In a recent survey, 56 percent of respondents predicted that in one year, their finances would be in much better shape than they are today. Only 18 percent believed that their finances would be about the same one year from now, according to the poll by the National Foundation for Credit Counseling.
Just hoping your finances will get better isn’t enough, however. The key to improving the state of your finances is to face your financial reality — and have a plan.
The most important step is to identify your spending patterns by taking a hard look at where every dime went last year and then sketching out a budget to cover your current expenses. But it’s not enough to identify all of your current spending. Financial reality is that expenses don’t always occur regularly.
— The unexpected: Things happen, and you need to be prepared. Put away 10 percent of each paycheck. In a year, you’ll have more than a month’s income set aside, enough to cover a short-term emergency.
— Maintenance on home and vehicle: Plan for routine oil changes and new tires. Think about the age of your appliances and the cost if your refrigerator or stove fails. Have the money set aside for replacement.
— Long-term savings: In the event of job loss, you’ll need savings to carry you through. You’ll still have daily expenses (although you can shave them down somewhat) and debts to pay off. It’s thought that six months of living expenses is enough of a cushion — but consider the number of people who have been on unemployment for one or two years. The bigger your financial cushion, the longer you can ride out a job loss.
— Periodic expenses: Don’t forget to plan for the known, irregular expenses, such as car tags and quarterly payments for insurance, as well as birthdays and anniversaries.
— One-time expenses: Is a relative getting married? Are you expected to travel there and participate, possibly incurring big expenses? Work these into your budget.
— Big-ticket items: Consider how you’ll make major purchases such as a home, new vehicle, vacations, summer camp for the kids, a new television and more. The more reality-based your budget and financial planning, the more likely you are to have the ability to pay for those things without going into more debt.
David Uffington regrets that he cannot personally answer reader questions, but will incorporate them into his column whenever possible. Send email to firstname.lastname@example.org. (c) 2014 King Features Synd., Inc.