Individuals who spend some portion of their day worrying about their personal financial situations add additional stress. Stress in small quantities has proven positive benefits. Stress in massive quantities has proven negative drawbacks. Having control of your money reduces the stress caused by financial burden. Getting control of your money takes some careful planning and execution, but it's well worth it. Here's the steps/rules we follow in my family to keep control of our money:
- Maintain a family budget and reconcile it once a week (or at least once every other week) against actual expenditures. We use a pretty cool spreadsheet system to help us keep track of cash flow, income, expenses, and upcoming budgeted expectations. If that's not really your cup of tea - maybe http://www.mint.com or something similar can help you get a better picture of what you're spending your money on.
- Work towards entirely eliminating consumer debt. If you have credit card debt, don't buy anything else with the credit card until you've eliminated it. Credit card debt is absurdly expensive - at least now credit cards show you how much money you'll spend if you do nothing but pay minimum payments to your grave. Numbers like that are pretty stark compared to the original price of something. I found a good little tool at http://www.creditcards.com/ that can also help show you just how expensive consumer debt is.
- Do your best not to take on a car payment, either. One of the most expensive things we own as consumers in the USA is a vehicle. Also, don't buy a car brand new. In less than one year the car is worth 50% less than it was when it drove off the lot. Let someone else spend 50% so you can save your wallet.
- Take advantage of the benefits your employer provides. Specifically, if your employer provides matching into a retirement fund - maximize that benefit. In my experience an employer will match something like 50% of your investment up to 6% of your total income. What this means is that if you willingly set aside 6% of your income into the employer provided retirement account, you just gave yourself a 3% raise with employer matching. Just watch out for what the vesting rules are. If you don't stay in a company for at least 5 years (in most cases) the company will re-claim at least some of the matching they put into your account.
- Have enough cash on hand (or in your checking account) to deal with any emergency that might arise. Also, plan for the depreciation of your assets, so that you don't have emergencies that are related to "things". Every object has a shelf life. So plan to replace it the moment you buy it, and work that into the budget. But if for some reason something breaks down before you're ready for it to, that's where the emergency fund comes in handy. Obviously nobody can foresee medical emergencies. Have enough money on hand to deal with them - whatever that means in accordance with your insurance policy.
- Have a diversified investment portfolio. Outside of the 6% you're setting aside with your employer's retirement plan, at the bare minimum an additional 4% should be set aside for retirement, (10% is the goal) which you should invest on your own. This money doesn't have to go directly into an IRA, but you should invest it in long term assets that are less liquid. Then, only in the case of an extremely catastrophic emergency you'd have access to these "back-up" funds. But in no situation should they be for something like taking a vacation early or buying a nicer car.
I think I may be forgetting a few of the items we do to protect our finances, but these five do a pretty good job as a starting point for how to keep your money working for you. My wife and I rarely have to stress about our money. We know how much comes in. We know how much goes out. And in general, our lives are much less stressful because of it.
