Taking Stock Financially

There are a few steps that a person needs to go through in order to figure out what they need to do in order to live a more frugal life. It’s time to pull everything together and establish where you are financially.

This is an important step when it comes to establishing a more frugal life. This isn’t a step that you skip! Take the time to read over how to determine your financial stability so you can begin your new life. You will feel a lot better once you know where you stand as far as your finances go. There are three steps to this process: determine your financial health, create a budget and set financial goals.

Determining your financial health can be a simple process or a difficult task, depending on how much you have to work with. It’s best to start with a clean slate, gathering all relevant information concerning your expenses and income and using the following procedure to find out where you stand.

To determine your financial health, get a piece of paper and pen or pencil and have a seat. Make sure all your papers and information that you might need is handy. Make two columns on the piece of paper, one entitled “Income” and the other labeled “Expenses.” Draw a line between the two so you won’t confuse any numbers.

Under the “Income” column, write down all incoming cash that you have, your paycheck for example or if you own rental properties, write down the income from that. Also, if you have weekly, monthly or yearly income from savings accounts, IRA’s, CD’s, etc. write that information down as well. Total it up on a monthly basis if you can and then a yearly basis as well.

Under the “Expenses” column, write down all your outgoing monies. Electricity bill, rent or mortgage, cable, telephone, and credit cards are all examples of expenses. You’ll need to calculate this on a monthly basis, but also a yearly basis. You should also write down somewhere how much you owe in total on your house or car if you have those.

The purpose of this is for you to get a look at how much you have coming in each month and how much you have going out. If you have more money going out each month than in, there’s a problem. If your income is more than your expenses, then you are on the right track. The question is if your income is more than your expenses, what is happening with the extra cash?

For most, honestly, their expenses are going to be larger than their income yet somehow they keep living the high life even though they can’t afford it. This is due to credit card companies being very gracious and extending credit to those who really don’t need it.

Also, if some people find themselves short one month, they won’t pay something that month and then they get further into debt because they owe back payments. If that’s the case for you, the next two steps will help to remedy that problem.

Your next goal is to create a budget. This does sound scary, but it is something that can be done and followed as long as you are willing to make changes and follow through with it and not veer off in the opposite direction. There are several ways to create a budget, some use paper and pencil; others use computer programs, and therefore, whichever process you are comfortable with is what you should go with.

Let us begin with plain paper and a pencil. Lined paper is best just to keep things neat and tidy. It is recommended that you get a spiral notebook so you can keep track of all your budgets for each month or every two weeks. Start off by looking at how often you get paid. As an example, let’s say that you earn a check twice a month. For simplicity’s sake, you have a salaried job where you earn the exact same amount in each check.

Make sure that you have your other paper listing all your expenses handy. You’ll need that as a reference. To start, write at the top of the paper which check this is. If you get paid on the first of the month and the fifteenth, write the month, date and year at the top. After the date, probably right underneath the date and a few lines down, write how much your check is.

Now we will be deciding which check you need to pay certain bills out of. Also, we will work on helping to divide up some monthly expenses so they aren’t all coming out of one check. You are going to have a column of things that have to be paid out of this check or items that you will be placing in your savings to pay later in the month.

You’ll need to look at your expenses. Look at the due dates for your bills and rent and car payments. Take your rent or mortgage payment first. Divide that total amount in two. Write down “Rent” and then the amount a few lines below your income.

If you have a car payment, take that amount and divide it by two as well. These are two expenses that most people have that are paid once a month and they are the statistically the largest expenses a person has.

One objective in living frugally is learning how to save your money and figure out ways to earn extra money. This is one place where you can earn a few extra dollars. By taking half of your rent or half of your car payment and placing it in savings and leaving it there until you need it, you can earn interest on the money.

Most savings account do not earn much, but if you are able to get a month or so ahead, you can start earning a dividend each month. But that topic will be discussed in more detail later.

Once you have those two items down, take a look at all your due dates. Bills need to be paid on time or early, most companies appreciate an early payment and it also helps in the long run to have on time or early payments.

As an example, if the electricity and phone bills are due on the tenth of the month, you will need to pay for them out of the first of the month check. These are two bills that tend to fluctuate, so take the last five or six statements that you have, add up all the totals due and divide by the number of statements to get an average. This is the amount that you need to write down for the payment amount.

Do this with any bills that are due before the middle of the month. These are the smaller bills, if you do have other large payments due once a month, these will need to be treated like the mortgage or a car payment.

Once you’ve written these down, don’t forget to budget gasoline and groceries and it’s good to put aside some money for eating out or the movies. This is usually just titled “Entertainment.” Now that those items are written down, you need to total up the amount of expenses you have and compare those to your total income for that pay period. You want to make sure that you have extra money leftover. If you don’t, hang on and don’t panic. You’ve only done one pay period.

Do this exact same procedure for your next pay period. You’ll have the other half of the rent or mortgage and the other half of the car payment, but you’ll also have a different set of bills that are due.

You want to make sure that you set your budget up to where you will have extra money leftover at the end of the pay period. If there are problems achieving this, there are several things that need to be looked at. Are you able to pay for one smaller bill in a different pay period? You can call the phone company and request to have your due date changed if that helps you out.

The main goal in creating your budget is to make sure your income is covering your expenses. If your expenses are larger than your income, then expenses will have to be cut somehow. You might have to get rid of the digital cable and just have regular cable for a few months until you can catch up.

You might also have to change your cell phone plan in order to lower your monthly bill. This is not something that can be done in an hour or two. It might take a few days to establish a budget that you believe you can live with and follow through with. If you create a budget and know you will not follow it then you are wasting your time. Take your time to think through it all.

Once you’ve created your budget, it’s time to set goals for your finances. You wrote down earlier how much you had left to pay on your vehicle. That amount might be $10,000 and right now, you are paying $200 a month for a car payment.

One financial goal might be to pay off the loan in three years instead of the four that are left. How can that goal be reached? You have created your budget and realize that you have $300 extra each pay period after all the bills are paid and the car has been filled with gas and groceries bought and you rented a few movies on Friday night.

A goal would be to take the $300 and put it into a savings account and let it grow and earn interest. After six months, you would have an extra $3,600 plus the interest. For example, a savings account earning 2% interest each month would earn you a minimum of $72 extra after six months.

Make your goal to take the $3,672 and make one lump payment on the car loan. After six months plus the lump sum, you have paid off half of the $10,000 owed to the loan company. After another six months, the entire car could be paid off three years earlier than you wanted it to.

Using the above as an example, look around for other financial goals. Possibly you have credit cards to be paid off. Perhaps you are more concerned about paying those off than the car or your house.

Take a look at your extra money that you are putting back and determine what you’d like to do with. If it’s not bills that you want to pay off, but maybe you’d like to go on a vacation or world cruise.

It is very feasible to save the money necessary to do these activities by working with your budget and determining where you can cut expenses in order to achieve these goals. It is also helpful to type or write the goals out and post them where you will see them most often. This keeps a person on track financially.

Remember to follow these steps and take some time to figure out exactly what you want to do. If you’re married or have others to think about when creating the budget and working toward financial goals, let everyone interact and have a say in what is going on. If everyone is in on the plan, then the goals will be more reachable if you are going at it alone.