How to Get on Top of Your Finances

Financial stress is debilitating! It can affect your mood, your relationships, your ability to take care of yourself, and your self-esteem. If it’s chronic, it can result in ongoing anxiety and depression.

It’s important to get on top of it, even if you’re feeling defeated and think there’s nothing you can do about it. You can.

The first step is to examine your money habits and see if you can get them under better control. I’m going to take you through a process to do that. Then we can talk about how you might go about increasing your income.

The worst thing you can do is to do nothing. The lack of control is a sure way to keep you in a state of chronic stress that undermines everything else in your life.

I’ll warn you up front this is a longer article than usual, but if you’re suffering with money issues, read it and try the suggestions I’ve laid out below.

How We Develop Our Money Habits

A good place to start is to think about how you learned to deal with money, and evaluate whether what you learned is working for you.

Money habits are usually handed down from our parents, and very often the way we handle our finances is similar to or mirrors the way one or both our parents handled theirs.

You might not even be aware of how much your parents’ money habits have rubbed off on you, but you need to be.

Take a little time and think about how one or both your parents handle money. Pay attention especially to spending habits, use of credit, debt load, saving, and strategies for dealing with financial problems. After you’re clear in your mind about your parents’ financial habits, assess your own habits versus those of your parents.

This exercise will give you awareness of just what your money habits are, and how deeply they’ve been ingrained in you. Obviously, the more ingrained, the harder it is to change them, but you can do it if you know they’re there to begin with.

Now let’s get down to brass tacks.

There’s five things you can do to get on top of your money:

• Find out exactly what you spend it on including real expenses and extraneous expenditures.
• Find out exactly how much income you have and from where and in what time frame.
• Figure out between those two how you can live within your means.
• Decide if you need to change your financial status, and if so, how you can do that.
• Make a budget that accurately reflects all the information you’ve gathered, and set up a plan to review it weekly.

Step 1:  Find out how you’re spending your money and on what.

For at least one month (but I would suggest 3 months), document every penny you spend. This means writing down daily what you spend and for what.

You can do this by setting up something on your smart phone to document it, or carry around a small note pad and write it down. This includes checks you write (if you use checks), debit card expenditures, cash expenditures, and credit card expenditures. Write it down. List the date, the amount, and what you spent it on. It doesn’t have to be in order yet, just get it down on the list.

I suggest 3 months because by doing that you’ll probably include expenditures that don’t occur all the time in addition to your regular monthly expenditures.

The first time I did this I was shocked at how much I spent at Starbucks in one month. You think to yourself, “Oh, it’s just coffee. It’s a small treat. No big deal.” You don’t realize how many of those treats you gave yourself in one month. Write it down.

Next, take your list and separate it into three parts:

• Regular bills you must pay every month like rent, utilities, food, etc.
• Bills you pay sometimes such as vet fees for your pets, or an oil change for your car, or anything that’s a bill, but not a regular monthly bill. If possible, list next to each of those how often you’re likely to pay them.
• Then separate out extra expenditures such as entertainment like eating meals out, or going to the movies, or whatever you do that isn’t a necessity but something you do for pleasure.

When making these lists, take special care to list all expenditures for food – both groceries and meals eaten out.

Food is a big expenditure and it’s one that we often greatly underestimate.

You want to get a complete picture of what you actually spend, and if you do 3 months instead of one, you’ll get a more accurate picture because you can average bills that vary from month to month.

One last thing: If you have credit cards and make monthly payments, review three months of payments and write down how much was paid to interest and how much to principal. I know this isn’t fun, but you’ve got to look at it!

Now you know what you spend.

If you’re not used to watching what you spend with this amount of detail, you may be quite surprised at where your money goes. If what you find meets your expectations, then you already have this part of the equation in check.

Let’s go to step #2.

Step 2: How much money is coming in?

If you have a regular job, and the source of your income is your paychecks and nothing else, it’s very easy to figure out your income. This would be income after taxes have been taken out including withholding tax and social security, and if applicable, health insurance. Usually there’s a smaller amount for Medicare and Unemployment Insurance.

