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David Wolfson majored in finance at Indiana University because, he said, he felt it offered him the best shot at one day starting his own business. But by the time the 22-year-old graduated in May, the country had spiraled into a recession. Unable to find a job, he decided to take a year off from the "real world" to tend bar and teach skiing in Colorado. "My class feels cheated out of opportunities that existed just a few years ago," says Wolfson. "It's frustrating."
It's not just the kids who are frustrated. With unemployment at 9.4 percent, a 26-year high, it seems like everyone is buckling down for the worst economic storm in a generation. "If you've been teaching your child how to manage his money for a rainy day, this is that day," says Kathy Stepp, a certified financial planner in Overland Park, Kansas.
It's good to learn to live within your means when you're just starting out. And that's a lesson worth reinforcing for people of any age. Whether you're struggling financially or looking for ways to maximize your bottom line, it's time for the entire family to give our financial boot camp a go. Here are seven exercises that will put everyone on the path to fiscal fitness.
1. Track Your Spending
Household incomes, adjusted for inflation, slid about 1 percent between 2000 and 2007, while total retail spending surged 16 percent. Are you outspending your income? If you haven't revised your budget in the past few years—or if you don't have one at all—it's time to get a better sense of where your money is going.
The drill - For two weeks, write down every cent you spend—on every pack of gum, newspaper, and impulse buy. It all adds up, and quickly. Note your cash or debit purchases in your checkbook register. Or break out the BlackBerry and iPhone applications.
Next, log on to free sites like mint.com or wesabe.com. Using your cues, these sites will pull information from your banking, credit, investment, and retirement accounts, and you'll see at a glance, with colorful graphs and charts, where your money is going. "At the end of the day or month, check to see where the leaks are," says regular Mint user Dennis Bailey, 56, president of Savvy, a public relations firm in Portland, Maine. "I was amazed to see how much I spent just going across the street for coffee."
Do you really spend a third of your paycheck on food—groceries, takeout, and eating out? Shoes? Bank fees? About 40 percent of checking accounts in the United States were hit with $240 in overdraft fees last year. If your spending in any category strikes you as high, that's the first place to start cutting back. The sites can even create a sample budget for you, but remember: The goal is to tighten your belt, not maintain the status quo.
The payoff - By the time you finish this exercise, you'll know where your money has been going and, more important, how you'll spend it in the future. At the very least, you should be living within your current means.
2. Automate your bill paying
When it comes to money, temptation really is out to get you. Professors at four universities looked at what drives economic decision making. It turns out our brain really is of two minds. When students chose a small reward now over a bigger gain down the road, the emotional brain battled for control over the logical brain—and won. "Our logical brain can see the consequences of our actions, but our emotional brain has trouble imagining the future," explains Harvard professor David Laibson, an author of the study.
The drill - Cut your brain out of the loop, and put your money decisions on autopilot. Authorize your bank to pay your essential bills—mortgage or rent, phone, utilities, cable—directly from your checking account.
Computer consultant and frequent traveler Paul Robichaux, 40, of Perrysburg, Ohio, has been paying his bills automatically for 20 years. "I can manage my accounts and make payments from my laptop, desktop, or mobile device," he says. Once the system is up and running, you eliminate the likelihood of paying a bill late. No late payments, no late fees, no damage to your credit rating. Just remember to check your statements regularly for mistakes and hidden charges.
The payoff - Your major bills have been paid on time. That's worth your peace of mind. Now to the real work.
High-Impact Habits
3. Pay Down Your Debt
Americans under age 35 spend 19.7 cents out of every dollar they earn just to make payments on what they already owe. Debt burdens for all age groups have climbed since 2001, and it's only getting worse as interest rates—and balances—rise.
The good news is that the credit card rules signed by President Obama in May will restrict card companies from increasing the interest rate on what you already owe if your account is in good standing. The bad news? The rules don't go into effect until February, giving the companies months to squeeze profits out of you any way they can.
The drill - Avoid making new charges unless you can pay them off during the grace period, and use any extra cash to attack your highest-rate debt first. Even $5 a month more than the minimum payment will help you pay off that balance faster.
While you may owe a lot more money on a student loan, knock out your credit cards first because the Stafford loans generally charge about 6.8 percent in interest, while credit cards range from 9 percent to 14 percent or higher. Ask your student-loan servicer to extend your payback period. Stretching ten years of payments on a $20,000 Stafford into 20 years will free up almost $1,000 a year. Once you've retired your credit card debt, switch back to the original schedule so you'll avoid racking up additional years of interest charges.
Next, apply your savings to your highest-rate card balance. People are understandably perplexed by this, but do the math: You're losing more money paying interest on this debt than you're earning on your savings. It's smart to keep a small cash cushion, at least $1,000, for emergencies.
Ask your credit card companies to lower your interest rate. If they won't, transfer debt from your highest-rate card to your lowest. Before you do this, take into account transfer fees (typically 3 percent of the money you move). Otherwise, the transaction may cost you more than it saves.
If you can, refinance your other types of debt. For example, local credit unions and community banks may let you borrow cash at relatively low rates to retire a high-rate car loan. And mortgage rates have dropped to record lows (a 30-year fixed rate was 5.74 percent in June), so if you have enough equity in your house, it may make sense to refinance. After you've killed your highest-rate debt, don't relax. Take the money you were spending on that account and apply it to your next-highest-rate debt.
Now it's time to set up another automatic transfer: Move 10 percent of your remaining discretionary income out of your checking account and into a savings account the day your paycheck clears. It may seem impossible at first, but if you can spare even $25 a pay period, it's a great habit to develop.
Once you commit to a debt-free life, the sacrifices get easier, says Michael Roberts, 42, of Charlotte, North Carolina. "I eliminated $60,000 worth of debt in two years, and I've been able to build up my savings and retirement accounts," says the marketing director of a home textiles company. "It's frightening to me that we don't teach enough of this in high school or college."
The payoff - Now that you've conquered your debt, start saving.
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