Surviving 2011

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About this time each year, individuals make a self-assessment to evaluate how the year turned out for them and what they’ve accomplished. Then goals or resolutions are made to start the new year off right with greater hope and prosperity. We should try to better our situation, no matter what the circumstances; otherwise, we end up sinking in the pit of despair. However, the sinking economy doesn’t give much hope for better times ahead.

I’d like to present a plan to help make it through the year with some dignity. There are many areas of your life that you should evaluate, such as your relationships, health, intellectual development, and spirituality, but I’m going to focus on the financial aspect of your life, and what can be done to get better control of your money.

The first step is to determine how much and where your money is being spent. Other than fixed or large expenses such as rent or utilities, it’s a guess for most people as to how much is spent on gas, food, entertainment, etc. If you don’t know the exact amount, take an educated guess and then total the amount to see if it’s close to what you’re actually spending. You will need to start keeping your receipts or recording your expenses in the future to get a better estimate of your spending pattern in specific categories.

Next, prepare a budget to determine how much you should be spending in various categories in order to live within your means or even start saving some money. Look at the expense categories you’ve created and organize them into four major expense areas: 1) Fixed and needed expenses such as rent and insurance; 2) Fixed and wanted expenses such as cable TV; 3) Variable and needed expenses such as food, gas, and utilities; and 4) Variable and wanted expenses such as entertainment, gifts, and vacations. In this last area, you should also include “fun” (I’ll explain later), and “other” as a category for all those expenses that don’t fit anywhere else.

Once you have your expenses listed under these four major areas, it is easier to see how and where you can start cutting your expenses. Fixed and needed expenses are difficult to reduce or eliminate, but you can still do some things such as moving to a place with lower rent or finding another insurance company with a lower rate. Fixed and wanted expenses may possibly be eliminated. Yes you can live without cable.

The next two categories are where you can start seeing greater savings. Your variable and needed expenses can be reduced by planning your food purchases and taking advantage of sales, planning your driving to accomplish as much as possible on one trip, hanging your clothes instead of using the dryer, etc. In the variable and wanted category you can reduce or eliminate most of the expenses in each category by eating out less, taking a less expensive vacation or waiting to go next year.

By looking at all your expenses and examining where to save, you should be able to live within your budget and find some extra money to accelerate your debt payment. Debt can strangle your financial security if you do not learn to master it. Examine all of your loans and the interest payments and put the extra money you’ve saved each month to help pay off the debt with the highest interest rate. Credit cards usually have the highest interest and require a low monthly payment that keeps you paying for as long as possible. If you’ve maxed out your credit limit and are paying extra fees, you may want to get a low-interest personal loan to pay off the credit card. The bank will usually want you to surrender the card, but if they don’t, put the card in a secure place and don’t be tempted to use it again.

Once you’ve retired one loan payment, you will use the extra money from the paid loan so you can accelerate the payment of the loan with the next highest interest rate. By successively doing this with all your loans, you will get out of debt a lot faster than you could by making minimum monthly payments.

Now, with all your debts paid, you should have a large sum of money left over at the end of each month. The next step is to put most of this money into a savings plan. There are many different ways you can save your money. Usually, the higher the interest rate, the higher the risk. Putting it into a bank savings account is usually the safest, but also has the lowest interest rate, which is below the rate of inflation and will not give you much of a return. Banks use your money to make money by putting it into high interest investments and activities that will earn them a greater return on their investment, so follow their example and be smarter with your money.

Once you start investing, you should never take the money out. Your goal is to take advantage of compound interest so that your savings will continue to grow at an exponential rate. If you’re concerned about the temptation to raid your savings or worried that relatives will ask you for a “loan,” then start an Individual Retirement Account, or some investment that makes it difficult to take the money out at any time. When you do spend money outside of your budget, it should be on things that have a potential to increase your income or increase in value over time.

I know you may see the logic in this process, but where is the fun? Who wants to live like a miser so you can have some money when you’re older? Well, there are a lot of people who are older and find that they don’t have the money they need to live on, so this plan can help you avoid it. As for the fun part, you can set up a category in the “variable and want” section that is labeled “fun” or “mad money.” This is an amount you budget (small at first, but becomes larger as you pay off your debts) and that allows you to spend money for fun things, or when you go “mad” on a shopping spree. You’ll have the money in your account to spend without experiencing the guilt afterwards.

Also, if you have some things you want to purchase, don’t go into debt to buy them. Make a list, prioritize the items, find the best price, and then set up a category in your budget that saves money to pay cash for these items. You need more patience to do this, but if it’s done right, you’ll usually get the things on your list in a relatively short period of time.

One of the easiest things to do is to spend money, but one of the most difficult things is to save it. The key to success is to develop more disciplined spending habits, record your expenses, and make the commitment to stay with the program. As you see some success, it will be easier to stick with it and not only survive 2011, but possibly thrive in the coming year.