If you have other sources of income such as a second job, your own business, alimony or child support, social security, or any other regular monthly income, you need to list it all and figure out what you receive on a monthly basis. For example, if you get some sort of income quarterly, you would need to divide that by three to know what the monthly amount is.

If you own your own business and pay taxes quarterly, you need to do your best guesstimate of the amount of taxes you pay so you can figure out your net income. You would also need to subtract business expenses to get an accurate estimate of your personal income. This works if you’re a sole proprietor. If you own a company, then you should have an accounting system just for your business and likely receive a regular paycheck from the company.

For any additional income you receive, be sure that you subtract taxes that you will need to pay at some point, either quarterly or annually. For example, if you get a social security check every month, you will have to pay taxes on that income each year when April 15th rolls around.

The trick here is to be realistic. Don’t over guesstimate. You want an accurate or under amount.

A note about bi-weekly paychecks:

If you receive bi-weekly checks, you get 26 checks per year which is two more than the usual 24 to cover 12 months. You can add up 26 check amounts and divide by 12 to get an accurate monthly amount, but you may also wish to just add up two of your checks to get your monthly amount, and then keep in the back of your mind that you get two additional checks during the year which you could earmark for other additional expenses or savings. Those checks usually come in July and December, but not always. You would need to check on that.

Now you know your total monthly income.

You know what’s next right? Subtract your total monthly expenses from your total monthly income.

What’s left over is your discretionary income. If you find your expenses are more than your income, you have a problem and we’ll get to that in a moment.

Right now, just figure out where you are. If you have less than $500 left each month, then you’ll need to be diligent about discretionary spending. You don’t have a lot of room to ad lib.

Step #3: How to live within your means.

It’s super important to live within your means because if you don’t, you’ll be in a chronic state of stress, even if you think you’re good at ignoring it.

None of us really do that well. It sits in the background and gnaws away at you, and often erupts in the foreground which keeps you in a crisis mode. It’s like living with a blanket of anxiety just underneath the surface, and then something happens and the anxiety surfaces into full panic mode.

Here’s the things to consider:

• Do I have enough to pay all my expenses on a monthly basis?
• If not, what can I cut out or curtail to make it work?
• What other irregular expenses can I anticipate during this next year that I need to be ready for?

These are things like car repairs, dental appointments, prescriptions, medical expenses, home repairs, clothes and/or supplies you don’t buy every month, expenses for the kids.

List these expenses and guesstimate what you think they could cost. Put the time of year you’re most likely to incur those expenses. Add them up. How much additional income do you need to cover these?

This is where people often get stuck. They live very close to the wire, and then one thing happens that throws a monkey wrench into the budget and they get behind. This is why Dave Ramsey tells us to keep $1000 in our savings account at all times so we have back-up.

I agree with this practice. Totally.

If you can, get that $1000 in your savings account!

If you have to do it over time, do that, but don’t back out. Just knowing you have it is very relieving. If you have to spend some of it, replace what you spend as soon as possible.

To summarize this step, these are the two things you should do to finish up:

• Figure out when or where you might need additional funds during the year.
• Figure out how to get a minimum of $1000 in your savings account, and make a plan to do it.

Step 4: Do you need to make changes in your financial status?

This is the step where you assess your financial needs.

Do you have enough money coming in to pay all your bills, and take care of extra expenses when they crop up? This is the big question.

If you find that you can’t do that, and you would have to rely on credit for those extra expenses, and worse yet, for regular expenses, then it’s time to do some critical thinking about how you can increase your income, because that’s what you need to do. You may also need to consider what expenses you can eliminate.

The goal is to live within your budget, and if you need more money, figure out what future plans you can make that will get you there. Possibilities are:

• A change in job with a better salary.
• Two jobs instead of one, although this should be temporary.
• Additional education or training to create better and more lucrative job opportunities.
• Capitalize on a skill you already have that you aren’t utilizing.
• Taking in a roommate if that’s a possibility so your expenses are decreased.

