Pimp Your Finances

If you’re like me – or an estimated 13% of people who made resolutions last year - one of your goals was to improve your finances.  For some, the goal was debt reduction (52% of all finance resolutions).  For others, it was saving money (24%), making more (13%), or investing more (7%).

Regardless of what your resolution is for next year, the time to start is now.  There is no reason to wait.  Here are 7 easy things you can do now to make 2009 your most prosperous yet.

1. Organize your documents and revamp your storage system

I try to go paperless whenever possible, but some things have to be kept.  Taxes, medical bills, utility bills, etc….  I use a small plastic file cabinet to keep them organized.  I try to sort everything throughout the year, but it always ends up like George Costanza’s wallet.

Now is the perfect time to sort through last years papers and make sure you have a system ready for next year.  Make sure you have places to store:

• Tax documents
• Utility bills
• Medical bills and receipts
• Home improvement receipts
• Warranties and manuals
• Legal documents

2. Clean out your closet – and donate your old clothes

We all have too much stuff.  Things that we don’t use but keep anyway.  It costs money in the long run.  The more stuff we have, the more space we need and the harder it is to find the things we use.  I clean out my closet every so often, and get rid of clothes I haven’t worn in a few months.  Instead of throwing them away, I donate them to a local charity.  They operate a thrift store and use the profits to help battered women.

How does this save money?  When you donate clothes (or anything else), you get a receipt and a deduction.  So you free up space and save money on your taxes, all while helping a good cause.  It’s a win-win situation.

As you clean, try to learn a lesson from the fact that you bought things you no longer use.  Once you’ve cleaned your closet, move onto the rest of your house.

3. Re-evaluate your tax withholding and exemptions

As satisfying as it is to get a big tax refund, you’re losing money.  You’ve given the government an interest free loan.

Ideally, you should adjust your tax withholding so that you owe very little or get a very small refund.  That way, you can use that money throughout the year.  Instead of giving Uncle Sam a loan, use it to pay down debt, increase savings, or stash it away for retirement.

The IRS has a withholding calculator for figuring out how many exceptions to claim.  Again, your goal should be to owe/pay as close to $0 as possible.  If you want more details, here’s another pagethat explains exemptions in plain English.

4. Plan your expenses for next year

The first step in building a budget is planning for expenses.  Failure to account for everything leads to cash shortages and temptations to use credit cards.  By planning your expenses for the year, you’ll be more inclusive and tend to adjust your expenses upward.  Get Rich Slowly explains the psychology of it in better detail.  Bottom line: it’s better to have too much money for expenses than not enough.

Make a list of all of your expenses, and try to estimate how much it will cost for the entire year.  Here are some things to consider:

• Rent/mortgage
• Utilities: electricity, water, cable, internet, trash, phone, etc…
• Insurance: health, car, home, renters
• Car: gas, regular maintenance, emergencies
• Food/groceries
• Gifts: birthdays, holidays
• Clothes
• Random shopping: electronics, etc…
• Vacation/travelling

The trick is to overestimate.  For my electricity, I set aside $150 a month, even though the average bill is only around $100.  By planning for more than I need, I make sure I won’t come up short.  The hard part is setting aside the extra until you need it.  I have multiple accounts with ING that I use to keep the money separate.

It’s a great trick to use with gas too.  Prices are low now, but won’t stay that way.  By setting aside extra now, you can make sure you have enough when gas goes back up.

After you have a yearly estimate, you can use it to…

5. Create monthly budgets

Once you know your expenses for the year, you can figure out how much you need each month.  However, expenses are just one part.  You should plan for savings, retirement, and day-to-day spending.  I don’t like planning down to the penny, so here’s what I do. 

I set aside money for all my bills, savings, retirement, and debt payment first.  I leave myself with a small (but reasonable) amount each month that can be used for whatever – be it food, entertainment, etc….  After I decide on the size of my miscellaneous fund, I calculate how much I have per day to spend and track it in real time.  That way, I immediately feel the impact of my spending.  If I go crazy at a nice restaurant, I’ll see that I only have $5 a day for the next week.

I aim to have money left over at the end of each month.  The first thing I do when I get paid is to take the leftover from my last check and use it to pay off debt.  That way, I’m paying myself first and last.

6. Increase your retirement and/or savings by 1%

Most people spend more as they make more, and as a result never get ahead.  They end up with more stuff and more debt, but not more money.

By immediately setting aside money for retirement or savings, you pay yourself first and keep your take home pay minimized.  Once the money is gone, you’ll adjust your spending accordingly and never miss it. 

This helps you get ahead in two ways.  First, you’ll build your savings and retirement.  Second, if you keep your take home pay low, you’ll keep your expenses low.  It’s a lot easier to cut spending than it is to make more money. 

7. Write down your goals

People who write their goals are more likely to achieve them.  Take the time to write your goals, including when you want to accomplish them, and how you’re going to do it.

Don’t just say “pay off credit card.”  Instead, say “pay off Mastercard by November 15th by setting aside $25 from each paycheck”.  Goals need to be specific and measurable.

Write your goals on a big piece of paper, and hang it up where you’ll see it every day.  Then you need to track your goals.  Every so often, make a note of your progress.  You may not like what you see, but you can use that as motivation.

By starting on your resolution now, you’ll hit the ground running come January 1st.  In the words of Tom DeMarco and Timothy Lister, “There are a million ways to lose a work day, but not even a single way to get them back.”

With everything in finances, time is your best friend.  Don’t let it go to waste.