How to Manage Finances

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Knowing how to manage finances is a vital skill for life in the current economic environment. Now that the national economy has shown signs of instability, knowing where you are financially has never been more important. Basic finance management can help you to:

1. Make the most of your income

2. Pay your bills on time

3. Protect your credit score

4. Save for unforeseen expenses

As the effects of the recent recession continue, we all need to know how to be financially responsible. This includes understanding how to take care of your finances. Good financial planning can help to protect you in the event of a sudden job loss, mounting medical bills or large household repairs. This page will cover how to manage finances. While you might be a little intimidated by the thought of managing money on your own, you really don’t need any special education in Finance or Accounting to take care of your money. You only need to know how much you make and how much you owe to keep up with your finances. After you obtain this information, you can design a plan that will help you to keep up or catch up with your bills and to increase your savings.

Credit Card Companies Use Traps to Raise Debt

Managing credit card debt is a big part of managing finances. Because credit card companies can charge whatever interest rate they choose, debt can accumulate quickly due to finance charges. In this video, Dateline NBC highlights the traps that credit card companies can use to raise your payments and why you should scale back your credit card usage.

Step 1: Assess Your Current Financial Situation

Managing finances successfully begins with understanding your current financial situation. The first thing you will need to do to assess your financial picture is to balance your checkbook. While balancing the checkbook may not be much fun, it is essential to do so regularly. This will save you a lot of money in overdraft charges or bounced checks, because it keeps you informed as to exactly how much money you have in your account. Balancing your checkbook includes keeping track of your everyday purchases. This means that you will need to begin keeping the receipts from your debit card transactions so that you can subtract the totals from your balance at home. You might want to design a computer spreadsheet to track your spending. Another part of your financial assessment is calculating the total of your outstanding credit card balances. Depending on the kind of spender you are, this may be quite depressing. But, knowing how much you currently owe is very helpful. It can help to temper any bad spending habits and it can also help you to take action that will improve your credit score, such as paying off credit card transactions during the grace period or reducing your debt on high-interest card accounts.1

Step 2: Organize Your Monthly Bills

Once you know how much money is available to you, you can plan out your financial decisions for the next pay period, including which bills you can pay. To do this, you need to know how much is due, to whom it is due, and when it is due. This makes organizing your bills extremely important. To organize your bills, you will need to do the following:

1. Gather all of your recurring bills

2. Separate them by due date

3. Determine which bills will be paid during each pay period

4. Immediately subtract your bills from your checkbook balance on payday

You might also want to consider using a bill reminder service, such as Microsoft Money or QuickBooks to help you remember which bills are due. You can also configure your email manager, such as Outlook, to remind you that bills are coming due. Another way to keep up with your bill due dates is to switch to paperless statements. In this way, you will receive your bills in your email inbox, instead of your mailbox. This can make it much easier to see which bills are currently due, since you will see them every time you check your email. Be sure not to delete them!

Step 3: Supplement Your Income, If Necessary

If your bill and credit card totals are frightening to you, you may want to consider looking for sources of supplementary income. Of course, you will want to start with your current employment. You might volunteer for overtime hours or additional work. This is the easiest way to boost your income. Another option is to provide in-home daycare for working parents. As the job market tightens up, more and more mothers are going back to work. You might be able to help them out by providing affordable childcare. Call around to local daycare centers and get an idea of the going rate, then discount it by about 10 percent. This will help you to get clients quickly. Be sure to check with your local city regulations before you start advertising though. You might have to submit to a background check or to a home inspection before beginning. If you are unable to find extra work at your main source of employment or if you are currently unemployed, you can find part-time or side jobs available on the Internet. Many websites offer part time work online in such fields as freelance writing, survey taking, or web content creation. If you really don’t have the time to do any additional work, you can still add to your income. Try having a garage sale. You can make a little money and get rid of clutter at the same time! You might also consider taking some gently used clothing or furniture to a consignment store to sell.

Step 4: Set Up a Savings Plan

Now that you are earning supplementary income, you should be able to set aside a little money each month for savings. This is usually easier said than done. It can be difficult to resist ads for the newest products or to drive past your favorite coffee shop everyday without getting a latter. But these little changes can help you to save money quickly. Setting savings goals can be a great motivational tool when you need to resist impulse buying. After you subtract your bills from your income for the month, what you have left over is called disposable income. Decide how much of that you will devote to little splurges and how much of that you will save. A good rule is to try to save 10% of your income a month.6 At this rate, a person who has an annual income of $36,000 will put away $3600 in savings that year. A good way to boost your savings is to consider a retirement fund. If you already have a 401k through your employer, add about half of your annual savings to your plan. Many companies will match whatever contributions an employee makes out-of-pocket. If so, you might be able to retire sooner than you think. If you don’t have a retirement account, consider opening your own IRA. A Roth IRA can be an especially advantageous way to save money, because the money is taxed as you contribute it. This means that you can withdraw the principal (not the interest) anytime you need to without incurring any penalties or back taxes.