By Andrew Housser
When you are sitting at your kitchen table, looking at a big stack of bills and a paycheck that may not feel as big, how do you decide what to do?
If you Google "manage money," the search returns 400 million responses. Indeed, sometimes, it seems there are 400 million separate ways to decide what to do with one's income and expenses. Fortunately, there are a few basics that apply to almost every financial situation. By putting things in perspective and moving one step at a time, you can make decisions that let you set the best priorities and goals for your financial life.
1) Make a list of your goals.
First things first: You can't achieve something unless you know what it is. Take a few minutes over a cup of coffee or tea to think about your goals related to money. If you are married, include your spouse in the conversation. What do you want money to do for you? Your long-term goals might include getting out of debt, purchasing a home, going back to school, taking a once-in-a-lifetime vacation or planning for your retirement -- or all of the above. Try to put these priorities in order of importance to you. Also write down short-term goals, such as staying on track with all bills, paying for holiday gifts without going into debt, or creating savings to prepare for occasional large expenses like insurance or auto repairs.
2) Write down your budget or spending plan.
The word "budget" makes some people anxious, so another way to think of it is as a "spending plan." Write down income and necessary living expenses. Subtract expenses from income to see if you can make ends meet. If you do not have enough income to pay your necessary bills, you must re-evaluate, as the only answer is to add income or cut costs. If you do have some income remaining after all necessary expenses, decide how you will apply that extra to the categories you identified in Step 1 toward meeting your goals.
3) Pay necessities first.
When it comes to prioritizing, the three necessities in life are food, clothing and shelter. For most people, these three categories add up to about 50 percent of income. Make sure to include these expenses accurately in the budget.
4) Pay at least the minimum on secured debts.
A "secured" debt is a loan that is secured by a tangible asset -- such as a car or a home. If you do not pay these bills on time, you could lose the asset, which -- in the case of a car or home -- can have serious consequences. Be certain your budget has room for these necessities. If not, consider how you can cut costs to make them affordable, such as by selling the asset and obtaining a more affordable alternative.
5) Eliminate credit card debt.
Credit card debt does nothing for you. In most cases, it's a bill you are paying for something you have long forgotten about or no longer use. Change your spending habits so that you pay for daily expenses with cash or a debit card. Then plan your budget so that you can direct money to paying down credit card debt. Doing so is one of the best investments you will ever make.
6) Give yourself a cushion.
Often, people put "emergencies" on a credit card. Expenses like a car or home repair, or unexpected medical expense, actually can be planned for, however. Work toward accumulating an emergency fund that you can draw upon when you need to pay a non-routine expense. Start with a few hundred dollars, and gradually increase over time to cover several months' living expenses. Anytime you use part of this "cushion," make it the priority to replenish it as soon as possible.
7) Make the most of time.
When you attempt to prioritize your goals, remember that some of them have a clock ticking. Saving for retirement or other long-term goals is something that reaps greater rewards the earlier you start. Consult a financial advisor, and/or review books or online savings calculators and information, to decide how much you should be saving for your future retirement. Most people should work to save at least 10 percent to 20 percent of their income toward retirement.
8) Be flexible.
Plans, goals, priorities and situations change. Keep a flexible attitude about your financial goals. When income goes up or down, change your spending plan accordingly. Also, revisit your financial goals regularly to be sure they are still in line with your current plans and priorities.
Financial goal-setting is an art, not a science. Once you can cover the basics, you can use money as a tool to achieve your longer-term goals. The key to finding financial freedom is living within your means and avoiding unhealthy debt. If you can stay out of debt, you can use your money to move forward into an exciting future.
First things first: You can't resolve to fix your money problems unless you know what your goal is. Take a few minutes to think about your financial plans. (©Stockbyte/Thinkstock)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
