If one of your goals in 2008 is to take control of your money, read on.
Track every penny you spend. The authors of Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence
admonish readers to “keep track of every cent that comes into or goes out of your life.” [This is] the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes. This is the step that somehow makes the biggest impact. It doesn’t matter how you track your spending — the most important thing is to do it. You can use a cash notebook, you can use an on-line tool like Wesabe, or oftware like Quicken or Microsoft Money. Whichever! Stick with it, make it a habit and don’t fudge the numbers. Record your transactions as soon as possible. Don’t judge yourself - just record. Tracking your spending is an exercise in data collection; it’s not the appropriate time to change your habits.
Develop a budget. After you’ve tracked your spending for a few weeks (or months), use the data you’ve collected to develop a budget. According to The Millionaire Next Door
budgeting is one thing that sets the wealthy apart from the rest of us — 55% of millionaires keep a budget. Many people fail to budget for a variety of reasons: it’s boring, we don’t think we need it, we don’t know how. But this simple act provides a roadmap for your money. There are a variety of budgeting methods you can choose, from Andrew Tobias’ three-step budget to the 60% budget. Start an emergency fund. Open an online high-yield savings account and add $20 or $50 to your account ever time you get paid. In The Total Money Makeover: A Proven Plan for Financial Fitness
, Dave Ramsey explains why he believes starting an emergency fund should come before anything else (for instance, why start the emergency fund before starting to attack debt.) After you’ve saved $1000, then you can attack your debt. Get out of debt . Are you struggling under a heavy debt load from credit cards or student loans? Make it a priority to unload some of this this burden in 2008. If you have the mental discipline, you’ll save money by paying down your high-interest debt first. But if you’ve tried that method before and failed, consider using a debt snowball. Pay your debts starting with the smallest balance first. Here’s how: Order your debts from lowest balance to highest balance. Designate a certain amount of money to pay toward debts each month. Pay the minimum payment on all debts except the one with the lowest balance. Throw every other penny at the debt with the lowest balance. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance. The debt snowball can give you awesome psychological payoffs, keeping you motivated to stay in the game. It’s not mathematically ideal, but it worked for me (and for many others besides).
Open a retirement account. If you’re young, you probably don’t think you need to start a retirement account. You’re wrong. No matter how old you are, now is the time to begin saving for retirement. Compound returns favor the young, and in a big way! (Here’s an illustration of the cost of waiting one year.) Don't understand the value of retirement accounts: read a bit more in The Automatic Millionaire : A Powerful One-Step Plan to Live and Finish Rich
or here what a Roth IRA is and why you should care. Spend less than you earn. This is the fundamental money skill. It’s common sense, yet many people never learn do it. Only by spending less than you earn can you hope to build wealth. This is easier to do if you track your spending or develop a budget, but those steps aren’t completely necessary. Even if you do nothing else in this list, spending less than you earn can put you ahead of your peers. (To continue this article, click here.)
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