by Cory Schmelzer San Diego Wealth Management
As with almost all financial matters, and most things in life, the easiest way to be successful in handling your budget is to develop a system. For instance, I teach my son to remember to make his bed every morning by giving him a memory trigger: while he waits for the shower to heat up, he goes back to his room and quickly straightens his sheets and pulls up the covers.
By streamlining your process, and spending a few minutes each week to maintain your program, you can not only enhance your current financial position, but you can save yourself some money in tax preparation, time, and fees.
Here are the steps:
- Gather all your relevant financial records: mortgage payments, credit card statements, and auto loans — and file them securely for future reference.
An accordion file works well for this task. If you choose to scan and save in a digital format, be sure that any computer files are stored safely and password protected with an appropriate backup system. Also, double protect any important hard copy files (that relate to taxes especially) in a locked, fire safe environment.
Memory Trigger: As the bills come in, file them according to month. Let the arrival of the statements or bills trigger your action to file them securely.
- Using your file, list your income and expenses systematically, then periodically review your situation. This will give you a clear picture of your overall situation. A budgeting program like Quicken, or spreadsheet program can be very helpful for the listing task.
During your periodic review, you will likely find yourself with either a shortfall or a surplus. If you have a shortfall (or even if you don’t) look for ways to reduce your expenses. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.
For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off 10 years early and save you thousands of dollars in interest payments.
Memory Trigger: Make an appointment with yourself to review your situation and let the calendar be your trigger.
- Pay the bills. Determine your obligations and priorities and distribute your income accordingly. This may be a weekly or monthly task, depending on your process.
Use the process of bill paying as a Memory Trigger to think about and to distinguish between needs and wants. Your valuation of certain line items will change over time. For example, a gym membership in your hometown may change from a need to a want if you begin traveling for work.
- At least quarterly, review your expenses and make the changes that your situation demands.
I use the changing of the seasons as a Memory Trigger to review my expenses, to determine any adjustments that need to be made. I visit one area per season:
- Spring – Insurance and Taxes
- Summer – Transportation
- Fall – Personal services (dry-cleaning, pool service or housekeeping)
- Winter – Utilities
Or, perhaps a life event triggers a full review of your assets and liabilities. For example, as a new parent, you might be wise to shift some assets in order to start a college education fund for your child.
Using these four steps is an excellent way to help you monitor your financial situation to ensure that you are on the right track to meet your long-term goals.