Managing money is a challenge whether you earn minimum wage or are considered comfortably well off. While making mistakes is considered a learning opportunity by some, it pays to make as few mistakes as possible when it comes to your financial status. Errors in judgment can be costly in both the short and long run.
It takes time and effort to come up with a budget, so many people procrastinate. You think that you have a handle on your expenses, but at the end of the week, your wallet says you don’t. To make ends meet, you haul out the credit cards. John H. Robinson, the Founder of Financial Planning Hawaii, Inc., explains why people have such a difficult time budgeting: “First, as a function of the fast-paced times in which we live, few of us have the time to go through months of statements to get a handle on our weekly, monthly or annual expenses. A second deterrent is complexity. Most individuals and families have multiple credit cards and accounts with multiple financial institutions.” The solution is to break the task of budgeting into small chunks. For example, get your bank records together as the first step. The second step is tracking the cash you spend every day. Continue to accomplish one task every day, and at the end of the week you’ll have everything you need to put together a realistic budget.
Basic needs include food, shelter, clothing, transportation and medical care. The problem is the quality and quantity in fulfilling those needs. For example, planning out meals and going to the grocery store each week is a lot cheaper than eating out all the time. You might convince yourself you need a brand-new luxury car when what you can really afford is a used economy car. It’s easy to convince yourself that your current needs are much greater — more costly — than they actually are. Take a fresh look at every expense and see where you’re overspending.
Sliding Back Into Old Habits
You may have developed a budget but now you find yourself coming up with reasons why this month you can’t stick to it. Eventually, you slide back into your old spending habits. It’s similar to sticking with a weight loss program, where you have just a treat or two not on your diet. Suddenly you aren’t on the program at all. Keep on the right path with your spending by sitting down every week and reviewing your expenditures.
No Emergency Funds
Experts recommend from three to eight months of expenses as an emergency fund. That’s a chunk of change. For example, if your expenses are $3,000 a month, you’d need from $9,000 to $24,000. If your savings program is 10 percent of your net pay of $5,000 per month, it would take 18 months to reach the $9,000. One method that may be counterintuitive to most advice is to claim zero exemptions on your tax return and let Uncle Sam keep the money for you. You won’t earn interest, but you will receive a hefty tax refund. Another method is to put all “windfall money” such as gifts into savings. Sock away any raises or overtime, as well. As certified financial planner Thomas Miller explains, people don’t save, because: “In my experience, people overspend simply because it is easier than not overspending. It’s not difficult to go to the store and buy something. What is more difficult is going to the store and not buying something. The field of psychology as it relates to purchasing decisions and consumer behavior has come up with some fascinating explanations as to why human beings overspend, but at the end of the day it all boils down to the same thing: Spending money is easier than saving money.”
Lack of Retirement Planning
It isn’t easy giving up what you want today for what you may need tomorrow. And even if you do have some savings for retirement, it’s tempting to use it to pay for emergencies. The solution is to start saving for retirement right now, even if it’s just a few dollars every week. Set a savings goal for the next month. Increase the goal for future months. The earlier you start savings, the more money you’ll have to retire, because you’ll be earning interest for a longer time. Also, avoid withdrawing money from your retirement savings to pay for unexpected expenses.