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If you’re looking for advice on how to be smart with your money this year you’ve come to the right place. With these 5 simple tips, you can get a plan in action and get yourself out of that financial loop you’re stuck in.
As a grown adult you’ll often feel like you get stuck in a financial rut where your income and your outgoing expenses are stuck in a never ending time loop and you either can’t get ahead or can’t afford to cash flow a nice purchase you’ve wanted.
Somehow, there’s always something that gets in the way whether it be an emergency or something simply deemed more important. As an adult, you’ve come to expect these things popping up, but that doesn’t make them hurt any less.
With a few smart money moves, you can help to break this endless cycle of bad luck and come out of the financial rut you’re stuck in.
#1 Make a Financial New Years Resolution
While it helps to start earlier in the year, you can basically do this step whenever. What truly matters about making a New Years Resolution is that you actually make it one that you can see and end goal for and the steps to get there.
Most New Years Resolutions fail by February, so if it helps to not think of it as a resolution, you can simply think of it as goals and plans. This is exactly what you need to do in order to be financially smart- make a goal, and a plan to get there.
While most New Years’ resolutions fail it’s often because there is no reason goal or plan, it’s simply a glorified wish and lack of determination. You’re different though, right?
You are motivated to get out of a financial rut and wanting to get to where the grass is greener and the money actually makes it to the end of the month. -That’s pretty good motivation.
To be smart with money you have to have a plan for it. This includes everything from setting up a budget to account for all of your incoming and outgoing expenses as well as a goal for where you want to be a few weeks, months, or year from now.
Having the right financial mindset can really play a great role in helping you to get motivated and stay motivated in achieving your goal/resolution.
So what do you want most and what do you need to do to get there?
If you want to have your car paid off completely- you have to pay the balance owed. Simple as that. How will you get there?
You can sell your car to a private party and take out a loan for the difference. Pay off the loan and then pay cash for a used vehicle so there are no payments needed.
You can add more money to the principal of the balance and pay it off early. Just be sure to double check that there are no penalties for paying it off early.
If you plan to pay extra, how much extra can you afford to pay every month, how many months will it take and what can you do to speed up the process.
Of course, this was just an example, but now you can see the goal, the plan and the steps to get there. It’s so much easier to picture and be motivated when there’s an actual plan in place.
#2 Plan Out The Yearly Predictable Expenses
Grab a yearly calendar, a piece of paper, and a pen. Fill in the calendar with important dates like your anniversary and birthdays. Thankfully the more common holidays like Easter and Christmas should already be included on the calendar, making your job much easier.
Now, similarly to making your yearly financial goals as above, if you want to be smart with your money, you’ll need to know how much you’re expected to spend on predictable expenses this year.
Predictable expenses are bills that you know are coming. Events that happen like clockwork and can be planned months in advance. For example, your birthday will never change, and Christmas happens every year on December 25th, and Mother’s day is in May (if you’re American).
You know you may have to spend money on Easter, especially if you have kids, but it flops around between months. Just because the date changes doesn’t mean that it’s not a predictable expense. You simply have to know when it is, because the expense part will happen regardless.
Predictable expenses to include:
- Holidays that you celebrate
- Unpaid vacation time you’ll need to take off of work
- Maternity leave
- Vehicle maintenance (including car tabs)
- Driver’s license renewal
- Student loan payments
You can go so far as to break it down into the monthly predictable expenses like your rent, utilities, and insurances, but for now, we’re simply focusing on the less-common bills that often come with a hefty bill.
Once you have a list of predictable expenses you’ll need to determine a spending limit
Being financially smart and making smart money moves means that you’ll need to know how much you’re going to spend, long before you’re going to spend it.
Set a limit for each of your predictable expenses. If you only want to spend $20 per birthday throughout the year that’s totally fine, but how much money will you need to cover all of those birthdays at $20 a pop?
Follow through with your list of expenses and determine a set budget for each, and how much money you’ll need to cover it.
Somethings (like vehicle tabs) are easy because it’s a simple 1 time purchase per year, but if you live in a high cost of living state like me then you could be expected to shell out $400 a year per vehicle for tabs where other locations can enjoy a $40 tab.
#3 Make Sinking Funds for The Events
You have your list of expenses, you know that they are coming up and unavoidable (unless you’ve got a successful unground hideout to live out the rest of your days). You’ve also figured out how much you’re going to spend for each thing and how much it will cost you in total. These are all ways to be making the right money moves!
