Financial Management Basics

Successful financial management is mostly about organizing, planning ahead, and being realisitic about what you can and cannot afford.  Many people have great difficulty with one or more of these skills, as evidenced by the growing incidence of credit problems and lack of saving in the United States.  It is easy, once things have spun out of control, to feel overwhelmed and stop even trying to get it back; this only results in digging the hole deeper and faster.  It is essential to do whatever you can - starting right now - to reverse the damage and start working your way toward firm, confident financial footing.  If the plan below feels too hard, seek the assistance of someone you know who has their financial life together, and get some hands-on instruction.


Creating Your Financial Management System 

What follows is a general plan for putting some order, predictability, and safety into your financial picture.  This probably doesn't include absolutely everything there is to think about (I'm a therapist, not a financial planner), but it's a start and should be enough to give you the general idea.  You may not find this easy to do, but this is what it takes:   

1. Get Organized 
Devise a system for organizing your incoming bills and paid receipts so you have a visual cue for items needing payment, and a reliable storage system for retrieving older documentation.  Establish a place for all unpaid bills to be kept, and put them there as soon as they arrive, before they get misplaced around the house or lost in the shuffle of other mail. 
2. Figure Out Current Expenses
Create a monthly list of regular bills (mortgage, rent, car payment, loan payments, utilities, etc.) and approximate due dates.
Include a monthly allowance for out-of-pocket expenses like groceries and miscellaneous household needs (you may need to do a spending log for a while to figure out how much this is).
Calculate and include a monthly amount to set aside for: 

  • health, disability, home, car, and other insurances

  • wage/income and other taxes
  • car and home maintenance
  • healthcare expenses
  • holiday, birthday and other gifts
  • clothing
  • other predictable periodic expenses
Include an amount to set aside each month for emergency savings:  
 • This amount should be as much as you can possibly stand.
 • Your emergency savings account should eventually total 3-6 months income.  Yes, really. 
  • Once emergency savings are in place, divert this figure to retirement, college fund, etc.
  • Never stop saving monthly unless forced, temporarily, by dire circumstances.
  • Never reduce the amount you're saving monthly unless forced, temporarily, by dire circumstances.
  • Don't skip it one month unless you have a specific plan to make it up within one to two months.
  • Raise the amount you're saving whenever possible, until it is sufficient to meet your long-term goals. 
Evaluate where your money is currently going.  Study your checking account and credit card records for the past year or two.  Keep a day-to-day spending log to track all out-of-pocket transactions, even the small-change ones.  Consider how the distribution of your money fits (or not) with your family's fundamental needs.  Always consider the long-term impact of your spending choices, because that's what you'll be living with long after the short-term fun is over.     
3. Eliminate All Unnecessary Expenses
• Don't pay others to do things you can do yourself.

• Don't pay for a higher level of quality than is adequate for your needs.

• Make sure you're getting the quality you are paying for.

• Spend money as much as possible only on things you will still have once the money is gone (i.e., buy products instead of entertainment.)

• Luxury expenditures (anything not necessary for basic survival) should be evaluated very critically.  If you're in financial trouble, forget about them completely until you begin to stabilize.  If you're stable, the occasional "morale booster" is okay only if it does not involve money that is needed in the list of expenses in #2 above.  If you're among those whose financial future is secure and organized, then you know exactly how much extra you have to play with, so go have fun (until then, luxury expenditures hurt you much more in the long term than they reward you in the short term).
4. Make Lower Cost Substitutions
• Cook at home instead of eating or ordering out;  this saves you money, with the added bonus of keeping you in control of what's in your food.

• Rent a video instead of going to the movies.  Or read.  Or play with your kids.  Or talk to your neighbors.  Or go for a walk.  Etc.

• Take your lunch to work instead of buying it there.

• Buy clothing at resale stores.

• Buy in bulk (only items you consistently use.)

• Buy store brands and generics as much as possible, provided the quality is sufficient.

• Buy cars, appliances, etc. that are slightly used instead of new.  Run your cars "until the wheels fall off."  Use appliances and home electronics until the cost of upkeep/repair is no longer more economical than replacement (Consumer Reports provides helpful information on how to evaluate this.)

5. Pay Down Credit Cards as Soon as Possible 

Stop using them completely except for emergencies, or if you do still use them,  don't charge anything you can't pay in full on the next credit card statement.  Using cash for your purchases will keep you much more aware of what you are doing, and will naturally curb your spending.  Getting out from under credit card interest rates is the single most productive change in money management you can make. 

6. Make Payday “Money Exchange Day” 
Have the bills ready for the paycheck when it comes, so you send the money out immediately (always including your savings and other expense set-asides) and leave yourself only with the minimum you need for cash expenses until the next check.  This eliminates the temptation of having money sitting around, and helps you to increase your awareness of the flow of your finances. 
7. ALWAYS Live Below Your Means
If you don't like the lifestyle this gets you, then find a way to make more money, and then still live below your new level of means.
If You Are in Financial Trouble Now
The plan above will work quite well if you're willing to exercise the restraint and discipline that it takes to bring sanity back to this part of your life.  If you can't manage this kind of plan on your own and have no one to turn to who can help, or if you are already in deep trouble, there is another option.
Consumer Credit Counseling Service (CCCS) is a non-profit organization that is available for helping people to work their way out of financial messes.  CCCS is funded by voluntary contributions from creditors, and is therefore able to offer budget counseling free of charge, and other more involved debt management services at very low cost.  Be careful in taking this step, however, as anything more serious than budget counseling will show up on your credit report, and not in a good way.  Regardless of where in western Pennsylvania you live, the number to call is 412-390-1300 or 1-888-511-CCCS; there are several regional offices and you will be directed to the one that serves your area.  It does not affect your credit report to call and ask questions to determine how CCCS may be able to help you.
Beware of CCCS sound-alikes.  There are a number of organizations out there that are purposely marketed to make you think they are CCCS.  In reality, some are legitimate businesses that charge a lot for their services, and some are con operations that will get you in more trouble than you already have.  Be careful out there, and don't give up. It can't get better if you don't try.
Copyright © 2007, Elizabeth Babcock, LCSW.  All rights reserved.
Some other articles you might find useful:
Self-Help for Intense Anxiety  

When is It Time to Consider Psychotherapy?

Depression Series, Part One: Depression -- Myths and Facts



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