December is a good time to reflect on all things important: family, friends and money. One can argue that money certainly should not be in the same category as friends and family. However, when it comes to how it impacts our lives, it is quite important. We spend time focusing on how much money we don’t have instead of focusing on how to manage the money we do have. As we wrap up the year, let’s take a look back at how we managed our money and set a new goal for 2014: to know how much we spend and to start saving correctly.
Here are a few questions to evaluate 2013, your year in money.
How Much Did You Spend?
We all know what comes in when our paycheck hits our bank account. However, where it all goes is another story. Analyzing your cash flow is your reality check. The difference between what comes in and what goes out helps you gauge the state of your family’s financial health. When you list what comes in and what goes out, you can then subtract your spending from your income to see whether you have a surplus or deficit. A surplus indicates you are living within your means. A deficit indicates you are living above your means and most likely not achieving your financial goals.
Do you have a method in place to track your spending? If not, there are several methods available to do this task, from the old fashioned method of simply writing everything down for a month, to entering information into Quicken or Mint.com or other money management apps. No matter how you do it, the important thing is that you see where your priorities are and how much you are spending on them.
Has your spending caused you to have credit card debt? It is amazing how quickly those three little words enter into our lives. If the answer is yes, then it’s time to get rid of those financial handcuffs once and for all. Once you have analyzed your cash flow and know exactly what is left over each month, implement a plan to reduce your debt. One strategy to consider when reducing or eliminating debt is to pay the smallest balances off first and pay the minimum on the rest of your debt. Although you may save some money tackling the debt with the highest interest rate first, the mental relief that comes with paying off each debt burden can far outweigh saving a few dollars.
Where Did You Save?
There are many places to save. However, too many people make the mistake of plowing all their available resources (or sometimes even mistakenly available) resources into their employer’s retirement plan. I like to use this analogy when it comes to saving for retirement: Yes, it is important to save for retirement, but if your house is on fire, you need to put that fire out first. I hate to break it to you, but for most of us, the house is on fire! We have been so programmed to worry about retirement that we have gotten ourselves into a mess today. We don’t set aside money in a petty savings account for pleasurable things. Our emergency funds are woefully inadequate should we face a crisis, and we have more debt than we can possibly manage.
As we wrap up this year, let’s take a look at our financial house and ask ourselves, is it on fire? If the answer is yes, consider temporarily stopping or reducing your retirement contribution. Do this instead: in 2014, eliminate your credit card debt, start a petty savings account and contribute to an emergency fund. Even if you can only pick one, it will be a step in the right direction. Once you have reduced the flames to a mere flicker, you can return to adding to your retirement savings.
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