Stop Leaking Cash

Few of us know how to manage money. But financial planning is a necessity -- and easier than you think.

Fundamental Financial Truths

Most of us just muddle along and learn how to manage our money as we go, befuddled by the plethora of options, decisions, and expertise that today's economic world encompasses Take heart. There really are a few fundamental financial truths that don't change over time. If you master them and keep informed of current trends, you can live well for less and save for a financially solvent future.

Calculate Your Net Worth
Let's start at the beginning: Before you do anything else, it's essential to figure out just how much you are worth. The easiest way to do it is to get a pad and pencil and make two lists -- one of your assets and one of your liabilities.

Your assets. Start by adding up the current value of everything that you own or have coming to you:

• Cash: Total of your checking and savings accounts, money-market funds, and CDs (certificates of deposit)
• House: The market value of your home.
• Other things of value: This includes jewelry, automobiles, home furnishings, art, vacation home, and such.
• Insurance: Figure out the cash value of all your policies.
• Investments: The current value of stocks and bonds, any rental properties, real estate partnerships, oil and gas partnerships, gold and silver, company stock options, personal collections (stamps, coins, antiques, and such), notes receivable, and the book value of a business.
• Retirement savings: IRAs, Keoghs, pension and profit-sharing plans, 401(k)s, any deferred compensation, and company savings plans (only count the money you could take if you left the company tomorrow).

Your Assets		Amount
Cash		$
House		$
Insurance		$
Investments		$
Retirement savings		$
Other things of value		$
TOTAL		$

Your liabilities. Now add up all your debts -- the amounts that you owe to others:

• Mortgage: Be sure to include home equity loans.
• Loans: Bank, car, and any other loans or notes.
• Credit card balances or any other outstanding debts.

Your Liabilities		Amount
Mortgage		$
Loans		$
Credit card balances		$
TOTAL		$

Your net worth. Once you have your two lists and have totaled them up, subtract your total liabilities from your total assets. The result is your net worth. Write that figure down. Memorize it. That's the number that will tell you when you can retire and how far along you are toward reaching your financial goals. Chances are your net worth is more than you think; however, if you find out that you are worth less than you think, let it serve as a wake-up call to revise your budget fast.

Assets		Liabilities		Net Worth
$		- $		= $

Get With the Budget

Every household should have a written budget. Some people have the feeling that if they balance their checkbook regularly, that should suffice. But focusing only on your checkbook is not a realistic, safe, or forward-thinking way to approach your financial well-being. It is also crucial to be honest about your budget, even when you overspend. Again all you need is a pad and pencil.

Total income. Add up all the money that you can expect to receive during the year:

Income		Amount
Regular paychecks and bonuses		$
Part-time or freelance income		$
Interest		$
Dividends		$
Other income		$
TOTAL		$

Fixed expenses. Next add up all the payments that you make a regular basis during the year:

Expenses		Amount
Mortgage payment or rent		$
Electricity, gas, and water		$
Telephone: Home and cell phone		$
Internet service		$
Garbage		$
Alarm service		$
Cable or satellite dish		$
Insurance		$
Debt payments		$
Commuting expenses		$
TOTAL		$

Variable expenses. Now add up all the payouts you make that vary more widely from month to month:

Expenses		Amount
Food and beverages		$
Paper goods		$
Car maintenance		$
Home maintenance and improvement		$
Furnishings and appliances		$
Clothing		$
Personal grooming		$
Recreation		$
Vacation		$
Gifts and contributions		$
Health care not covered by insurance		$
TOTAL		$

The moment of truth. Subtract all your annual expenditures from your total annual income. If the total expenditures are less than the total income, you are living within your income; if the expenditures are more than the income, you need to go through your variable flexible expenditures -- and some of your fixed expenditures as well -- and reduce your spending.

Total Annual Income		Annual Expenditures		Cash Flow
$		- $		= $

Savings and Spending
When you are working out your budget, keep in mind that the recommended savings rate is 10 percent of your take-home pay. If this isn't happening, you may be ill-prepared for retirement. Start by writing down everything you spend for about three months. This should give you a pretty good idea of how much you spend on food, gas, personal items, recreation, and all other variable expenditures. It's also a good idea to take out the past year of utility bills to get an idea of the seasonal rise and fall of expenditures there. Once you start seeing where your money is really going, you can look for ways to cut back and save more.

Think Small to Build Big

A lot of people only think in big terms for savings -- feeling that if they're not putting away $500 a month, then the effort is just not worth it. That kind of thinking is really destructive. If you're not used to putting away any money for savings, start small. Can you find $25 a month to go into a savings account? Most people can find that much just by cutting out a movie, a dinner out, or even a really lengthy long-distance phone call. If you can free up $25 per month to go to savings, you'll be $300 a year richer; if you can free up $25 a week for savings, you'll be $1,300 a year richer. Because the money you put aside will be earning interest, you'll be surprised at how fast even small amounts of savings will grow. Put it in perspective: If you save just $1 a day, by the end of the year you'll have $365. In an account with a four percent interest rate, that would actually become $372 (you've made $7 by doing nothing). In ten years, you'll have saved $3,650 or, at the same interest rate, $4,487. As you can see, over time it all adds up.

Bonus Tip: Unexpected Income?
When you have a windfall -- bonus, gift, extra cash for extra work -- use the rule of thirds to determine how you'll use it:

• One-third for the past. Use one third to pay down a debt.
• One-third for the present. Use a second third to make a home or personal improvement you want.
• One-third for the future. Put the final third immediately into some sort of savings or investment.

If you follow this rule, you'll see your debt shrink, your savings grow, and you won't feel deprived.

Sneaky Savings
Another trick to help you save more (or pay down debt much faster) is to take an amount from a debt payment that has been paid off and continue paying it -- either into a savings account or into another debt. For example, let's say you have two car payments, one for $300 and one for $230. Once you pay off the lesser debt, just begin adding the $230 to the second debt and make new payments of $530. You'll be amazed how quickly you pay off the second debt (and save on the loan's interest as part of the bargain). Once that second debt is paid off, try tucking that payment into a money market savings account and watch your savings take off. Because you are already budgeting for the $530 to be unavailable to you each month, this strategy may be the most painless way to build up your savings.

Safety Margin Plan for a Rainy Day
Conventional wisdom dictates that you set aside three to six months of living expenses in case of an emergency. To safeguard this critical safety net fund, you'll want to put the money into a money market account or short-term certificate of deposit (CD). That way you won't be tempted to dip into it. Only bank your money with institutions that are insured by the Federal Deposit Insurance Corporation (FDIC), which will protect your money up to $100,000. If you have more than this amount, spread your money among different banks so all your savings will be covered.