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6 Steps to Spring Cleaning Your Finances

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By Eva Norlyk Smith, Ph.D.
April 4, 2011

If you’re struggling to follow through on your New Year’s resolution to pare down credit card debt or rein in spending, take heart: April is Financial Literacy Month, and with it comes a fresh wave of advice on how to transform that financial makeover from a should-do to a can-do.

Unless you’re independently wealthy, your financial goals are probably something like this: Spend less and save more. Here are six tips to spring clean your finances and develop better habits for the New Year, courtesy of experts at the nonprofit credit counseling agency, Money Management International:

1. Take stock
It’s the 28th of the month. Do you know where your paycheck went? Chances are that a great deal of it has already been spent, and you only have a vague idea of how you spent it. Most of us pay for expenses as they come. Then, at the end of the month, we wonder why the credit card bills are so high, or why there is so little money left in our bank account.

The key to financial stability is not just how much money you earn. It is also how you spend it. Money has a way of flowing through our hands like water. If you don’t keep track of it, you won’t know what to keep — and what to cut.

Tip: For the next three months, track your expenses. Carry a notebook with you, and enter all your expenses as they come up — including that cup of joe at Starbucks or that soft drink from the local 711. Keep a running total in a spreadsheet or a book-keeping program like Quicken or Quickbooks. Or, even better, use one of the many great websites available to help you track your spending and rein in debt.

2. Evaluate your spending profile
Once you have recorded about a month’s worth of expenditures, take a look at your spending profile. For all but the extremely frugal, this can be a real eye opener.
Tip: Make a list of all your fixed and variable expenses, and divide them into two separate columns in a spreadsheet. Fixed expenses include utilities, car payments, rent or mortgage, credit card payments, cable TV, cell phone and any monthly subscriptions. Don’t forget to also include fixed expenses that aren’t due monthly, such as insurance payments. Then, total the expenses for each category to get a snapshot of where you stand. Calculate how much you spend each month on fixed expenses and variable expenses.

3. Look for ways to reduce spending
Now that you know where your money goes, it should be a lot easier to look for ways to cut back on spending. For most people, saving money doesn’t mean just cutting out one or two large expenditures. It’s usually a trickle of many small savings that add up to big savings. Here is one example from the America Saves coalition of how saving even just a small amount can add up to an extra $150 each month:

  • Save $.50 in loose change and save $18 a month.
  • Cut soda consumption by one liter a week and save $6 a month.
  • Bring lunch to work and save $60 a month.
  • Send one free e-card per month instead of buying a card and save $4 a month.
  • Buy grocery story brands and save $10 a month.
  • Use fewer phone features and save $10 a month.
  • Eliminate premium cable channels and save $20 a month.
  • Borrow, rather than buy, one book per month and save $15 a month.
  • Hand wash, rather than dry clean, one shirt per month and save $3 a month.
  • Comparison shop for gas (saving an estimated $.25/gallon) and save $4 a month.
  • Total Savings: $150 a month (Source: America Saves)

Tip: Brainstorm all the different ways you can cut expenses. Write down every idea, even if it’s far-fetched, or it’s something that you really don’t want to cut back on. You can make final decisions later. This is your chance to get creative with cost-saving measures. Don’t forget to consider fixed expenses as well, such as changing your cell phone plan, lowering your utility usage, cutting back on your cable subscription or canceling monthly subscriptions that you rarely use.

4. Make a list and check it twice
Before making final decisions about which expenditures to cut back on, make a wish list of all the financial goals you can think of. Is your goal to pay off credit card debt faster? Build an emergency savings fund? Save money for a down payment on a new house? Pay off an existing mortgage? Put more money in your retirement account? Save for a dream vacation? Or all of the above?
Tip: Once you have your list, assign a number between 1 and 5 for each item, according to how important that item is to you. The financial goals with the highest scores are the ones that you will want to focus on first. Then, in the final list, include both a carrot and a stick: Write down something that you are really motivated to do, such as saving for the down payment on a house and something that you have to do, such as paying off high credit card bills.

5. Prioritize savings options
Now, take a look at all the savings options you wrote down for step three. For each option, decide whether it’s worth giving up that expense for the financial goals you set. Keeping the long-term financial rewards in mind will make it easier to decide which of the present pleasures you are willing to forgo.
Tip: Put a check mark by each of the savings you decide to aim for in the months ahead, and voila: You have your final list of savings goals.

6. Identify emotional barriers
Of course, saving money isn’t as simple as making a list and checking it twice. Each time you make a purchase decision, you will have to reaffirm your commitment to your financial goals. We live in a consumption-driven society, and whether it’s advertisements, or just the drive to keep up with peers, we are constantly bombarded with stimuli to spend, spend, spend.
Tip: Train yourself to recognize emotional barriers to saving. Whenever you’re about to break your savings goal, take a look at what’s driving you to do so, and then decide if it’s still worth it. Learn to recognize the difference between a want and a need, and ask your friends and family for support.  Then offer them your support in return as they work toward the same financial goals.