Week Two – Afraid to Open Bank Statements?

By Nathan Green
Contributing Writer

Does this sound like you? In a telling survey by COUNTRY Financial, released earlier this year, a full third of Americans have been afraid to open their monthly bank statements this past year.

Despite signs of a muddled economic recovery, many are taking a hard look at their personal finances in 2011. Americans say their financial priorities are reducing debt (28 percent) and boosting savings (21 percent).  These two areas are critically tied to another area of personal finance - a family budget. Nearly half (49 percent) of families currently do not utilize a household budget, a number virtually unchanged in the past few years and a serious financial misstep.

“It is difficult to see the impact of making positive changes like reducing debt and boosting savings without tracking your finances against a budget,” says Keith Brannan, vice president of Financial Security Planning for COUNTRY Financial.  “Following a budget, even if you’re still uncomfortable with your bank balance, makes it easier to revisit your financial plan and adjust as necessary.  If you don’t have a budget, a good new year’s resolution may be to develop one.”

A family budget is perhaps one of the most crucial aspects of money management and personal finance. In fact, according to Morningstar, families with a budget save 12% more, have 18% less debt, and (not as quantifiable) can bounce back from an unexpected expense with less pain.

Budgets can be as detailed or as simple as your lifestyle and needs require. There are pieces of software to track every cent, or you can use the back-of-the-envelope once a month to see how you are doing. At a minimum, sit down as a family and talk about your goals, needs, wants and then draw up a plan. Check in as often as necessary to make sure you are on track. Budgeting can be like a diet. You have to have a plan, you have to keep motivated, it has to be realistic and sustainable, it gets easier over time, and once you start to see results you won’t want to go back.

So, without a doubt, your second (the first being an honest discussion on your financial goals and priorities) task for getting a handle on your finances is to start tracking them. How much money is coming in each month? How much is going out and for what? How much (if any) is currently left over for paying down debt or boosting savings? A few generalized benchmarks; rent/mortgage should not be more than 28% of your monthly income and you should use 15-20% of your income to pay down debt, build an emergency cushion, or save (in that order). Beyond that, it’s up to you to make a budget that makes sense for your situation. If you cannot make a budget on your current income, then you will have to look at raising your income by seeking additional employment.

You might be thinking, “I can’t afford to put 15-20% of my income aside each month.” Well, here’s the hard truth. You can’t afford not to. The fact that you’re reading this and found it relevant enough to read through the previous 300 words is a start. Now is a good time to get real with yourself and figure out if you have to make some serious decisions about your lifestyle or at the minimum start saying “no” to a lifestyle you cannot afford. It might mean shopping at thrift stores instead of the mall in some cases, or it might mean buying a ’93 Camry instead of leasing that BMW in others.

Sound difficult? Start small, with one or two changes a month. Then add a few more changes next month. Within six months you will have a streamlined budget more in line with saving than spending. Remember that following a budget is not about depriving yourself of needs and wants. It is an essential component in helping you attain your goals and priorities, the very things that will make you truly fulfilled in life. You have to flip your thought process here. What will bring you more satisfaction in the long run; cutting back on eating out or getting out of credit card debt? And when you do get out from under debt, you will have more free cash for the extras that add pleasure to everyday life.

Now that you are sticking to your budget and putting aside 15-20% of your income for debt/emergencies/saving, you are ready to put that amount to work for you. Lay out each credit card bill you get. Start with the one with the highest interest rate. Pay the minimums on all cards except the card with the highest interest rate. To this card you will add the extra money you’ve found in your budget to this card payment. Do this until you have that card paid off. Now move to the next highest interest rate and on top of the minimum payment that you have been paying, your going to add the amount you were paying on the previous card – the payment you send gets bigger with each card. This is called “snowballing” and it starts slow, but you will be surprised how quickly you will get your balances to zero.

One last word about debt. From now on avoid it like the plague. If you don’t have the money in your budget and checkbook, you can’t afford it. Period.

Follow these steps and I guarantee you will not afraid to open your monthly bank statement, in fact, you may look forward to it.

Questions and comments: .(JavaScript must be enabled to view this email address)

[HPR will be bringing you financial articles from Nathan Green from BestLife Financial Planning. This is one in a five part series focusing on personal finance. Readers can email their personal finance questions to .(JavaScript must be enabled to view this email address) and he will do our best to answer your questions.]