After you know your net worth, you need to figure out if you are headed in the right direction.
You need to figure out where your money is going. To do this you will need to track all of your expenses. Write down every bill, payment and expense that you pay in a typical month.
Most of the time people spend a lot more than they think they do.
How do you fix that?
You’ve heard it a million times: keep a budget.
Related: The Complete Guide to Budgeting
Spend Less Than You Make
This is the most important single rule of finances. There is an old phrase (attributed to Bill Earle) that applies well here:
“If your outgo exceeds your income, your upkeep will be your downfall”
…and this is the case every time.
If you spend more than you make, you will eventually end up with extreme financial hardship and most likely bankruptcy.
When you start a budget, you will figure out how much money comes in (income) and how much goes out (outgo). Easy enough?
If you spend more than you make, then you will have to change something. Start by cutting the least important expense. Check out the budget series for more on that.
Keep a Buffer
It’s also a good idea for most people to keep a buffer in their checking account. This is especially important when you are just beginning to organize your finances.
The amount will depend on each different situation, but it’s not uncommon to keep $200-$500 in your checking at all times as a buffer.
This is the easiest form of overdraft protection.
You may miscalculate and spend more than you intended. It’s common to get random charges from companies for things you didn’t buy and keeping this buffer makes the process easier, while you wait for the money to be put back into your account.
Other times you may simply forget about certain bills or payments. Figure out how much of a buffer you need for your specific situation, but I would suggest keeping at least $100 in your checking account at all times.
You never know when something will happen that is out of your control.
Continue: Pay – Organize Your Monthly Bills
Series: Begin | Know | Spend | Pay | Give | Plan | Debt | Invest
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