First up, improving your finances. Whether you want to get out of debt, spend less, or simply save more, you need to have a plan. We live in a culture that encourages us to buy what we want when we want it, so it can be hard to see the bigger picture and tighten your belt for a distant future. But, as someone who recently got out of debt, I can’t emphasize enough how good it feels to no longer have that burden of obligation—the benefits in stress reduction alone make the sacrifice worth it.
If you are hoping to get out of debt, or just become better about money, I highly recommend Dave Ramsey’s financial advice and strategies. If you want details, he has numerous books and workbooks on the subject, probably available at your local library, but his basic plan involves a series of steps, the first four of which are 1) setting up an initial emergency fund of $1000, 2) paying off all debt except your mortgage using the debt snowball, 3) building up your emergency fund to be 3-6 months of expenses, and 4) investing 15% of your income in retirement accounts.
His plan is not easy (and I could never bring myself to follow it completely), but it does work. As I’ve said before, his radio show and podcast are great motivators, particularly on Fridays, when people call in to shout “I’m debt free!” and tell their own personal get-out-of-debt stories (which often made my own attempts at sacrifice seem like child’s play). As someone who used to work in investment consulting, I find most of his financial advice to be extremely sound. He is particularly good on how to budget, which was never something I had focused on before. But, from my own experience, I can tell you that just setting up a budget and sticking to it made me feel like I had more money.
The gist of his budgeting technique is as follows:
1) Every dollar of income should be spent on paper at the beginning of the month.
2) Monthly cash flow should be zero, with any overflow after expenses directed at savings or paying down debt.
3) Use the envelope system for as many items as possible since people have a tendency to spend far less when they use cash not credit. The envelope system works as follows: take out the monthly category amount in cash, put this cash in an envelope for that category, and when the cash runs out, spending for that category for that month is over. Personally, I didn’t use categories and just started with a gross amount per week that I used for everything, but if you have a difficult time sticking to you budget, the envelope system can be very helpful until you get used to budgeting.
Today, to further my own budgeting efforts for the coming year, I finally signed up with Mint.com. I’ve been on a pretty strict budget for the last few years in order to be able to pay off my enormous graduate school loans, which I did in March with the help of some long-awaited money from my father's estate (and I thank both my parents for being such a good savers that they were able to provide us with so much when they made so little). However, my small publishing salary means I still have to be pretty vigilant on the budget front since I am bound and determined not to borrow ever again (unless, as per Dave Ramsey, it’s for a 15-year mortgage where the payments are not more than 25% of my salary).
I haven’t been very happy with the budgeting tools on Money, so we’ll see how things go with Mint. I will say it was extremely easy to set up my accounts with them, which I hope is a sign of how easy it will be to adapt to a new system. I definitely look forward to being able to track everything online wherever I am and not have to wait for when I get home to enter items. And one thing I already love about this software is that they have an easy way to roll over budgets month-to-month for categories like clothing where you might spend far more in one month than another. That feature should also make short-term savings goals and spending, such as for travel or Christmas presents, much easier to handle. If anyone out there has tried Mint, I’d love to hear how it worked for you.
In the meantime, look out for the next installment in this series (“Looking Good, Feeling Good”) on Monday.