to come up with a list of expenses that you'll have to face in a month. This will include Every Month expenses like mortgage/rent, electricity, phone, and other utilities, as well as memberships and fees like the gym, kids' sports, lessons, and activities. Dave has a really good comprehensive list in his book My Total Money Makeover and has a few different budgeting forms online. Definitely worth checking out.
The main thing for the first task is figuring out how your income number and your outgo number compare. One of two things will happen, probably.
1 - you realize that your income should be sufficient for your family, because according to these numbers, you aren't spending more than you make. In this case, you need to take a look at your discretionary spending... are you going to Target/Wal-Mart for one small thing and leaving $100 later? Are you hitting the ATM or the drive thru a lot more than the numbers you just wrote down would suggest? Are you abusing credit cards for stuff that you should be cash flowing? Try to be honest with yourself and identify why it is that your income isn't as powerful for you and your family as it seems on paper.
2 - you realize that you do not make enough money to support your current lifestyle. In this case, it's still usually going to be easier (especially in the current economic climate) to cut spending than it will be to create income. So, start prioritizing and taking a look at your expenses. Brainstorm things that can be cut back (going out to eat, cell phone plan, grocery budget) or cut out completely (gym membership, magazine/website subscriptions, activities or organization dues and fees). Of course, if it's possible to up your income a bit by taking on an extra job, do it! Preferably, if you can make a little money doing something you'd do anyway, you'll clearly be more successful. Sell a skill that you have - do some personal training, childcare, landscaping, open an etsy shop for your crafting, teach lessons for something you do well. Or of course, go the old fashioned route and get yourself a part time job or a paper route. If those things aren't in the cards, get a garage sale going or (safely, carefully) craigslist some old furniture, kid toys/gear, handbags or other "high fashion" items.
The first step to changing your financial life, in my opinion, is admitting you have a problem and figuring out what it is! So, take on this first task!
Next up, the B word: BUDGET!