Thursday, December 1, 2011
Unexpected Places That Your Money Is Hiding
Many of us struggle to save because we can't seem to find enough money to set aside that isn't already designated for other costs. You know you should be saving more, but how? It's a challenge, no doubt about it.
The overall goal of building wealth is increasing your net worth. Net worth is defined as the amount of money you would have if you sold all of your assets and paid off all of your debts. This number should grow over time.
So, how to find this hidden money? First, you need to take stock of your current financial situation. This includes your monthly income, monthly expenses and assets (amounts in checking, savings, stocks, bonds, CD's, mutual funds, 401K, etc.). Next add up all of your debt. Ok, so you have 4 numbers now:
Your monthly incomeYour monthly expensesYour assetsYour liabilities (debt)
To calculate your net worth, subtract your liabilities from your assets. This is the number that you need to grow over time, preferably quickly. Now you at least know where you stand. Next, subtract your monthly expenses from your monthly income. Your monthly income should cover all of your monthly expenses, and then some. If it doesn't, you need to figure out where your money is going. Sites like Mint.com are extremely useful for tracking this type of information. I had no idea how much I was spending on certain things until I started tracking it on Mint. Mint is also FREE to use. It's a beautiful thing.
Ok, so you've signed up for Mint.com and loaded your financial information. Did you find anything surprising? Now comes the fun part. Grab a sheet of paper and make two columns. Go line by line on your monthly expenses and designate which ones actually add value to your life. Does an occasional cup of specialty coffee add value to your life? Sure, it makes you happy and its something you enjoy. Do you need 8 in a month or would you still be just as happy with 2?
Cut out all unnecessary expenses as quickly as possible. Like establishing any new habit, it may be uncomfortable for a month or so while you get used to it but it will be worth it. Send the money, to the penny, of what you were spending on non-value added things to your smallest debt balance. Once you pay that off, take the entire amount you were sending to that smallest debt amount and add it to the payment for the next smallest. Continue this until you have paid off all of your debt.
While you are restructuring your budget, ensure you have enough in savings. You should have at least $1000 at all times though its a better idea to have a minimum of 3 months worth of cash you could dip in to should something sudden happen. Calculate this amount by taking your normal monthly expenses and multiplying it by 3. You may want to consider applying a portion of the money you just freed up to adding to this savings budget.
Chances are, you've heard this all before. I have, about a million times. So why do we still not do it? The short answer is discipline, or rather a lack of it. Anytime I had extra cash, I would spend it on something fun instead of sending it to debt. This is where the beauty of having a financial plan comes in to play. If I can't see it, I won't touch it. Take the money out of my check before I have a chance to spend it and divide it up so I can build my savings and reduce my debt at the same time. Once I got on this plan with my financial adviser, I was shocked at the progress in just 3 months! I had not managed to save that much money in the past 3 years! My only regret was not doing it sooner.