Tips for Money Management in the New Year

The new year is a great time to clarify the vision of your life—your ideal lifestyle that reflects your values, your family situation, and other factors unique to you.That vision may change over time, so revisiting it at the start of the new year can help you refocus your financial habits to reflect your current goals.

There are four purposes for clarifying your vision:

1. It helps you know your unique values.
2. It helps you recognize when your spending is not in alignment with your values.
3. It gives a beginning structure to your budget or spending plan.
4. It motivates you to take the necessary financial action.

Here are a couple of exercises to help you clarify your vision:

• Take some time to reflect on what you value, asking yourself questions such as: How would you spend your day if all of your money woes were magically taken care of? Or, how would you spend your day if you had all the time, money and love that you ever wanted? What type of home would you live in? Where would it be located? What type of furnishings would you have? What colors, textures, and space would surround you? What would you be wearing? What would you be doing with your day? Who would be with you? Just let yourself dream and fantasize this lifestyle. During this exercise, jot down notes to yourself until you get some clarity.
• Make a collage with pictures that depict ideas, scenes, moods, or objects that you desire to have.

Once you have clarified your vision, take these steps toward bringing your finances into line with that vision.

Identify Problem Areas with Money.

Most people with money problems believe that not having enough money is their primary problem, and are unable to pinpoint their specific difficulties. Upon further analysis, more specific difficulties and habits may be identified, such as:

• Bouncing checks, and losing or not paying bills
• Impulsive spending or buying things on a whim
• Being disorganized with papers, making it impossible to locate them at tax time
• Carrying large credit card balances
• Procrastinating doing taxes
• Not earning enough money for survival (financial underachievement)
• Not saving for the future

Establish Short-, Mid-, and Long-Term Goals

Once the problem areas are identified, goals for improvement can be set.

• Short-term goals may include such things as cutting up credit cards, saving $5 per week, curbing eating out, or keeping papers together.
• Mid-term goals may include saving for a vacation, saving for furniture replacement, or beginning to pay off debts.
• Long-term goals may include saving for college tuition or planning for retirement.

Prioritizing these areas poses a special challenge because successful money management means paying attention to all of them. It is advisable to break down each task into small action steps and incrementally build your confidence until you are attending to the whole financial picture.

Organize Financial Papers

Losing financial papers may have serious consequences. To avoid misplacing or losing them, have a special spot in the house where all financial papers can be stored. This can be a file cabinet, desk drawer, special box, or envelope. This central location should be near where the mail is opened, and may also house a calculator, stamps, envelopes, and anything else needed for paying bills.

Here are some tips for organizing:

Daily Mail Routine. When the mail arrives and is opened, money papers are immediately separated from the rest of the mail and placed into the special container. Money papers include checkbooks, bills, bank statements, legal papers, insurance papers, checks to be cashed, and extra checks. Anything that has a designated account number is important and needs to be immediately separated from the remainder of the papers.

Files with Dividers. Dividers with file names such as home-related, grocery, gifts, utilities, bank statements, personal, car and fuel, hobbies, and insurances can be placed in the container. These file names should reflect your lifestyle and should be kept simple.

Paperwork Flow System. This is a system in which all the money papers “flow” to one central location. For instance, “temporary holding tanks” are designated in the wallet, purse, planner, and car, which hold money papers and receipts until they can be placed in the central money location. These temporary tanks can be envelopes, shoe boxes, or, even more simply, a special spot in the wallet for receipts. Once a month or so, these papers can be transferred to the central location.

