control of finances
Sunday, May 17th, 2009Statements like “I have too much month at the end of the money” are often said as a joke. The reality of not having enough money to meet basic needs is no laughing matter. The best way to gain control of finances is to establish and manage a plan for spending. Planning for spending is a financial practice that many consumers fail to do. This leads to frustration with money matters and overuse of credit.
There are several steps that ensure success and put together the pieces of the financial puzzle. The worksheets provided could help determine where a family is, where they want to be, and how they can get there. The most important pieces to the puzzle are income, expenses, reserve accounts, and credit use.
Income. The most common source of income for most families and individuals is take home pay from work outside of the home. Use monthly net income rather than monthly gross income when planning. With net income, or take home pay, deductions have already been made for many expenses. Don’t list these again on the expense sheet. Overtime pay and other sources of income that are not regular or reliable can be used as a resource but should not be included in monthly net income. Changes in economic conditions can lead to a sharp reduction in overtime opportunities.
Expenses. In order to plan for spending, it is important to know where the money is going. If this is not known, write down how much and where spending occurs each month. This can be as simple as using a pocket sized tablet and a pencil or a computer with some money management software. Once spending is known, planning can begin.
When filling out a monthly expense sheet it is important to be as realistic and honest as possible. It is natural to underestimate expenses because it makes people feel in control. In the “current” column list all expenses. When completed, if they are too high, mark which expenses can be changed in the “adjusted” column. The “actual” column can be used to record actual spending for a month to determine how accurately current expenses are estimated. The “periodic” column
Reserve Account. Some bills are paid quarterly, semiannually, or annually such as car insurance and property taxes. Money needs to be set aside to pay these periodic expenses when they come due. The easiest way to do this is to place money needed for future bills into a separate account. Using a savings account will keep it out of the immediate reach and will actually earn some money (i.e. interest) as well. Figure the actual amount needed to set aside by following our directions. This is the most important step in planning because one large annual bill can completely undo a spending plan and lead to excessive credit use.
Credit Use. There are many advantages to using credit if it is handled wisely. Misuse of credit can be very costly. Financial educators recommend that no more than 15 percent of monthly net income should be spent on credit payments. For example a household with $2,000 net income per month paying more than $300 in credit card payments is probably headed for trouble. This figure does not include house payments.
Putting It Together. Putting everything in writing is just the first step. It takes time to make adjustments that will make all the pieces come together. Once the plan is finalized, changes in financial habits may be required. These changes take time and energy. It can help to remember what your goals are and how good it feels to reach them.
Explanation of monthly expenses
1. Savings is the most important part of expenses and should be figured first. Base this amount on savings goals that are established (example: $200 to go into Roth IRA or college savings fund).