Strategies For Financial Health
Wednesday - October 18, 2006
Avoid the traps that so many people fall into: too much debt, too little savings, too much spending. In part three of The Young View’s money managing series, Brian Chang, CFP, CLU, ChFC, CFS and a partner in the firm of Deutsch & Chang, explains how to get things under control.
“The first step in creating a budget is getting a handle on your cash inflows and outflows,” says Chang. “List all sources of income that you have (salaries, rental income, stock dividends) coming in monthly, and make monthly averages of those that are not paid monthly.
“Next, list all monthly expenses that you have (rent/mortgage, utilities, cell phone, etc.) For bills that you do not pay monthly, divide that expense to make it monthly. (Or, if you always use your debit card, look at about three months worth of these expenses, add them all up and divide by three to get a monthly average.)”
The next step, says Chang, is to compare what’s coming in versus what is going out. Are your monthly expenses greater than your monthly income? If so, you need to reduce your spending.
“Remember, every $1 you make today, some of it goes out the window for daily expenses, some for taxes, and some of it you must sock away because one day you will not be working. If you never sock any of your paycheck away, there will never be a day that you are not working.”
Chang says, “Most people have no idea how much they actually earn on an annual basis. The only thing they know is what gets directly deposited on the 15th and 30th of each month. The key to budgeting your finances is not necessarily earning more but making the most of what you have that counts.
People don’t notice all of the little purchases, he says. The pack of chewing gum, a newspaper or magazine, the plate lunch. Most people have $50 to $60 in their wallet and when that starts running low, they just go to the ATM machine and withdraw more.
“Before you know it,” he says, “you are spending hundreds of dollars a month on junk that you don’t even remember buying.”
Chang remembers that he used to visit Starbucks twice-aday and he’d often see some of the same people on both visits.
“If the average latte cost $3, that means that I’m spending $130 a month on coffee,” says Chang. “For that price I could go to the store and buy a lifetime supply of coffee.”
Don’t give up all your daily habits, says Chang. Just be aware of what the true cost of those habits are.
Here are some tips from Chang to get your budget under control:
1. Pay yourself first! This is the No. 1 rule for the affluent. Chang says he doesn’t know why it works, but if you sock away money into your retirement account first, there will always be money left over to pay your bills. It never works the other way around. The easiest way to do this is to set up an automatic investment where they debit your bank account each month.
2. Increase your deductibles on your homeowners and car insurance. If you do this, then your premiums would decrease. Now put that savings into your investments to build that up so in the unfortunate instance that an accident does happen, you have the money to pay the higher deductible. Think about this, compare how many times an accident happens versus how many times you pay your insurance premium.
3. Keep separate bank accounts for your bills and discretionary spending. You could set up a bank account that is dedicated to paying all of the bills or your automatic investments. Your other bank account is for your discretionary spending. This way, if you spend all of your money in the discretionary account, at least you know that all of the bills and investments are taken care of.
4. Here is a strategy for young people currently renting who want to purchase a new home but the higher monthly payment worries them: Put the difference of your current rental payment and what your higher monthly payment would be into a savings account or money market mutual fund. This way, you will see if you can safely budget your finances to accommodate the higher monthly obligation, and you’re putting more money away to have for a down payment at the same time.
5. Prepare for non-monthly expenses. Ever notice that your credit card balance increases every year around Christmas from all of that shopping? If you are always racking up $2,000 in credit card debt, maybe you should save $166 a month to come up with the cash for all of that shopping.
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