This Is the Secret to Organizing Your Finances

This Is the Secret to Organizing Your Finances

The first step when organizing your finances is to determine what it is you would like to accomplish. After your goals are set, the most important thing you need to take a good look at is your cash flow, so that you can figure out the necessary steps to fund your goals. I suggest doing this in three steps:

  1. Add up how much you are spending.
  2. Figure out how much you earn and pay in taxes.
  3. Subtract your expenses and taxes from your income to calculate your discretionary income.
This is a cash management analysis. It does two things: it brings awareness to your spending habits, your taxes, and your income, and it allows you to plan accordingly. By plan accordingly, I mean that when you are faced with a decision to buy a new or used car, to buy a bigger home, or even just to add a monthly cable bill to your expenses, you’ll know exactly how that is going to impact your cash flow. So let’s explore how to figure out your cash flow in a little more detail. (For related reading, see 3 Steps for Creating an Emergency Fund.)

Spending

The best way to know where you are spending your money is to import all your credit card and banking transactions from the last four months into a free online budgeting software program. I prefer Mint.com, but there are several out there, including, Yodlee.com, MySpendingPlan.com, and others. Once you’ve opened an account and have imported your transactions, you can look at your spending trends. As you get more data, you’ll know how much goes towards food, auto and housing expenses. This also tells you where you can lower your expenses if needed.
If you’re interested, you can compare your spending habits with that of the rest of the country by looking at the latest Consumer Expenditure Survey. Mint does a nice job of suggesting ways to save money on credit card interest and fees, insurance rates and other expenditures. (For related reading, see Got a Raise? Here’s How to Avoid Lifestyle Creep.)

Income and Taxes

The best way to compare your earnings and tax bill is to look at Total Income on line 22 of last year’s tax return. Subtract line 60, Total Tax and any state or local taxes from their respective returns to determine your after-tax income.

Discretionary Income

Now subtract your expenses from your after-tax income to determine how much you have available to fund your goals. This will let you know if you are living above or below your means, and how much you have left to allocate towards your savings goals.
This analysis lets pre-retirees know how much they can save, and what they may need to have a steady income in retirement. And it can prevent retirees from running out of money because they will be able to determine if they are spending more than their portfolios can handle. Whether you are a pre or post-retiree, once you are aware of where your money is going, you can more easily make conscious decisions with your money. Finally, my parting thought: the best way to lower your expenses is to cut out unnecessary items and reduce big ticket items, such as cars and homes.

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