Curb Impulsive Shopping

Impulsive shopping and spending is defined as any purchase you did not plan to make when you left the house that morning, any purchase that is not a part of your budget, or any purchase that you don’t need. Here are some ways to curb impulsive spending:

• Put an interruption between your money and the urge to spend it. Avoid credit card use and ATMs. Don’t carry your checkbook with you. Consider having another signer on your checking account or not carrying extra cash.
• Avoid temptations. Identify and stay away from problem areas such as malls, favorite stores, arts and crafts shows, websites, home shopping channels, and newspaper circulars. Throw out catalogs as soon as they arrive.
• Bring a list when shopping, and stick to it. If you have trouble sticking to a list, try this: Before you go to the store, call a friend and commit to your shopping list. When you are done, call them again to report that you have adhered to your list.
• Bring a calculator to the store (you probably already have one in your phone) to add up purchases as they accumulate.
• Wait a certain number of hours before a purchase. If this time elapses and you decide that you still want the purchase and have the money to buy it, then go and buy it.
• Find fun hobbies or things to do that are free or inexpensive. Shopping shouldn’t be the main pleasure in life. The world is filled with a vast array of stimulating activities, such as museums and libraries, local lectures, support groups or clubs, public parks, or free concerts and other community events.

Cut Up Credit Cards

Credit cards and the debt that can easily accrue can take a person in the wrong financial direction. Balances build up rapidly from interest, late payment fees, and over the limit charges. This accumulation will rapidly turn small purchases into very large expenses. Paying only the minimum amount due on a large credit card debt means it could take 30 years to pay off the entire balance. If you are in the habit of not paying off credit card balances, the next time you use your credit card, ask yourself if you love the purchase enough to pay for it over 30 years. Call the companies and close these accounts, even if there are balances to pay off.

Keep records to become conscious of where money is going.

Carry a little notebook (or use your phone or other device) and begin to keep track of all purchases. Record even small purchases, such as the parking meter or a beverage.

Successful money management demands that you be able to account for your money. Keeping a record of purchases helps curb impulsivity and serves as an indicator of whether you are spending your money where you want to be spending it — toward your vision and values. As spending is tracked, certain categories will naturally emerge, such as parking, groceries, restaurants, vending machines, gasoline, clothing, newspapers, household items, donations, and hobbies. As you continue to record your spending, you will no longer have to wonder where all the money goes.

It may be difficult to write down all of their expenses, but do the best you can. Even if you do not keep a perfect record of every expense, the records that you do collect will help you move forward in changing your money management habits.

Determine expenses and develop a spending plan

A spending plan is like a budget. It involves allocating a certain amount of money each month for each spending category in your life. Follow the steps below to develop a simple spending plan. Spreadsheet software can be helpful in developing a spending plan.

• Make a master list of all expenses. Gather these figures from checkbook records and credit card statements from the past 12 months.
• It is easier to construct a spending plan monthly rather than annually since most utilities and installments are paid monthly. Sum all expenses from the past 12 months and divide by 12 to get the monthly total expenses. For weekly expenses, multiply them by 4.3 to get the monthly amount.

One secret to healthy financial management is to plan for all expenses every single month. The spending plan or budget can help keep these upcoming expenses top of mind, and ensure that they are planned for every month and not forgotten.

Some suggestions:

• Use an envelope system. Label a series of envelopes with the names of the major categories of budget items. Upon receiving a paycheck, cash it and place the amount of money allocated for each category in the proper envelope. Whenever an expense needs to be paid, withdraw money from the appropriate envelope. When there is little or no money left in a given envelope, you will know that you have spent the allocated amount for that category and can stop making further purchases in that category until you receive the next paycheck.Record every monthly expenditure in your checkbook at the beginning of the month so you will know when they are due. It may be helpful to eliminate paper and arrange for utilities, car payments, and house payments to be automatically withdrawn from a bank account.
• Special accounts: Open a special bank account for large ticket items and fluctuating categories such as vacations, car repair, clothing, home repair, and replacements, and make a monthly deposit to this account.
• Sudden expenses: If you are consistently faced with sudden unexpected expenses such as car repairs, dental and medical emergencies, roof leaks and other household problems, then open a special account for these sudden “emergencies.” Remember, most cars break down, teeth need repair and homes need maintenance. They are a predictable part of life so plan ahead for them.
• Calendar system. Use a yearly calendar to track financial obligations exclusively. At the beginning of each month, record all incoming money and also all major financial obligations for the month such as rent, utilities, insurances and payments due. After these are filled in, fill in other allocations such as groceries and fuel, because these are also necessary expenses. In doing this, it is clear at the beginning of each month what your obligations will be. Refer to this calendar daily. Some persons also find it helpful to record the expenses that will be due later in the year.