Now to take the next smart money moves and go one step further with that information. Make sinking funds.
Sinking funds are like a small savings account that accrues amounts of money for a specific purpose. They are much different than an emergency fund (but we’ll get to that later).
An example of how this works-
Let’s say that you’re as unfortunate as me and will need to pay roughly $400 in June for new tabs for your vehicle. As I write this it is February, giving me about 4 months to come up with that cash. This means I should set aside $100 a month.
Sounds easy enough, but if you receive multiple paychecks per month then you can break it down to even smaller payments. My husband gets paid once a week, whereas I get paid once a month. If I divide the $100 a month by the 5 paychecks we receive then we’re only looking at $20 every time we get paid.
Paying $20 a paycheck into a small sinking fund savings account for the purpose of paying the car tabs sounds much easier to digest than trying to pay $400 from a single paycheck or monthly budget. This is how to be smart with money, by dividing up larger expenses and strategically saving up for them so they don’t hurt your budget nearly as hard.
#4 Save Up Your Emergency Fund
I can’t talk enough about the importance of having an emergency fund. Especially since my daughter came down with a double kidney infection out of nowhere in Nov 2019!
My 6 year old girl just randomly started complaining of tummy pain and within a few days her fevers were dangerously high and not breaking. Her pain was unbearable, so we rushed her to the ER thinking appendix issues only to find out after an ultrasound and a CT scan that both kidneys were infected. We still have no clue how it happened because all of the tests came back inconclusive.
But, this was something we could have had no way to prepare ourselves for. Emergencies aren’t planned. They just happen. Thankfully we had a $1000 emergency fund in place because the few days in the hospital cost us $400+ on food alone!
Because we had an emergency fund, the experience was less scary (in the financial aspect) because the money was there. We were able to focus on the kid and not the bills that would follow.
Having an emergency fund is financially smart
We personally like to keep $1000 in our emergency fund because:
- It’s more than enough to cover our vehicle deductible if it gets in an accident.
- It can pay for several month’s worth of groceries if needed.
- It can cover a few week’s worth of pay for my husband if he had a sudden job loss or had to miss work.
The amount of money you keep in your emergency fund should be enough to cover your basic bills for at least 3-6 months, and that is our goal once we become debt free. For now, we’re keeping the $1000 until we get the last of our debt paid and hen we will increase it to a 6 month fund.
#5 Pay Off Debt
Now I don’t expect you to be able to go out and pay off all of your debt, but you could probably do a good deal at paying off debt even if you’re broke with just a few budget changes.
Being financially smart means making smart money moves and getting it to work for you, not against you. One of the best ways to do this is to get rid of debts.
Line up all of your debt on a piece of paper or a spreadsheet and figure out how much is owed to each.
If you have bills in collections, you can save money by settling for a lesser amount but will need to claim the unpaid balance as income on next year’s tax return if it’s more than $500 in savings.
I won’t lie, this is how I’m using this year’s tax return money. Paying off debt in collections by paying a 30% agreed upon amount instead of the total amount due. It’s helping us get to a better financial place, faster and I’m okay with that.
You can often settle for even less than 30% as credit companies will pay pennies on the dollar to own your debt, but we’re fine with the 30% because paying it cuts our owed debt down to half.
Once you have your debt listed out, line it up from smallest to largest.
The snowball debt payment method will have you go from smallest to largest to get the payments removed, while the avalanche method has you start at the highest balance or highest interest rate and work your way down.
How you choose to pay your debt is up to you.
While I love the instant wins of getting rid of the smaller debts, I have been known to jump around if it helps me to save more money or give me a bigger shovel every month. You do what you think works best and whatever keeps you sane and motivated.
If it helps you to keep the right financial mindset and you can continue to make smart money moves by paying off debt and making your money work for you, then it is well worth it.
So to recap, if you want to be smart with your money this year you will need to:
- Make a financial goal
- Plan out your large yearly expenses
- Make sinking funds to cover these expenses before they arrive
- Create an emergency fund
- Pay off debt
If you can do these things then you will be much further ahead than most people are. A majority of people couldn’t cover a $500 unexpected expense [source] and a majority of Americans go into debt every year for Christmas [source].
These 5 simple things will help to change your financial mindset and let you be less stressed while embracing a frugal lifestyle because remember that being frugal doesn’t mean being cheap- it simply means being more purposeful with your money.
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