It’s day 3 of the 5 Day Reset Challenge and today it’s all about money, honey.
January is a great time to review your finances and make sure you’ve got a solid plan in place for the year ahead. Even if you’re already diligent with your budgeting, it never hurts to give it a once-over, especially if your financial picture or lifestyle has changed.
While a complete financial overhaul is something that may take time, there are a few easy things you can do right now to set yourself up for success in 2019.
DISCLAIMER: I’m not a financial expert and encourage you to consult with your financial planner regarding your own personal situation. These are
Know What You Make
Most of us budget on a monthly schedule, but that might differ from how you’re actually paid. If you get a standard biweekly paycheque, you’ll actually have months where you’re paid 3 times instead of twice. Maybe you earn commission or have some other kind of variable income. Take this into account when making your plan. You might want to take an average of your monthly income or use your lowest monthly income to budget on the safe side. Choose a method that you’re comfortable with and write that number down.
Know What You Owe
Pull the most recent statements for everything you currently owe – credit cards,
- Total amount owed
- Interest rate
- Minimum payment
- Payment due date
When it comes to your mortgage and/or car loan, you’re likely locked into a monthly payment for a set term. Consumer debt, on the other hand, can be paid off as soon as possible. Consider using the debt avalanche or snowball method.
Debt Avalanche / Snowball
The debt avalanche requires you to pay off the account with the highest interest rate first while paying only the minimum payment on the rest of your outstanding debts. Since higher interest rates will cost you more in the long run, the idea is to get rid of those debts first. Once the highest interest rate has been paid off completely, you take the money you had been putting towards that debt and start applying it to the next highest interest rate on the list. This pattern continues until all of your debts are paid off in full.
The debt snowball is similar, except it requires you to direct higher payments to the debt with the lowest balance first while continuing to pay the minimum on your other debts. Once that debt is paid off, apply the same payments to the next lowest debt on the list, and so on, until all of your consumer debt has been cleared. While this may end up costing you a bit more in the long run depending on your interest rates, some people find this easier to stick with because they often see results (the elimination of one debt completely) faster than the avalanche. If all of your interest rates are relatively similar but you have some smaller debts that you know you can knock out of the park quickly, you might want to consider this method.
There are online calculators to help you figure out the timeline and payment amounts for both the avalanche and snowball methods. You can also read more about these methods of debt repayment by visiting Dave Ramsey’s blog. If you’re struggling with debt, his site has a lot of great resources and his Total Money Makeover book is a good one to check out.
Know What You Spend
When most of us go about setting up a budget, we do it by estimating what we spend in a month. Some things are static like your rent/mortgage, insurance payments, and cable bill, but other things like groceries, gas, and heating may fluctuate.
Do you have any idea how much you actually spend on things like takeout, clothing, or personal care? Probably not. A good way to get a better idea is to take an average of the last 3 months. Since December can be a bit of a wacky spending month with the holidays, you may want to consider looking at September to November.
Pull up your bank transactions and/or credit card statements for this time period. (Sidenote: if you’re still using your credit card and are carrying a balance, stop it. Do not pass go. Do not collect $200). For each month, add up all the transactions you made in the following categories: groceries, dining out/fast food, personal care, gas, shopping, and miscellaneous (aka I have no idea where this money went). You can add or take away categories depending on what works for you. Once you’ve done this, take an average for each category. Are you surprised? Does it line up with what you thought you were spending?
Hopefully this step will highlight spending you may not have been aware of and allow you to either make sure that you’re allocating enough money to these areas or come up with a plan to curb your spending.
Now that you know what you make and have established your debt snowball, write down all the other fixed expenses you need to remember to pay every month and the date they are due. This might be your cable bill, phone bill, utilities, day care – you get the idea.
Automate as many of these payments as you possibly can. This will prevent you from forgetting or missing a payment (because life happens). You may be able to set up automatic payments through online banking or directly through your service providers. For things like utilities that can fluctuate throughout the year, consider equal billing to make budgeting easier and prevent surprises. If you live somewhere with a colder climate where your bill my be significantly higher in the winter compared to summer months, this can be especially helpful.
Check Your Credit Score
Do you know your credit score? It can impact your ability to get a mortgage, rent an apartment, buy a car, even get a job. It used to be difficult to get but thankfully these days it’s pretty easy.
The first place to check is through online banking. My bank lets me check my credit score at any time right through their site. Aside from that, you can sign up for Credit Karma or Borrowell. If you find out your credit score is lower than you hoped, both sites also offer articles about how to rehab and improve your score.
Make A Budget
Last but not least, make a budget. Whether it’s on paper, in an excel spreadsheet, or through an app, track where your money is going. Set limits and boundaries for your spending and stick to it. Make a plan to save for big purchases ahead of time. There are a million different ways to track your money, so it may take a bit of trial and error before you find the one that works for you. I’ve primarily been a spreadsheet budgeter but over the last few
The difference with the YNAB system is that you budget money as it comes into your account rather than budgeting the whole month based on what you think you’ll earn and then getting to the end of the month only to find out you’ve overspent all over the place. It requires you to stay engaged on a pretty regular basis (for me, it’s every time I get paid) to make sure you’re on track. If you want to give this a try, I recommend reading the book (you can probably find it at your local library) or at least checking out the videos on the YNAB YouTube channel first. They offer a 34 day free trial* and if you sign up before January 15, they’ll send you the book for free. The program costs about 80 bucks a year which gives you access through the app and desktop website.
*If you sign up using these links and decide to purchase the product, I’ll get a free month. I’ve already paid for the product with my own money and am not affiliated with YNAB in any way other than being a paying customer.
That’s it! You’re done!
This was a long one, but I hope it was helpful. What’s your go-to budgeting method? Share it in the comments below.
Missed the first two days of the challenge? Click below!