It may be that several of these things apply, or one applies right now, and others are goals for the future.

I remember getting out of undergraduate school and being unable to find jobs that were adequate to support myself. I could swing it only if I had a roommate and kept my older car which wasn’t all that reliable. Even with that I had to be very frugal, and if any unexpected expense came along, I had to use a credit card. That lead to increasing debt and a lot of stress. It pushed me to pursue graduate school and choose something I wanted to do that was also marketable, and even after graduate school, I had to work my way up toward better and higher paying jobs.

Whatever you decide, you can make changes. What’s important is to be honest with yourself about:

• Your spending habits
• Your true income
• Your future prospects
• Your use of credit

Step 5: Make a budget.

The last step is to make a realistic budget for right now.

You now know what you spend, and how you spend it.

You also know your real income after taxes.

What’s realistic? What do you have to cut back on? What do you have in the way of discretionary funds that you can use once your bills are paid? How much credit card debt do you have, and how much interest are you paying on that every month?

With this knowledge, make a real monthly budget that you can stick with. Consider these things while doing that:

• How do I get paid? If you get paid bi-weekly, decide what bills get paid out of which paychecks. Decide also when you buy food, get gas, and spend money on extras. As mentioned already, food is a large expense, but it’s also a area where you might be able to economize by planning meals ahead, cooking for yourself, and avoiding eating out or take-out too much.
• Which credit cards should I pay off first? It’s usually a good idea to start with the smallest one so that once it’s paid off, you can take the money you were spending on that one and apply it to the next smallest card and pay it off faster. You just keep going until they’re all paid off. I would also suggest that if you have a way to move cards onto a zero percent card, it’s often very helpful. This is especially true if you have a lot of interest to pay every month. Be careful with this. You need to be sure you can pay off the balance before the zero percent promotional period runs out. If you can’t, make sure you know what the new interest rate would be. If it’s higher than what you were paying originally, it might not be a good idea to make the transfer. Think it through, set up a plan, and stick to it.
• Set up an emergency fund. Decide when you’ll put money in savings each month to get that $1000 set aside for emergencies. The sooner the better.

Now that you’ve finished with everything, make a vow to yourself that you’ll continue watching both what you spend and what you make each month. It’s very easy to slip back into bad habits when you stop watching. But, the more you create this habit, you’ll find it becomes automatic and you enjoy being aware of where your money goes.

A good way to do that is to use some sort of bookkeeping program where you actually document weekly your expenses and income. I use Quickbooks because I run my own business, but there are other programs that aren’t so involved that will allow you to easily track your money. Pick an app and use it!

If you input this information into a tracking system weekly (at the very least), you’ll always know how much money you have and what you’re spending it on. It’s a great habit to cultivate because it keeps you aware. Remember that your goal is to live within your means. If you do, you won’t feel financially stressed!

One final thing to think hard about.

In two words, credit cards.

Credit card debt is financial prison. I’ve been there as have many of us, and if you’re there now, you must get out.

The first step is to make a vow that you won’t use credit cards until you’re financially solvent. Even then, if you find it addictive, don’t use them at all. Ultimately you should never purchase anything on credit that you don’t already have money in the bank to pay for. If you can’t do it that way, then don’t use them.

I recognize that if you’re in the hole already, you may be using them to survive. With the economic stress our country is in right now, and the pandemic we’re experiencing, you may not have been able to do anything else. That’s totally understandable. If that’s the case, all you can do is work toward moving out of that position as soon as you can, and hopefully we’ll recover sooner than later. You can still do the exercises I’ve laid out here so you have a big picture view of where you are, and what you might change to secure your financial security as soon as you can.

My hope for each of you is to get on top of your finances, have money available for surprise expenditures, and be relieved of the chronic and debilitating stress and anxiety that not having enough money can lead to.

As always, I welcome your comments, stories, ideas, and questions.