Now's The Time To Clean Up Your Finances

It's never too soon (or too late) to take charge of your financial situation and get on the right track. The hard part is figuring out where to start. With some dilligence and the following tips, though, it is possible, even if you're on the brink of bankruptcy.

Creating a Budget
Creating a budget is easy, sticking to it is a little more challenging. First you have to track the money that’s coming in and going out.

1) Review your pay stubs and write down how much money you can count on every month.

2) Next list your expenses. Put your savings at the top of the list, so you don’t forget to tuck money away for emergencies. You don’t want to live paycheck to paycheck. Making sure you pay yourself first is the best way to avoid falling into that trap.

3) After savings, write down you biggest bills, like mortgage/rent, car payment, and child care expenses.

4) Then add the expenses that are about the same every month (groceries, utilities, phone, etc.)

5) Credit card and other debts? Include at least the minimum monthly payment and add a little more if you can. Ultimate goal: pay the full balance on your credit card every month.

6) Finally, try to think of all of the other expenses that often creep up every month (hairdresser, pet supplies, dining out). Make sure they’re also on the list.

I love the Budget Wizard tool at www.beehive.org. It remembers to ask you about expenses and debts that you may have forgotten and lets you to update your finances to see if you’re staying within your budget.

Sticking to a Budget
Making purchases with a debit card (you’ll have an automatic record online) or keeping all of your receipts in a big brown envelope can help you keep track of your spending. But will making note of every latte or iTunes download keep you from breaking your budget? I try to follow “The 60% Solution” – a plan that MSN financial editor Richard Jenkins came up with to help his family stay on the right financial course. No more than 60% of your gross income can go to committed (“fixed”) expenses (i.e. all taxes – including taxes withheld from pay, rent/mortgage, utilities, food, clothing, transportation, insurance, child care, etc.). The 40% of your income is split between savings and “fun money”.

The 60 Percent Solution

1) Committed expenses/”fixed” monthly expenses (60 percent)

2) Retirement savings and/or debt repayment (10 percent)

3) Long-term savings/emergency fund (10 percent)

4) Short-term savings/irregular expenses (10 percent)

5) Fun money (10 percent)

The key is keeping your “fixed” monthly expenses down, so that you actually have “fun money” left over to spend on anything that you want.

How to Save When You’re Living Paycheck to Paycheck
Living paycheck-to-paycheck? Make sure the first bill you pay is to yourself. Every dollar of your pay goes to expenses, you say? You need to figure out what you can cut.

Have you stopped the magazine subscriptions, the premium cable TV channels, and weekly manicures? Do you check out the “unit price” on items at the grocery store to find less expensive products? Are you bringing your lunch to work? You need to try to cut at least 3-5% from your expenses. View it as a 3-5 percent pay cut, take that percentage of your pay and have it automatically deposited into a savings account.

Build your savings over time, adding a percentage or two until you’re saving at least 10% of your pay. When you get a bonus or a raise, continue to live off your current income and devote the amount of your pay increase in savings. Your ultimate goal: saving 20% of your gross income – extremely difficult at first, but doable if you’re disciplined about saving.

Skip a few manicures and pedicures, bring your lunch and buff up your savings.

Figure out what expenses you can cut to stash away just $40 a week over the next 50 weeks and you’ll have saved $2,000 — a sizeable sum for your emergency fund (in case the car breaks down or you have an unexpected household or medical expense). Now that you’re in the habit, save the same sum next year and tuck it into an IRA.

By squirreling away $2,000 a year from age 22 to 50, assuming your money earns 8% a year on average, you’ll have amassed $207,900. If you start saving that annual sum a decade later, you’ll only have saved $82,900 by your fiftieth birthday. A 32 year-old woman would have to save an additional $3,000 a year to catch up to the 22-year-old. So even if you’re paying off student loans or credit card debt, don’t skip putting some money away.

Add more money than you think you’ll need to your “emergency fund.”

Only you know how much of an emergency cushion will let you rest easy. Many financial advisers say keep 3 to 6 months worth of living expenses. But in times like this when job security is so uncertain, padding your cash reserve with a few extra dollars — perhaps 20 percent more than you think you’ll need — is extremely prudent. To quickly boost your short-term savings:

• Save your tax refund. Don’t spend your tax refund, if you’re lucky enough one. Put the money in your emergency savings rather splurging on that trip to Cancun.
• Redirect a portion of your 401(k) contributions to “emergency” savings. Have a portion of the sum that’s deducted from your pay and sent to your 401(k), automatically sent to your bank savings or money market account.
• Keep stash of cash in Roth IRA. Contributions to a Roth Individual Retirement Account are always yours to take out as you wish. If you don’t have cause to dip in that pot and keep the money in the Roth until you’re 59 ½ years old, you’ll be able to take out your contributions and earnings tax-free.

CONTINUED : Roth IRAs: A Great Place to Save

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