Before you commit to a personal financial plan or household budget, it's a good idea to experiment with different savings and spending scenarios. Relying on "willpower" to rein in your spending or a personal budget to guide you will only get you so far to meeting your goals for paying your bills, saving for retirement and having extra cash on hand for goodies or emergencies. Practicing money management with a few key exercises will help you create the financial plan that works best for you.
Create a Budget
The most effective money management exercise to help you get a realistic picture of your personal financial situation is to create a budget. List your expenses and fill in your projected monthly amounts. Use a spreadsheet so you can quickly change amounts to see the results. Using a variety of formulas that show monthly averages, annual results and your net income each month, you can quickly make decisions based on changes in your spending habits that will hurt the least and help the most.
Run Debt Scenarios
Have you ever wondered how much your coffee habit costs you? If you buy just one $5 cup of coffee per day during the workweek, that adds up to $1,250 each year. If you put those cups of Joe on your credit card at 20 percent interest, that's roughly $1,500 annually depending on how much of your balance you pay each month. Add a couple of $10 lunches each week, two trips to the movies each month, a CD here and a DVD there and you can see how your credit card debt and interest quickly balloon. Run debt scenarios to calculate what your discretionary spending really costs you. Look at your credit card statements and review the payoff scenarios the card companies provide. One shows your payoff in years and interest if you pay the minimum balance, while the other shows you what you need to pay off your balance in three years. You might be stunned at the difference paying a bit more on your balance each month saves you.
Project Retirement Needs
Find a free online retirement calculator and see what you'll need to have saved by the time you retire to live the lifestyle you want. These calculators let you enter personal data, such as how many years until you retire, what you currently have saved and what annual income you'll need when you retire to match an income level at today's standard of living. Run different scenarios that take into account better-than-expected and less-than-expected retirement contributions and final assets to learn what you need to start saving now and every year to retire securely and comfortably.
Run Home Ownership Scenarios
If you're interested in owning a home, look into what you'll need to save for a down payment, cover closing costs and handle move-in expenses. Free online mortgage calculators can help, but you'll need to consider where you want to buy and how much house you want. Mortgage lenders recommend that your total monthly debt payments, including your mortgage, add up to no more than 36 percent of your gross pay. Using this formula, you can determine how much house you can afford or how much down payment you'll need to buy the house of your dreams.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.