The “Great Recession” has affected everyone by reminding us that managing our personal finances is a full-time job. Priorities have had to change. New directions must be considered, but the one fact that cannot be ignored is that saving money is the only prudent path to establishing financial security in an ever-changing marketplace.
Why is saving money so important? The good news is that we are living longer. The bad news is that Social Security and Medicare will never provide the necessary funds for an adequate lifestyle over an extended period of time. We will need to supplement both of these government programs with income from other sources, hopefully, from an investment portfolio that we have accumulated over time. The compounding effect is there to help us month-after-month, but we must start the process at some point. It is never too late or too early to begin saving for one’s future. The process can be as easy as “1-2-3”.
Step 1: Review past spending behavior You cannot change your present situation until you understand how you got there. Start by analyzing the previous six months of income and expenses. Segregate check expenditures into categories like housing, clothing, medical, automobiles, insurance, food and entertainment, and “electronics”. The latter item is the newest “black hole” in family economics. Include cable, Internet and all telephone usage under this column. You will also need the details for electronic debits to your bank account, as well as posting each item on a credit card account, to arrive at “usable” information. Your monthly “net” income may be negative if you have been funding your lifestyle with . Debt includes student loans, credit cards, auto loans, and mortgages. Do you know how much in interest charges that you are incurring each month?
Step 2: Prepare a financial budget to guide future performance Your objective now is to get control of your finances, based on modifying your previous behavior and living according to a new financial budget going forward. This process will help you accumulate for savings, improve your credit rating and live within your means. Start by calculating your average monthly spend rate for each of your selected categories and arrange the categories from highest to lowest. Next, take your average monthly income and deduct 10% to 15%, depending on your savings preference. You may reduce these amounts by any savings plan contributions that you make at work, but the “net” income figure becomes your expense budget going forward. If your monthly expenses exceed this figure, then you have some work to do. If you have credit card accounts, think like a businessman. Banks offer a range of merchant account fees on the selling side, but they also offer many options on the buying side of the equation, as well. There are many sites on the Internet that can help you here. Your largest discretionary item may be “Food and Entertainment”. Cutbacks may be required here and elsewhere, but there is no “gain” without some “pain”.
Step 3: Monitor spending patterns and prepare for investing Investing only begins after paying down or re-financing high-interest debt and establishing an adequate emergency fund of three to six months of net income. After you make an investment, the last thing you want to do is to sell it at the wrong time to fund an immediate cash need. In the meantime, get educated in the art of investing by attending a workshop or class on the topic. Planning and preparation are key factors to acquire before putting your personal funds at risk in the market.
It is never too late or too early to start saving for the future. The process starts with a review of your present situation and ends with peace of mind. It’s time to get started. Good luck!
BIO: Tom Cleveland has had an extensive career in the international payments industry, spanning over three decades. Mr. Cleveland earned an engineering degree from the Georgia Institute of Technology and did graduate work in Finance at Georgia State University. Currently, Tom writes articles for and others that offer helpful insights related to both business and investment management strategies.