Changing My Financial Future

A few weeks ago my wife and I made a major decision. We are going to change our financial situation.

We are feed up with living paycheck to paycheck, paying back loans, not have money in the bank for vacations, new computers or activities we can do as a family.

The first step was to figure out what we are bring in and what we are spending. Since we are using Quicken, figuring out what we are bring in was quick and easy. This told exactly how much we have to work with.

The second step was to figure out what we are spending. At first we though this was also going to be easy with Quicken. It turns out that we did not do as good of a job categorizing the expenses plus we did not categorize that ATM withdrawals very well. So we start a spending notebook, at the end of each day we recorded the date, what we spent money on and how much we spent.

The third step was to setup some starting goals. We needed a starting point to shoot for. This was a very fuzzy area for us so we needed to do a little research. We turned the research into the following initial goals. First, a small emergency fund of double the house payment. Based the past expenses this should cover most of the emergencies that come up. Second, stop using the credit cards, stop using the debit card and stop taking on new debt. We have found that we spend less and think about the purchase more when we have to use cash. Third, pay off the debts we have now. We are exempting the house from this goal because we have read some conflicting information about paying off the house. There seems to be two main methods for paying down the debt. The first is to list all the debts by interest rate from highest to lowest. This method saves the most amount of money in the long run but may take a while before we see any results. The other method is to list the debts from smallest to largest amount owed. This method offers us the opportunity to see some results right away. We opted for the second method. Fourth, increase the amount of money in the emergency fund to six months worth of expenses plus insurance deductibles. This should give us a strong base to work from for what every new goals we come up with.

The fourth step was to create a budget. This has proved to be a difficult a task to complete and keep up with but it is the most powerful tool we have to managing the expenses. There are several important ideas we needed to keep in mind when creating a budget. First, it may take between 3 and 6 months is start getting the budget right. It takes a few months to figure out all the expenses you have. We are working on the third monthly budget and we are still finding items we forgot about. Second, we created a 'free spend' category. This is money we are allowed to spend for no reason at all. This is important mental health item. Creating and sticking to a budget is hard work we need the mental relief that this category provides. Third, we need to talk about and review the budget frequently. We use this time to figure out how we are doing financially and to help encourage each other.

We have been working on this for about three months now and have seen some results and some unexpected benefits. It is a great feeling to see the amount of debt we have decreasing at a steady rate. We now sleep better. We don't worry about how to make ends meet. We have more control over the money. We are now starting talk about additional financial goals like a solid retirement plan, a college fund, investing and vacations.