Most of us probably know that we ought to be on top of our finances. In an ideal world, we’d all have a clear understanding of our expenses, how close we are to meeting our goals, and how we’re doing savings-wise. But in the actual world, a large chunk of younger adults are somewhat clueless on the money-management front: 36% of millennials are “winging it” when it comes to matters of personal finance, according to a survey conducted by U.S. Bank.
If you, too, have been taking an overly casual approach to your finances, you may be doing yourself a major disservice. But it doesn’t have to be that way: Here’s a simple, three-step plan that you can use to painlessly get your finances in order.
1. Create a budget
Following a budget is one of the most effective means of managing your money. And the best part? Setting one up is really easy. All you need to do is list your recurring monthly expenses, factor in once-a-year expenses (like annual membership renewals), and compare your total average spending to your total earnings. If the numbers don’t align — meaning, you’re maxing out each paycheck without leaving room for savings, or, worse yet, spending more than you take home — then you’ll need to go through your various expenses and identify areas you can cut back on.
Now, if you’re trying to get out of the habit of being too vague about your money, this is where the rubber meets the road: When creating your budget, it’s vital to use the most accurate data you can to figure out how much you spend. Don’t guess at those figures. Instead, comb through your bank and credit card statements to get a solid handle on what you’re spending, and take some time to track your “incidental” cash spending over the course of a month, too. That will give you a starting point from which you can make changes as needed.
2. Automate your savings
Saving for the future often doesn’t fall high on our lists of priorities. Even if we know we should do it, more immediate needs — and, let’s be honest, wants — can be more compelling, which makes it difficult to consistently set money from our paychecks aside. To bypass the risks of temptation, automate your savings. Doing that will effectively force you to pay yourself first.
If you don’t have a solid emergency fund that can cover three to six months’ worth of your expenses, building one should be your first priority. Arrange for a portion of each paycheck you receive to land automatically in a savings account until you hit your target. Next, start to automate your retirement savings. If your employer offers a 401(k) plan, sign up, and have your contributions deducted from your pretax earnings. If a 401(k) isn’t offered, you can set up your own, or find an IRA that offers an automatic savings option.
In all of the above situations, the mental trick is simply to route the cash toward those future needs seamlessly and invisibly. Money you don’t ever see in your paycheck or checking account is money you’ll be less likely to spend.
3. Map out your financial goals
If you haven’t done so already, set down a list of your financial goals for both the short term and the long term, and figure out what actions it will take on your part to achieve them. For example, you might want to buy a house and pay off your student debt within the next five years — but doing both may require a serious frugality push on your part. Down the line, you might have the goal of retiring early, or saving enough to put your kids through college without them taking on heavy student loan debt. Either one will will demand consistent savings.
Once you’re clear on which financial objectives are most important to you, don’t just cross your fingers and hope you magically manage to achieve them. Do the math, develop a plan, and take an active approach to hitting those goals.
There are plenty of parts of life where a “let’s just wing it” strategy often works out beautifully. Personal finance is not one of them.
