Similar to your things needing to be in proportion to your living spaces, you want your finances to be in proportion to your expenses. This also means living within your means. Your means being your income.
When your expenses outweigh your income, your finances become out of balance and that’s where debt comes into play. If you don’t keep on top of it you suffer the consequences, which usually means an overwhelming amount of debt, and no savings or investing capacity.
Ideally, we want the income side of the scale to be significantly higher than the expenses side of the scale. This provides the means to save money and make investments for future endeavors such as buying a house, taking vacations, college tuition, starting a business, retirement, etc. Organizing your finances helps to keep you out of debt and living life on your terms.
There will be challenges along the way to achieve a proportionate income to expenses scale mentioned above. These life challenges could tip the scale so the balance becomes heavier on the expenses side. Some of those challenges may include loss of income due to unemployment, illness or injury, or natural disasters. It may help if we all had a crystal ball to alert us of impending challenges, but alas, we don’t.
You may be thinking, that I’m going to suggest creating a budget and sticking to it, well you are correct! I’m not a money manager, financial adviser or any type of numbers savant, but I have encountered many years of supporting myself. Like everyone else, I’ve experienced many of the challenges mentioned above, and my financial scale has gone up and down on both sides. Understanding my financial situation at all times, and making adjustments along the way has kept me on track to avoiding an overwhelming amount of debt.
How can you organize your finances other than creating a budget? None that I know of. There may be many ways to create a budget, but I think the old school basics work pretty well, as least for me. There are many apps and websites to guide you, and if that works for you, great, use them. The tools I will use here are paper and pen. So, let’s get started!
Getting Clear on Your Income & Expenses:
- List the amount of your monthly income. This could be from work, social security, disability, pension, child support, etc. Don’t include investment income because technically, you don’t want to use this income source to pay expenses.
- List all your expenses – monthly, quarterly, semi-annual, annual, etc. This will be different for everyone. I’m not just talking about monthly expenses such as rent, mortgage, utilities, insurance and credit cards (how many you use and their balances could be a main source of debt). What I’m going for here is to write down what you spend your money on every month in terms of food, clothes, supplies, massages, nails, gym membership, transportation, lattes, entertainment-movies, television, gaming, restaurants, concerts, etc.
- Do the math – subtract your expenses from your income. I know this can be a real eye opener for many people. Do you have any money left, or did you come up with a negative number? If the math leaves you with a zero balance, or a negative number, you’re not living within your means. This exercise shows that you don’t have any money left over to save, or to invest in your future. It can also show that you are in debt.
- Look at your list to determine ways to cut costs. Maybe you eat at home more instead of going out to eat? Maybe you choose a different form of exercise other than going to the gym? Maybe you reduce the amount of clothing you buy each month, or buy outfits quarterly instead of monthly? This will look differently for everyone but I’m thinking there are ways you could reduce or eliminate some of those expenses.
- Let’s talk about credit card debt. Our addiction to buying things on credit is probably the number one way that keeps us from living within our means, and launches us into debt in a big way. So many people have multiple credit cards and are only paying the minimum on each one. This concept costs us big in fees and interest. I mean really, how many credit cards do you need? Keeping the number of cards to a minimum of one or two, and paying off the balance each month is a great way to stay out of credit card debt. If you are swimming in credit card debt, I recommend contacting a credit counseling service for help. The assistance you receive from them will factor into creating your budget.
- Another point to consider is your acquiring habits. Look around your home. Do you have an overwhelming amount of clutter? Do you have clothes with price tags on them that you’ve never worn? Do you have a lot of unopened packages of items bought online? Do you frequent garage sales or thrift stores? Do you have difficulty passing up freebies? If you answered yes to any of these questions, you may have an acquiring problem. This could be contributing to your debt. If you are serious about creating a budget to organize your finances, I recommend talking to a mental health professional about your acquiring habits.
Creating a Budget:
- Now that you’ve reduced or eliminated some of your unnecessary expenses, write the revised list with their due dates; monthly, semi-annually, annually, etc.
- Look at the list of monthly expenses which should no longer exceed your monthly pay; the list should include the semi-annual & annual bills (break the total amounts into a monthly amount). Factor in a percentage to save and/or invest. Ideally you will have a little left. Many employers that have direct pay allows for separating amounts into different accounts. This helps for saving since you don’t actually miss it because a percentage goes right into a savings account.
- Determine two days a month to pay bills. These dates may depend on the frequency of your pay checks. I would stay away from the first of the month for one of those dates because a lot of bills are due the first day of the month, and many employers that pay twice a month may be on the 1st and 15th. Automatic payments, or scheduling bills online is a great time saver and eliminates late fees from snail mail bill pay. If you don’t want to go the automatic or online scheduling route, schedule enough time to mail your bills so they arrive before their due date.
- Make sure your bills are getting paid by regularly checking your accounts. If you use a paper check register, make sure you do the math when the transactions occur so you know how much money is in your account at any given time.
- As you spend money, be mindful of your budget as well as your debt. When you want to spend money, ask yourself if this purchase is in your budget, or will create unnecessary debt.