Thursday, June 4, 2009

So How Did You Get Here? Where do you Start?

The first place you start is with honesty with yourself and all parties involved in your financial life. Until you are honest about all the factors in your financial life you are going to struggle to come to terms with facing your financial life.

When I talk about honesty, people often think I’m discussing people who are hiding debts, lying about spending, hiding information from their spouses, etc. In fact that is the far end of the spectrum. Many of us find ourselves guilty of deceit through ignoring our finances. We know they are there and may even be tending to them with basic maintenance but deep down we know we aren’t giving them the full attention they need. This is what far more of us are guilty of and leads many of us into not having the financial health that we could have than the deeper issues of hiding spending, debts, and other dangerous financial habits.

So regardless of where you are in your financial life the first step to changing your financial path is to take an honest look at your financial habits. Even many of us who think we are doing well find out when we do a financial “audit” of our habits we find we haven’t been as honest with ourselves as we thought we were. I know since the beginning of the year my husband and I have started our own personal financial audit and while we always thought we were doing well, we’ve realized we can and should be doing better. None of our habits are leading us to danger but they aren’t leading us to financial wellness either. There have been some challenging moments as we faced our own emotions, habits, fears, and approaches to finances that had to be evaluated, tested, and worked to decide how we could improve the habits we have that work well and how to make new habits that can increase our financial well being while removing the less successful habits.

Anyone who wants to tell you this is easy or painless is selling you something. It isn’t easy or painless. Whether you are financially challenged or just trying to make your finances work better for you, changing the way you’ve done things deals with far more than money. It reaches into all levels of your life and how you address those changes can determine how successful and long lasting those changes are going to be.

Just about every financial guru will tell you the first thing you have to start with when going down this road is finding out where your money is going. I started years ago on paper and moved to spreadsheets when I got computerized because I loved the way I could immediately see the way changing numbers changed my budget. If I saved X number of dollars in Y column it gave me more money to spend on Z. The immediate feedback works for me. It was something we’d gotten out of the habit of doing because we always had enough money to pay the bills and deposit money into the savings. When we got serious about budgeting the spreadsheet has returned and become a great communication tool for us to share in clear terms how much money we have in income and clear and precise deductions for all the money we spend in each pay period. I’ve taken to creating a spreadsheet for each pay period and dividing the expenses per pay period because this is the most effective method for us. I found trying to do it all on one sheet got confusing trying to figure out which bills were due when. Others do fine with one sheet. I’ve seen students who do one sheet for the whole semester since the vast majority of bills hit at the beginning of the semester and the “living” expenses are basically one line item for the semester budget based on how much is left for that category. It is a matter of what is most efficient and productive and honestly, what is working. If it isn’t effective, you need to rework it to make it work for you.

Once you’ve written down what you make and everything you owe, now comes that gut wrenching honesty part, do you make more than you owe? This is why many people avoid budgeting. They just don’t want to know. They avoid the truth at all costs. That is one of the things I really do love about spreadsheets. It lays it all out for you. If you set up the formula it will subtract the income from your debts and let you know exactly how you are doing on that budget. We’ve had the unexpected months where we did better on certain bills than we expected and been under budget and we always love those. We’ve also been over budget with unexpected emergency costs and that is ultimately why we do have emergency funds saved so we can pay for those costs. In the beginning we also had months where we realized we just were spending too much and needed to cut back in certain areas if we wanted the option to splurge in others. Having all the expenses laid out made those choices harder to ignore. In the past it has been easier to not be honest with ourselves and decide we’d deal with those problems later while we enjoyed ourselves now. Now we are trying harder to acknowledge the cost needs to be paid now, not later. It doesn’t mean we can’t do it; we just have to be honest about how we will pay for it. If that means we are going to dip into savings, then we acknowledge it upfront, not when the bill comes in.

Once you reach the point of honesty about your financial situation you are in a far better place to move forward with addressing where to go next.

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