May 1, 2014 by Alicia
Welcome to Part I in my new “Saving Series” – Setting Up Your Finances. Be sure to check back for the other parts: Saving in the Kitchen, Saving in the Laundry Room, and Saving by Cutting Expenses.
Disclaimer: If you have serious spending issues, I recommend looking into Dave Ramsey’s methods for a good plan to control your money. Dave Ramsey was a millionaire, lost it all, and found proven systems to get your finances back on track.
I have laid out, what I call, “beginner” steps to setting up your finances. These are things that hubs and I did when we got married and have tweaked along the way. We are absolutely a work in progress. We have made poor financial decisions but more importantly, we have not repeated them.
1. Set goals. If you’re married, make sure you agree and set your goals together. If you have no goals, you will have no plan. If you have no plan, you will spend your money flippantly and probably end up in ridiculous debt. We got married 2 weeks before the 2008 Summer Olympics started. We watched them nonstop and decided to set a goal to go to the 2012 London Games. We opened a separate bank account and put $25 per paycheck in it to start building it up ($25/paycheck = $50/month = $600/year x 4 years = $2,400). We weren’t sure if that would be enough but we had to start somewhere. Eventually we started contributing more money to that account because we decided to use it as our “travel account.” We live far from family so we have traveled regularly (more before kids) to see them. This travel account was the BEST idea we ever had! Taking trips became SO MUCH LESS STRESSFUL because we already had the money put away so traveling wasn’t so financially burdensome. I encourage everyone, especially those in their 20’s, to start a travel account. Contribute whatever you can and experience the world a little bit – especially before you have kids.
That’s just one of the goals we set for ourselves. Sit down and think about your goals. Pay off debt. Buy a family car. Take a mission trip. Pay for the kids’ college. Save capital to start a business. Buy a house. Pay off a house. Give 20% of income away. Everyone’s goals will be different, the important thing is to make some! And then make a plan. “A goal without a plan is just a dream.” -Dave Ramsey
2. Pay Off Debt. Much easier said than done. (Just to be clear – we are not debt free) Dave Ramsey says to pay off your smallest loans first to feel accomplished and motivated to pay off the next. This is a phenomenal way and proven successful. I personally prefer a different route. With the exception of our mortgage, I prefer to pay off whatever loan has the greatest interest rate first. A greater interest rate means greater debt. Do whatever makes the most sense for you.
Most people are paying minimum payments on various debts (school, car, medical bills, credit cards). The key is to take the money from one settled debt and apply it to another – a “debt snowball.” For example, you are paying $200/month on student loans and $100/month on a car payment. If/when you pay off your car first, DO A HAPPY DANCE!!! Then then take that $100/month and add it to your student loan payoff, making that $300/month. Never put that $100 back into your budget. You are already used to living without it so apply it to other debt so you can get out of that hole faster! Don’t let debt defeat you. You can conquer it. Make a plan. Ask for guidance. And once you crawl out, do everything in your power to not cower back in. “You know what you can do when you don’t have any payments? Anything you want!” – Dave Ramsey
3. Set a budget and stick to it. This step alone can help you achieve your goals from #1 and pay off your debt from #2. Put pen to paper. Write out all your monthly expenses, including your debt payments. Seeing it on paper will make it become much more real. Cut unnecessary spending and put that money toward your debt first, then your goals. Taking out cash for each line of spending is a great way to curb extra expenses. When the cash for groceries is gone, get creative with what’s in your pantry. When your eating out cash is gone, you eat at home. You get the idea. Set a budget that reflects your effort to pay off your debt and reach your goals. Stick to it. Don’t expect your debt to go away or expect to reach your goals without hard work. Mint.com is a secure and free website that helps you manage your budget. We use it and love it! “A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey
4. Free money! Ok, not really free. But as part of your budget, you and your spouse (if you have one) should each have an allotted amount of “free money” that you can each spend however you want. Financial disputes are one of the leading causes of divorce. That’s why it’s important to set your goals together, set your budget together, and each have some free money to yourself. Example: $20/month each to spend on shoes, guilty pleasure drinks/food, decor, tools, whatever. It’s healthy and freeing for both of you!
These are just 4 beginner steps that hubs and I took when we joined our finances as husband and wife. We do many other things to save money, some of which I will be highlighting in this series. Be sure to check back – or click the follow link on the right side of the home page and you’ll be notified when I post them!
What steps have you taken to set up your finances? Do you think what we did was crazy? Do you have any suggestions?