The experts all agree that there are several things to start doing right away to get your finances on track. They seem obvious, but, since it is the new year, you can start now to get ahead.
1. Organize your finances: Now is as good a time as any to start off the New Year correctly even if you haven't done it so far. You can create a new filing system right away and just put all the new mail as it comes in. A simple system might be the best for you, especially if you are just getting organized. A few categories may be all you need to stay organized. I'd suggest the following file folders: set them up now and as you pay your bills or receive your statements, put the documents away accordingly. If you use a software program, you needn't keep every statement; this is especially true if the company you work with has an online system.
Categories for everyone: Break down income/expenses/savings/personal information/job-related information. Income is easy: throw in your pay stubs and any other income you receive. You can throw all that away in the shredder if you trust your company to give you a correct W-2. If you have self-employment income, keep all of the information in its own file.
Expenses can be large or small depending on your own personal situation. I like to keep track of my debts in terms of mortgage, home equity, student loans, car loans, credit cards. Each different debt should have its own folder tucked inside of a larger folder for the category. Thus, if you have a hanging folder for credit cards, you can have a regular file folder for each different credit card. When the new bill comes in, look at it, compare it to the last month's bill, make sure everything is correct, and put it away. (Don't forget to pay it). Do the same with everything.
Other categories could include: utilities, insurance, groceries (receipts), gas, other commuting expenses, vehicle repair bills, home maintenance, and subscriptions. If you run your own business, you need to keep track of all your business expenses and hang on to those receipts.
Lots of other paperwork probably comes into your house every day. You can create categories for such things as they come in if they don't fit anywhere else, or you can set up general categories for such items as warranties, job benefits, insurance policies, tax returns, tax receipts, medical records, mementos, etc. I have recommended a home filing system called filesolutions.com before: it has all the categories you could think of and then some. It is an excellent system for getting your paperwork under control. With about 2 hours, you can be up and running; then, everyday, you can throw things into the system.
Finally, invest in a good shredder: As the mail comes in, get rid of the junk that you don't need right in the shredder.
2. Create a Budget: Simple or complex, a budget is a tool for helping you reach your financial goals: do you want a car, college for your kids, enough to spend, a house, retirement savings? It is not magic, it is planning that gets you to your goals. If you want to be able to go out once a week for dinner, you need to look around and see where you can trim other expenses to afford that. Otherwise, you will look around and find that you are in over your head in debt. Go simple on the budget at first. Most people advise you to gather all your receipts for a month and figure out what you spend your money on. Then, you can figure out where you can cut back. You may be surprised to find that the $25.00 you send to AOL and the $60.00 to the health club, plus the water bill, and your daily coffee are costing you a few hundred dollars a month. While not all of that is bad, it should not surprise you -- know what you are spending to know if you can afford that spending. Plus, these habits save you money. If you budget $200.00 a week for groceries, and you find yourself spending $250.00 on groceries and little food items, you can easily figure that you are going into debt by $200.00 per month -- either increase your budget item or decrease your spending for that item.
3. Make eliminating your debts a priority: You do not have to do this all at once; however, you should work on one debt at a time until all but your very good debts are paid off: what is a good debt? Your mortgage is an example of a debt that you may not want to pay off early depending on what type of mortgage you have. (If you want to learn the difference between different types of debt, see ("What is Your Bad Debt Load?") If you have credit card debt, even $10.00 per week will help to eliminate that sooner than if you continue to pay off the minimum. And do not try to pay off all of the debt at once: it is more effective and efficient to choose one debt at a time and throw all of the money you can find from your budget into paying off that debt. Why? It is a simple idea really. If you have 5 different debts, each one has a minimum payment that you have to deal with. Get rid of one of those debts and you only have 4 minimums to deal with. That gives you the 5th payment to place on the next debt. I explain our debt elimination system in "Eliminating Debt."
4. Take the advice: pay yourself first: Even if you are trying to deal with debt, there are too many upsides to saving for retirement regularly and to the extent possible. This is especially true if you use a tax deferred or tax advantaged retirement plan. The examples abound: a person who saves for 10 years from ages 24-34 and never saves again will have more money at age 65 than someone who saves from 35-65. It is the power of compounding interest. So, whatever you do, be sure to take as much as you can and put it into savings. Use payroll deductions. And you need not be an expert at investing (although learning about it might be a useful resolution for another year). Just throw it into some index fund. Worry about one thing only: expenses. A fund with lower expenses is generally better even if the returns are a little less.
5. Save for an emergency: Experts recommend that you save three - six months worth of expenses in case you have a true emergency. I don't really agree with that. I think it is a lot of money first of all and, secondly, I think getting rid of debt is a more valuable thing to do with any extra money you have than put it into an account that earns at most 5%. (Your debt costs a lot more than that). So, we are in a middle ground: we are attempting to save $2,000.00 and pay down sufficient debt that, if need be, we could tap back into in the event of a true emergency. We feel like that amount is the amount we need for those times when we have a bad month that hurts our finances and makes us backtrack. Since backtracking is no fun, we figure a little cushion would give us just the right amount of "extra" money should the car break down, or we need to go take care of my mom or something like that. I wish we already had that amount, but, we do not. Our strategy is to build it in to our monthly expenses; however, we are doing that at the same time as we pay off debt.
6. Agree to live tight for awhile if need be: Only you can know what is palatable for you. Some of us would rather go without morning coffee from the deli in order to have someone to clean our house; others would rather give up new clothes in order to have the morning coffee. If you can do it all, more power to you. If you are doing it all on credit cards, at some point, they will come up and bite you. So, right now, set your budget for 0. You cannot spend more than you take in in a month. That may mean giving up all the extras for a while -- if you have a steady income and just some seemingly overwhelming debt and expenses, you will come out from under. Remember to have some fun with money every once in a while. Just know what you are spending and where it is coming from. This year is our year to be tight. We have not given up everything: we have given up a lot of the things that made life a little easier and a little more fun where fun is tied to spending. But we have a pretty good time anyway -- we have not given up anything we truly need or that is absolutely important to us and we live fine. We may not be giving our usual overly generous Christmas gifts this year; however, we are giving a fair amount to Goodwill of things that we used to spend money on and no longer do. We may not go out to dinner so much, but my family still enjoys good meals around our own dinner table. We may not get the flat screen, HDTV t.v. my husband is eying, but we still have plenty of televisions to watch. You get the point. There is so much excess in all of our lives: simplify it and it will get easier.