You probably remember the KISS adage – keep it simple stupid. Since effective management of your finances involves a lot of scorekeeping, much of which is time consuming, following the KISS principle is especially important. This article provides some ideas to help you better manage your finances with the goal of helping you to assure you meet your financial objectives while minimizing the time needed for goal setting and scorekeeping.
Establishing Financial Goals and Developing a Spending Plan
A recent article reported that a majority of Americans favor energy conservation. But, the popularity and sale of fuel-inefficient SUVs and pickup trucks continues. Most people say that saving for retirement is very important. Yet, when they change jobs, many people withdraw and spend funds accumulated in their 401(k) plans. The inconsistencies between what we say we want and what we do suggests the need to take the time to establish financial goals and focus on achieving them. It takes much less time to establish financial goals than it does to fight over money – the number one source of marital conflict.My wife and I depend on the use of a spending plan to help us set our financial goals. We call it a “spending plan” rather than a budget because for us the word “budget” has some negative connotations. We usually prepare our spending plan for the following year sometime during late October or early November. Developing our first spending plan took some time because we wanted to detail our financial goals. In addition, we needed to gather a lot of information about our current costs. Updating the plan takes much less time.
Our spending plan includes more than just spending. We start by listing all of our expected sources of income for the following year, factoring in pay raises, for example. Then, we construct our spending plan for the year. Much of our spending plan is very straightforward. Taxes, mortgage and car payments, and insurances offer little opportunity for short-term discretionary changes. Just examining these costs, however, does provide a lot of visibility into how we spend our money. Knowing the costs of operating and maintaining our home, for example, is particularly helpful as we start to plan for our retirement – a time when our income may decrease.
We discuss at length other areas such as periodic home refurbishing, entertainment, lawn and garden care, clothing, vacations and gifts. Then, we establish spending plans for the year. Just after the first of the year when we have received statements for our brokerage account, mutual funds, etc., we update our statement of worth and make final adjustment to our spending plan. We include optional retirement contributions and plan to spend less than our income since unexpected expenditures always occur. Finally, we track our expenditures on a month-to-month basis throughout the year – we keep score. Setting our goals and developing a spending plan has really helped us utilize our resources wisely, while avoiding arguments over money at the same time.
Simplify, Simplify, Simplify
To keep our finances manageable, my wife and I follow a number of useful practices that you may want to consider.
- Use only one credit card. We use a single credit card and charge nearly all of our purchases. We receive a single credit card bill each month and can easily keep score on how we spent our money. We always pay the bill in full to avoid the horrendous interest charges.
- Choose a credit card that provides meaningful incentives. We use a GM MasterCard because it offers 5 cents toward the purchase of most GM products for every dollar spent. Recently, I leased a new car and had $2,000 in credits. They add up rapidly when you charge most of your purchases.
- Use one brokerage house and keep mutual fund investments in one company. Similarly, maintain only one checking account, one money market fund, and one insurance agent.
- Arrange for debit payments whenever possible. This assures that your bills will be paid on time and reduces your paperwork. We use debit payments for utilities, auto lease, and insurance payments.
- Avoid trading individual securities. Rather, invest in mutual funds, particularly index funds. If you do like to trade securities, consider establishing a self-directed IRA and trade in this account. This will reduce your record keeping significantly.
- Be sure to maintain good financial records.
The information and planning ideas contained in this article are for general use only and may not be appropriate for all readers. Therefore, the ideas presented here should be relied upon only when coordinated with professional financial and tax advice.
