For the three families that took part in The Forum’s Financial Fix-up, the past six weeks have gotten them looking closer at their finances and taking positive steps regarding their money. Perhaps you’ve been inspired to do the same. Today, we’re compiling the best advice the couples received to outline how anyone can take on their own money makeover. These are actionable steps, broad enough to apply to most individual situations. For more detailed, personalized advice, contact The Village Family Service Center or a financial adviser.
• Step One: Get the numbers down on paper. You can’t do anything about the dollars unless you know how many you have and where they’re going. Figure out what your take-home pay is, not your total salary, advises Tracy McFarlane, a financial counselor at The Village. Subtract out things like taxes, insurance premiums, flex dollars, child support and retirement savings. This is your spendable income.
Then write down what you spend in different areas (housing, food, transportation, clothing, etc.). Determine if those numbers are accurate by tracking your spending for at least two weeks.
• Step Two: Balance that budget. In other words, make sure as much or more is coming in than is going out. There are only two ways to fix a budget that’s out of balance: Increase income or decrease expenses. To increase income, take a second job or find one that pays better, get a roommate or rent out a room, and sell unneeded possessions, McFarlane said.
As far as expenses, every budget has these two categories: fixed and variable. If fixed expenses are higher than recommended maximums, the budget may be unmanageable, McFarlane said. For example, your rent or mortgage payment should not be more than 30 percent of your net income. Variable expenses are the easiest to limit when a budget is out of whack. These include groceries, eating out, entertainment, hobbies and technology. This is when people really need to analyze their wants and needs. Remember, they may be temporary sacrifices. “What little things can you do now that will make a big difference as you go forward?” McFarlane said.
• Step Three: Pay off debt. Figure out how much you can pay toward your debt each month, and make this payment even as the balances go down. This in effect “snowballs” your payments. “The power payment method is always the way you should approach any debt, whether a self-administered plan or through a program,” McFarlane said. Call your credit card company directly to try to lower your interest rates. Most have an internal hardship program, McFarlane said. Or contact a consumer credit counseling agency, like The Village. Families with small children who receive more than $200 in a tax refund should change their withholding on Form W-4, McFarlane said. Otherwise they’re giving an interest-free loan to the government, perhaps while paying interest to a credit card company, she said. “It’s really putting you further behind,” she said.
• Step Four: Save for the future. Budgets should also include a third category for periodic expenses, such as insurance payments, medical bills, car repairs, home maintenance and gifts, McFarlane said. Add up these quarterly or yearly expenses and divide by 12. Put this much into a separate account.
Also save for emergencies, putting aside three to six months of expenses, and start saving for retirement with diversified accounts. The first place to start saving for retirement? Your company’s 401(k) or 403(b) plan. Paul Jarvis, a portfolio manager at State Bank and Trust in Fargo, said he sees far too many people not taking advantage of the company match. “Don’t throw money away,” Jarvis said. “Take advantage of money your employer offers. Contribute up to the match.” Then start increasing your contributions. Many people aren’t putting enough toward retirement, especially now that people live longer and want more active, fun-filled retirements, Jarvis said. To ramp up savings over time, each time you get a raise, increase your retirement contribution. “That way you’re not going to miss your money. You’re not going to see a drastic change in your take-home pay,” he said. Look at diversifying your savings. Investing in a Roth account, whether a Roth IRA or Roth 401(k), will provide tax diversification in retirement. Also make sure one particular stock or bond is not more than 10 percent of your portfolio. “I like to see it less than 5 percent,” Jarvis said. “Mutual funds are a good way to do that,” he added.
But first things first: “Create a written budget and live by it. That’s the most important thing,” McFarlane said. “Design a budget that works with your income and your goals. … Stop adding to your debts, and make a plan to pay them off.”
Readers can reach Forum reporter Sherri Richards at (701) 241-5556