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Paying off the mortgage, putting the kids through college without financial aid, amassing $1 million -- are you kidding? For some, having any cash left over at the end of the month after paying the bills and buying the necessities for daily life is a lofty goal.
Accumulating a nest egg -- or even saving for a rainy day -- gets put on the back burner for many who find themselves just trying to get by. However, you can break out of the paycheck-to-paycheck rut, pay off debt and actually start setting aside money. The key is to start tracking your spending, develop a budget, set goals and make sure your not paying any more than you have to on your debts, says financial planner Rebecca Pace of Pace Advisors LLC in Cincinnati, Ohio.
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"Unfortunately people get bogged down in short-term needs and then get caught short when the big expenses hit," Pace says. "If they have not taken the time to determine their goals, it's hard to be motivated to watch current spending."
Track spending and watch expenses
The first step toward breaking out of the paycheck-to-paycheck cycle is to track your spending on a daily basis -- down to how much you paid for a cup of coffee. Pace suggests carrying a notebook with you for a month to write down everything on which you spend money. The list needs to be more detailed than just "groceries, $100; dining out, $50." Write down what you bought at the grocery store and how much it cost, or what you ordered at a restaurant (appetizer, entree, wine and dessert).
"Sometimes it's an eye-opening experience," she says. You might be surprised to find you spent, say, $50 over the last month on that daily cup of coffee, $80 on movie rentals or $100 on alcohol to accompany your meals while dining out. This exercise can be time consuming and frustrating, Pace says, but you need to know how you're spending your money before you develop a spending plan. Enter the expenses you tracked in your notebook, along with monthly bills and the amount -- if any -- you put into savings, into an Excel spreadsheet or our cash-flow calculator to find out whether your income and expenditures are in balance.
Don't stop with the obvious expenses such as utilities, gasoline, food and recreation, though. Look at how much you're spending (perhaps unnecessarily) to maintain bank or investment accounts or pay down debt. High fees on checking, savings and retirement accounts can eat away at your earnings. And high interest rates on credit cards and loans can force you to pay more than you have to over time.
Set goals
Once you know how much you're spending each month and on what, you can set achievable goals, such as paying off debt, saving for a house or building a nest egg, and create a budget. If you don't establish a goal, you won't be motivated to change your spending habits, Pace says. However, acheiving that goal shouldn't require you to make a drastic life change or cut out all things that make life fun. Make it attainable and something you can get excited about (like retiring in ten years with enough money to buy a waterfront house), and celebrate your progress (with something inexpensive, of course).
When establishing your goals, be sure to differentiate between wants and needs. Short-term needs, like buying a new car to replace one that's barely running or paying for a costly medical procedure, are your top priority. Longer-term needs, such as a retirement fund, are priority number two. And wants, such as a vacation in the Bahamas, fall to the bottom of the priority list.
If you're married or have a significant other, make sure you set and prioritize your goals together -- without criticizing one another's spending habits. Each of you should write down five goals, then compare lists to see which you agree on and how to prioritize them. You need to know what direction you want your financial lives to take before crafting a budget to get there.
