Your financial decisions have a significant impact on your life. And, if you’re like many Americans, you may find money management stressful, which can lead to a lower quality of life.
Research shows that only 40% of Americans would pay an unexpected $1,000 expense, such as a car repair or emergency room visit, from savings. In order to improve these stats, it’s essential to learn how to be smart with money. Luckily, it’s easier than you think.
If you’re feeling stressed about your finances, follow these five steps to get back on track.
Step 1: Track Your Spending for a Month
Use an app or spreadsheet to track each purchase you make for a month. Next to each one, add the date and item category. These notes will help you observe spending patterns and understand where your money is going.
For example, if you buy toiletries and a friend’s birthday gift at the supermarket, your grocery bill will be an inaccurate reflection of how much you spent on food. If you buy presents for friends and family during the holidays, account for the inflated spending.
Log notes about your expenses to track fluctuations and significant purchases. Calculate how much you’re spending in specific stores to help you get an accurate understanding of your habits.
Step 2: Create a Monthly Budget
In one 2019 survey, 93% of Americans claimed everyone needs a budget, yet only 67% of people ages 39-54 maintain one. A budget is a fundamental tool used to manage finances. Without one, it can be easy to lose track of spending.
Use what you’ve learned from your monthly spending tracker to create a budget with real numbers outlining the five major categories you should have in your budget: income, bills/debts, living expenses, leisure spending, and savings.
Collect pay stubs, financial account statements, and bills from the past year. List your monthly net pay — what you make after deductions. Review your spending in each category, then list exact amounts under each column.
For fixed expenses, like your mortgage, budget for the actual amount. For variable expenses like electric or water bills, budget for the average monthly amount. To find the average monthly cost, add the amounts from the last 12 months and divide by 12.
Can your income support your expenses and savings goals? If not, you may need to make some changes.
Step 3: Cut Back on Expensive Habits and Hobbies
If you’re wanting to escape debt, the biggest mistake you can make is keeping the same spending habits.
To get your budget on track, start by identifying your daily, weekly, and monthly recurring expenses. Then, try to remove one unnecessary expense.
For example, do you commute daily to work? Are you close to enough to walk, even just once a week? If so, you can save money on gas. Or, do you dine out often? This can be a significant expense. Try to cut spending by packing a picnic lunch or cooking at home with friends.
To get started, identify one expense you want to cut back on and aim to reduce it by half. Alternatively, you can replace it with something new.
For instance, buying coffee on the way to work may be $175 a month. Instead, buy a can of coffee to make at home for $15 a month. In this case, you’d save $160 each month.
Or, if you pay for gas to drive to work, why not try carpooling? Ask a co-worker who lives in the same neighborhood if they want to alternate who drives.
Try the same method with other unnecessary costs you identify.
Step 4: Identify Ways to Reduce Monthly Bills
In addition to daily spending, it’s important to look at big ticket items, such as the bills you pay each month, when trying to minimize financial stress. Oftentimes, with a little bit of research, you can find ways to cut the cost of your monthly bills.
Review your utility, media, and cellphone bills. Look for offers from competitors and compare them against your current provider. Many of them are willing to reduce bill costs if you call to discuss your options.
Most people refinance loans to save money on interest. If you find a new loan with better rates, you can enjoy long-term savings. You can also consider consolidating your debt, which bundles multiple bills — student loans, auto payments, credit card bills, etc. — into a single, easy-to-manage payment.
Step 5: Create a Plan to Pay Off Your Debt
With average personal debt more than $38,000 in the U.S., it’s no surprise the majority of Americans cite debt reduction as a top financial priority.
The first step to paying off debt is to determine how much you owe. List your debts, interest rates, and who you need to pay. Then, choose the best method below.
- The Snowball Method: Pay off the smallest debts first to reduce the number of bills and achieve quick wins.
- The Avalanche Method: Pay off high-interest debt first to save money on interest.
Once you have a plan in place, you’ll be on your way to paying off your debt.
Do you want to manage your finances like a pro? Find more money management tips and resources on our WalletWorks page.