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7 Simple Ways to Manage Your Money

Our friend Sheila over at tolovehonorandvacuum.com wrote this great post about seven steps toward financial freedom in your marriage. Money is a source of conflict for a lot of married couples, and sometimes the most daunting part is not seeing a way out. If you’re finding yourself in that boat – or if you just want to tighten up your financial reality a little more – I think you’ll find this post really helpful. Enjoy!

–  Josh at Thriving Marriages

One: only go into debt for four things: a house, a car, education, or to start a business.

Even some of those are debatable: it’s usually not worth $40,000 in debt for a Philosophy degree, and many people can save and buy a used car without debt. Nevertheless, these are the four things where debt may be necessary. Notice that Christmas isn’t on the list!

Two: Know your financial situation.

If you don’t know your income and expenses you can’t budget and you can’t plan, and that means debt is almost inevitable. So add up all of your assets (like a house, a car, savings) and all of your debts (credit cards, lines of credit), and the difference is your net worth. Then figure out your income and your expenses. If you own a business and don’t have a regular income, check your net income on your tax returns for the last three years. The average of that is likely pretty close to your income. Divide that by twelve, and now you have your monthly income.

Three: Make a budget.

Know how much you’re going to spend in each category on a monthly basis. Then spend cash, not credit. Stash cash in envelopes for food, entertainment, miscellaneous, etc. Include in that budget money for debt repayment, and repay debt, starting with the highest interest debt, as fast as you can.

Four: Create an emergency savings fund.

Once your debt is paid off, save the equivalent of three months’ income and put it in a savings account or money market account where it’s easy to access. That way, if you ever are out of work for a time, due to a layoff, an accident, or a family emergency, you won’t have to borrow money.

Five: Start saving for the long term.

Now that you have your safety net, take at least 10% off the top of your income and invest it in an RRSP. Pay yourself first through an automatic monthly contribution so that you’re not waiting until the end of the month to save “whatever’s left”.

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Six: Budget for upcoming big expenses.

Let’s say you want to send your kids to camp next summer, but that will cost $1000. You’re unlikely to have $1000 in July, so budget for it throughout the year. Similarly, if you need $1000 for Christmas, don’t think that will magically appear in December. Let’s say you also want to take a cruise next year that’s $3000, and you want to buy clothes over the course of the year for the family for about $1000. Add that up and you need $6000, or $500 a month in savings.

If you will need another car in three years, and you want to spend about $15,000, you need to save $5000 a year. So add another $417 in savings every month, for a total of $917. Set up an automatic payment into a savings account for that amount on a monthly basis. If that price tag sounds too steep, remember: If you can’t afford to pay for it beforehand, you certainly can’t afford to pay for it after the fact, when you’ll end up doling out interest, too!

Seven: Finally, here’s the clincher. Don’t buy stuff you can’t afford.

The stress isn’t worth it. And the freedom that comes from being out of debt and having a financial plan? That’s something money can’t buy.