Pay off debts

To pay off debt, make a list of all debts that includes credit cards, as well as outstanding debts to doctors, dentists, friends and family, and loans from 401K plans.

Make a chart including creditor, total balance due, payment due date, minimum payment, and interest rate so you can visualize your total debt.

If you are in serious debt, this may be an emotionally painful task. Do it anyway. Talk with a trusted friend or therapist to help deal with the emotional pain. Call creditors to ask for a lower percentage rate or reduced late fees. Arrange regular payments with creditors and stick to the plan. Do not promise more than you can realistically pay. They are less likely to cooperate if you don’t keep promises or stick to what you have agreed to pay monthly.

Start Saving

The savings habit should begin immediately, even if it means starting with a piggy bank and making weekly deposits of small amounts, even $.50 or $1.00. No matter how high the debt load, a savings habit needs to be developed. Start small, and be patient with yourself as you learn this new habit. There are different purposes for saving money:

• Short-term expenditures: These include items like a new refrigerator, a vacation, or insurance payments due annually or semi-annually.
• Mid-term expenditures: These include children’s education, a down payment on a new car, or the purchase of a new home.
• Long-term future savings: These include retirement. This type of savings can be especially difficult to conceptualize because it is not an immediate need. Nevertheless, the day will come when you’ll need this money to live on.

The solution for all of these savings needs is to make saving money fun and visual. For instance, some people find it helpful to use a cute piggy bank for certain expenditures; others find it helpful to use an envelope with a photo of whatever you are saving for glued to the outside. You can also open a special bank account for a particular goal and have automatic deposits taken from your paycheck. If necessary, open this bank account at a different bank—across town so you’ll be less tempted to withdraw from it. Some also find it helpful to make a visual thermometer or graph as they save money for special occasions.

Find support and incorporate other resources

Some people may be able to implement the suggestions given here on their own. Others may need the assistance of a friend, therapist, or coach. An individual providing support can help make budget categories and monitor and regulate spending.

Put money management on a timeline

To manage money effectively, it is necessary to organize the above ideas on a timeline. Below is one example of such a timeline, which specifies tasks to be done daily, weekly, monthly, and yearly. The approximate amount of time it might take to accomplish each task is also listed. The reader should create a similar timeline that is customized to his/her own circumstances.

Daily

• Place money papers in one central location. (less than 5 minutes)
• Open and sort bills. (5 minutes)
• Record spending. (less than 5 minutes)
• Review vision and budget if overspending. (less than 10 minutes)
• Keep a daily account balance on checking accounts. (less than 5 minutes)
• Resist impulsive spending.

Weekly

• Pay bills; write checks and mail them; mark date paid and move paid bills to folder marked “PAID.” (10-20 minutes)
• Review expenses for the upcoming week. (5 minutes)
• Go to the bank; deposit checks and withdraw needed cash for the week. (20 minutes)
• Add up weekly spending , especially in problem categories. (10 minutes)

Monthly

• File “PAID” bills into appropriate files. (5-10 minutes)
• Reconcile bank statement. (30 minutes)
• Compare actual income and spending to budgeted allocations. (5 minutes)
• Assess areas of overspending.

Yearly

• Collect money papers for tax preparation. (1 hour)
• Create a financial vision for the upcoming year. (30 minutes)
• List large expenses for the next year. Assess necessary repairs, clothes needed, major gifts, and travel. (10 minutes)
• After tax preparation is complete, box up money papers, label with appropriate year, and put in storage. (30 minutes)

Summary

In this article, the task of managing money has been broken down into a number of steps, and suggestions have been given for carrying out each of these steps. Because money is a daily event, some action is needed every day. If consistently applied over time, these suggested techniques will help with money management.