1. Divvy up any unexpected income
When you have a windfall — a bonus, gift, or extra cash for extra work — use the rule of thirds to determine how to use it:
• One third for the past. Use one third to pay down debt you owe.
• One third for the future. Put a second third immediately into some sort of savings or investment.
• One third for the present. Use the final third to make a home or personal improvement or purchase you want.
If you follow this rule, you'll see your debt shrink and your savings grow, and you won't feel deprived.
2. Keep a slush fund handy
Something — be it a car repair, an emergency root canal, or a job layoff — always comes up to throw you off your monthly budget. To keep these incidents from running you into debt, you need to have an emergency stash in an easily accessible account, preferably a money market account (they earn a little more interest than regular savings accounts).
How much is enough?
Easy. Track all of your spending for a month (including everything from your mortgage payment to lunch at the deli), and multiply that monthly total by three. That three-month operating budget is a scary number, eh? Well, this is the minimum you should have on hand in case the roof caves in (literally or figuratively) and you need some dough to get you through the rough spots. And don't worry if this money isn't accruing the big interest; it's there for emergencies.
3. Ditch the ATM card
We're always making impulse purchases, from a pack of gum at the supermarket checkout line to that new Van Halen-meets-bluegrass CD. How can you stop your bank account from hemorrhaging? Take a page from the old-timers and shred your ATM card. It's just too easy to take out money at the local 7-Eleven when you're jonesing for a Snickers bar at 2 a.m. Instead, figure out how much cash you'll need each week for your regular, cash-based purchases (things like lunch at the cafeteria and your daily cup of coffee), head on over to the bank teller's window, and get your walking-around money for the week. With a finite amount of cash, you'll start to think twice before those spur-of-the-moment spending sprees.
4. Put yourself on your payroll
There comes a time every month when the bills start piling up and you force yourself to sit down and write out all the checks. Well, there's one more check you should be writing — one to yourself. Jay Fine, a longtime financial planner based in Monroe, New Jersey, offers this easy way to put your retirement planning into high gear. "Put yourself on the payroll," he says. "Every month — or even better, every paycheck — make sure you set an amount aside for investment. A good number would be about 6 percent. Anything more would be great. If you have to, you can even write yourself a check to deposit or send to another account. But just as you pay your mortgage and your electric bill without fail, now you'll be making sure to pay yourself as well."
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5. Make, and stick to, a budget
Budgets are the first steps to gaining some financial order in your home. Stanley Kershman, an author, lawyer, and creator of the website www.debtonadiet.com, has a six-step plan to accomplishing just that:
1. Don't attempt to do your entire budget in one sitting. Take a few days, breaking the work down into manageable pieces.
2. Gather up all of your income information, including salaries, interest, and gifts.
3. Next, gather up all of your expense information. Do this thoroughly, even if it takes three days, a week, or a month. Make sure you're not missing anything.
4. Using a budget worksheet add up all of the totals for the income and outflow.
5. Figure out where you can do some fine-tuning, either to pay down your debt or increase your savings goals. However, above all, make sure you're making as much money as you're spending. Stay out of the red.
6. Redo the budget with the new totals, and post it around your house, lest you forget you are now living within the cozy confines of a household budget.
So you diligently track your income and every expense that you have. But how do you know if you're spending reasonable amounts of money on things like housing, debt, and groceries? Follow these parameters offered by E. Kim Dignum, a financial planner in Fort Worth, Texas, courtesy of CNNmoney.com (all figures are percentages of your gross household income):
•30 percent: Housing and debt (mortgage/rent, credit cards, auto loans, student loans, etc.)
•26 percent: Living expenses (food, clothing, utilities, transportation, medical, entertainment)
•25 percent: Taxes (federal, state, local, and property; FICA and Medicare)
•15 percent: Savings and retirement (401(k), stocks, mutual funds, college savings, etc.)
•4 percent: Insurance (life, health, disability, auto, homeowners, etc.)
6. Follow these financial rules of thumb
Concerned about how much you're spending, how much you should be saving, and how much house you can afford? Use these easy equations to determine how financially healthy you are:
• The price of your home should not be more than 2.5 times your annual gross household income.
• Your total monthly debt payments (including mortgage, student loans, car, and credit card payments) should not be more than 35 percent of your monthly gross income. Some mortgage brokers will stretch this ratio up to 40 percent, but that leaves you very little budgetary wiggle room.
• To retire comfortably, your nest egg should be about 20 times what you want your annual income to be. If you anticipate needing about $75,000 a year to live on when you retire, you'll need to save a nest egg of about $1.5 million. Of course, this will vary if you retire early or continue to work longer than usual.