Volatile financial markets. Housing prices on the decline. Unemployment rising. An uncertain -- at best! -- outlook for the economy. It's no wonder many Americans are feeling less well off and less optimistic about their financial futures. But despite all the bad news, I always think of the new year as a time for positive change. As individuals, we certainly can't move markets or predict the future of the economy. But we can take a serious look at our finances, in particular our patterns of spending and saving. It's quite simple, really: When you spend less, you save more: It's certainly the best way I know to get your financial house in shape.
At the heart of financial well-being is a simple, profound kernel of personal financial wisdom: Live within your means. And the easiest way to accomplish this goal is to make a budget and stick to it.
Your budgeting process doesn't need to be elaborate. Most people know exactly how much money they make (some self-employed people and small business owners, of course, have to estimate their income). That's your top line. Now figure out your fixed expenses, such as your mortgage payment or rent, insurance premiums and car payments. Other expenses are variable, like utilities, groceries, clothing and entertainment, though most of these are easily estimated. Your past bank statements can help you understand where your money goes, or you can use personal finance software. Once you have a handle on where it goes, you'll start to understand where you can cut back.
A critical component of living within your means is to avoid nondeductible, high-interest debt, in particular, credit card debt. I'm not saying don't use credit cards at all; they can be a useful financial tool and can help you track where your money goes. What I am encouraging you to do is to avoid carrying credit card balances. Credit card interest costs are high and nondeductible, which is bad enough; even worse, every dollar you pay in interest is a dollar you're not saving for the future or even spending on something of value now. In fact, if you have a lot of credit card debt, your 2009 financial makeover should start right here: by reducing the amount you pay in interest. That alone will have an immediate and obvious positive impact on your finances.
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