Are You Handling Your Money Well?
Everyone handles money, but not everyone handles money well. In fact, I would venture to say most people in the United States do not handle their money well. Our society is known for a large debt to income ratio and it's spend it before you even make it mentality.
What Is A Debt To Income Ratio
Debt to income ratio is a percentage found based on your gross monthly income. To calculate your debt to income ratio, you add up all your monthly debt payments and divide them by your gross monthly income, which is your income before taxes and other deductions are taken out. An ideal debt to income ratio is at or less than 36% of your income. If your debt is more than that, it becomes hard to maintain your cost of living. One of the first steps when analyzing your finances is to determine if you have a fairly low debt to income ratio. If you find that yours is to high, then obviously, you either need to make more income, or work hard to get rid of some debt.
Can I Even Afford How I Am Living?
A major problem in the United States is that people can live in so much debt that they don't even realize they just plain don't make enough money to afford their cost of living. People who do not make a monthly budget are unaware of where their money is going. One of the most basic practices in finance is to create a monthly budget. To do this, you must list all of your monthly expenses: bills and living costs like food and gas. Once you have done this, you add them all together and you have found your minimum monthly income; that is, the amount of money you at least need to make in a month. Many, many people I know have been shocked to find that literally do not make enough money to cover even their most basic expenses without going into further debt. To print out a monthly budget form, visit the website listed below.
Monthly Budget Worksheet
- Monthly Budget Spreadsheet for Excel
Download a free personal monthly budget spreadsheet for Excel. Compare your budget to your actual expenses.
How Can I Get Control of My Spending?
Once you have created a monthly budget and you have enough income to cover it, then comes the real trick of staying on budget. This is another part of handling money that many, many people struggle with. Creating a budget doesn't mean a thing if you do not stay within its parameters. Popular Financial Adviser Dave Ramsey suggests only using cash for your living essentials, such as food, gas and clothes. That way, when you have spent the cash in that category, you know that if you spend more, you are ruining your budget, or at the very least will have to deduct from some other category the amount you are going over budget. Some people might not need to take this drastic of action, but if you use a debit card for your purchases, you will have to keep track daily to make sure you aren't busting your budget. Ramsey also suggests budgeting yourself some spending money so you can still get pleasure from enjoying your money, but without damaging other areas of your income. Here are some ways to get overspending under control:
- Find Another Source of Happiness - If shopping is the only thing that makes you happy, you have set yourself up for disaster. Whether it is pursuing a new hobby, (cost-free like hiking, reading, bicycling, working out, rock hounding, letterboxing, etc.) or volunteering for a cause you feel strongly about, if you fill your time with meaningful activities it will leave less time for overspending.
- Get an accountability partner. Chances are there is someone you know who needs to get their spending habits under control as well. Partner up and hold each other accountable when you are feeling weak. This is a proven way to help addicts maintain their sobriety, and after all, shopping can become an addiction.
- Use a spending app like Level or Unsplurge to help you keep track of what cash you have spent and how much you have left.
Don't Live Check to Check
If you are living paycheck to paycheck, or if you create your budget and find there is not a lot of wiggle room between expenses and income, disaster is lurking around the corner. Why? Because life is unpredictable. It is absolutely essential that you have some kind of savings account for when the unexpected happens. And it will happen. Everyone experiences it from time to time. Whether it's your car breaking down, a trip to the ER, un expected school fee for your child, an appliance repair or replacement, a vet bill or even some extra dental work, the extra stuff does happen. If you don't have any savings, then you are immediately in financial crisis when something happens.
A Little Course On Investing
These are just a few things to consider if you really want to get in control of your finances. It is definitely worth it. When you get to see your savings grow and experience the security that brings, you will never want to go back to how you were living before.