Few of us have any formal training when it comes to dealing with our finances. Most of us learn the hard way -- through the school of hard knocks. For some those lessons cost very dear in the form of bankruptcy and lost homes. Others are fortunate to ride the storms out and come out on the other side battered but not beaten. I have learned my lessons the hard way. I do not come from money and my family had to work hard for every penny. Bad choices and bad luck meant hardship and expenses that had to be paid for with even more sacrifice. However it doesn't have to be that way. Here are the five important lessons, or steps, that will make your road to financial security easier for you and your family. Step One is simply tracking your expenses. No you don't have to go the route of carrying a little notebook around and jotting down every candy bar or even getting receipts for your morning coffee. However if you want to get a real handle on your money then you need to know where it goes. This means keeping track of all your major expenses and watching the pocket money you set aside for smaller purchases (such as coffee and candy bars). Within a few weeks and certainly by the end of a month you'll know what expenses are eating up your budget which gives you the power to make changes so you can meet your goals. Step Two is to create a budget. Once you have your basic expenses charted then you need to draw up a budget. First outline all the monetary commitments you have made including housing, transportation, food, clothing, entertainment, etc. Now make a note of your goals such as savings, retirement, etc. What adjustments (if any) do you need to make to meet your goals? The golden rule of financial security is only to spend money you have. That means not using your credit cards unless you can pay them off every month. It is not about making more money but simply living within your means. If you want to spend more money then you need to find a way to either save money in one area or increase your income. Step Three is planning ahead. Do you have a rainy day fund? What happens when you have unexpected car repairs, dental or medical expenses, or some other unexpected expense? How will you fund this? While some unexpected expenses are just that -- unexpected (and that's why it is good financial planning to have a rainy day fun) -- others can be anticipated. You know after so many miles that your tires will need to be replaced and after so many years your hot water heater can be expected to fail. Start saving before the event so you don't have to utilize your credit and even better if you take the time to shop around and save money too! Step Four is start saving. You can have just one savings account but likely once you get going you are better off looking into other savings vehicles. Obviously saving your retirement money in your basic savings account is not a good strategy for the long-term. However you can use your savings account to save money for short-, medium- and long-range plans. I start saving for Christmas in January and this strategy means I don't have those depressing post-Christmas bills to pay. It is easy to save a little bit every month and then not worry about how to fund the holidays. Similarly I save for vacations so I don't have to put my fun on credit. Step Five is doing your homework. It could be as low level as clipping coupons and shopping the supermarket specials but it can really pay off when you look at major expenses such as mortgages and car loans. Should you refinance? Should you simply add another $50 or $100 a month to your mortgage? What are the tax implications of one strategy? Doing your homework certainly means researching and shopping for all major expenses as well as regular bills. My parents moved their cable, telephone and internet service to one provider and saved money while gaining high-speed internet access in the process. I put our utilities on the budget plan so it was easier to control expenses. Our mortgage payment was eligible for a lower rate when drawn directly from an account at the bank holding the mortgage. I designated a savings account and made that account my designated savings account for Christmas and vacations which means most of the time our balance is over the $500 minimum needed for a free account. This is not tough and it is not a terribly ambitious strategy, but I guarantee if you follow these five steps you will find yourself on the road to financial security. |
