M Stands for Management
SIMPLE Personal Finance Series
M Stands for Managing Your Money, CREDIT, Spending, and More
Financial management tends to bring to mind images of stock markets and traders and investment advisers. These big finance, long-term issues remain important, but the SIMPLE way to managing your finances involves much more immediate and daily concerns, including:
Manage your paycheck
Manage your spending account
Manage your bills
Manage your day-to-day money
Manage your credit
Manage your spending
The term “manage” is used deliberately. More than just “handling, directing, governing, or controlling” your money, financial management also means more than “taking charge or care of” your money.
Managing your money means much more than just organizing and taking care of it. It often involves “bringing about or succeeding in accomplishing something despite difficulty or hardship,” as in, “How did your team manage to pull off that amazing win?”
Managing your money, your paycheck, your credit and your spending is not easy. However, it is worth it.
Manage Your Paycheck
Managing your paycheck begins with submitting an accurate W-4 form to HR. You should fill out the federal, IRS W-4 form as well as a W-4 form specific to your state of residence.
When completing your W-4 forms, keep in mind that the more exemptions you claim, the less income taxes your employer will pay on your behalf throughout the year. If you claim too many exemptions, you may end up owing a substantial tax bill come next April. If you claim too few exemptions, your paychecks will be smaller and you will likely receive a refund next year of a portion of taxes you paid this year.
There are two trains of thought with regard to exemptions and tax refunds. The CPA and ultra-disciplined households will want to pay no more taxes during the year than necessary. They will generally complete the W-4 using its accompanying worksheet and base the calculations on accurate information (current and from the previous tax year).
This way, throughout the year, their paychecks are larger, meaning they can use the extra money to save and invest, hopefully at rates of return higher than inflation (which historically averages around 3%). They will likely receive not refund next April and may even have to pay a couple hundred dollars extra. However, they are okay with this, because they have been maximizing as much of their paycheck as possible to earn additional income through investing.
The opposing train of thought is to use the possibility of an income tax refund as a sort of forced savings plan. Household adhering to this model justify their choice to pay more income taxes during the year because they believe that they would otherwise spend that extra money on items of little or no importance.
Instead, come next tax time, they receive a significant refund that they can use to repair a vehicle, replace an appliance, or take a vacation. Even though paying more in taxes during the year essentially equates to lending Uncle Sam your money at 0% interest until you file your next tax return, such households believe this forced savings is the best way to avoid living completely paycheck to paycheck on an annual basis.
This brings up the next point of paycheck management: direct deposit. Most employers offer to deposit your paycheck directly into your checking account. Many, in fact, offer employees the chance to split their paycheck and deposit it into multiple accounts.
Setting up multiple direct deposits can be an effective way to build savings all year rather than waiting for a tax refund next year. Submit your request to have a specific dollar amount or a percentage (e.g. 5% or 10%) of your paycheck deposited directly into a savings account. Ideally, this savings account will be inconvenient for you to access so you are not tempted to raid it during the year to pay for non-priorities.
Manage Spending Account
At the turn of this century, writing out and mailing a check was still a common method of paying bills in most households. Back then, the importance of balancing a checkbook register was a no-brainer.
With the almost complete disappearance of checks (replaced by debit cards, pre-paid cards, online bill pay, Paypal, Google Wallet, Apple Pay and digital currencies), balancing your checking account can seem so outdated it borders on laughable.
Using a paper checkbook register is not only uncommon, it is also becoming unnecessary. Yet, balancing your account should still rank high on your financial priorities each month. If you depend solely upon the balance shown on your bank’s phone app to show you your available spending money, you will likely experience frequent overdrafts or declined purchases.
Many debit and prepaid purchases, online bill payments, and even direct debits might take several days to process through your bank account. If you forget such purchases, you might experience insufficient funds to cover them when they finally process. This can result in overdraft fees from your bank or in insufficient funds fees from the merchant.
If you dislike writing and the math involved in paper checkbook registers, use a simple phone app (there are many free versions) or the automated account sync options available in programs such as Quicken, Personal Capital or Tiller. Whichever method you choose, choose one. Until your bank processes EVERY transaction immediately, balancing your account will never be an outdated task.
If you ever get frustrated with the stack of statements and invoices and payment due notices piling up on your kitchen table or elsewhere, you will benefit from implementing a system for organizing your regular bills.
Your first consideration should be to do away with your bills all together. By automating your payments using direct debit or online bill pay, you will dramatically reduce the paper clutter in your home. Direct debit is the process of providing your utility company, lender or other organization to whom you make monthly payments your bank account number and your financial institution’s routing number. Each time a payment due date arrives, instead of having to fill out the payment form or write a check, your payment is deducted automatically from your bank account.
There are two reasons this might make you nervous, though it should not. First, you might worry that you will not have enough month in the bank to cover your bills. Such concern indicates a need to better address your monthly spending plan (budget). Second, you might fear giving such sensitive information out to businesses, especially with financial hacks becoming so commonplace among businesses. The irony of such fears is that those most worried by hackers prefer to send checks in the mail. All checks have your account number and routing number printed on them, and the likelihood of the check being lost in transit or found by a dumpster diver is much higher than the risk of providing such information electronically.
Whether you pay bills electronically or by mail, receiving your bills by email can minimize your clutter and actually reduce the chance of losing the bill. When a bill arrives by email, either pay it immediately or set a reminder to make the payment. Then, do not delete the electronic bill. Instead, place it in your email archive or in a “bills” folder in your email inbox. In the future, this will allow you to find any bill using your email’s search feature.
If you choose to continue receiving paper bills, find a bill organizer that allows you to place the bill in a slot indicating the day the payment is due.
The “kitchen bill pile” is another low-tech option. When a bill arrives in the mail, write the due date on the outside of the envelope and place it in the pile so that the next bill is on top and the bill due furthest in the future is on the bottom.
Regardless of the method you choose, choose one. Chaos will never lead to regular only payments.
Manage Your Day-to-Day Money
Putting together and regularly reviewing a spending plan must to form the basis of your money management activities. Regardless of what format you use to budget – whether you do it on paper, use an Excel spreadsheet, enter your figures into an online program, or post it on a refrigerator whiteboard – planning out your spending for the next month and beyond helps you to hold onto the money from your paycheck that you will need for future purchases and expenses (rather than spending it now and using credit cards later).
As with most important money-related behaviors, managing your money on a daily basis involves more of a commitment to yourself than it does the development of a skill. Whether you write it down, post it on a mirror, make it the wallpaper on your monitor, or keep it on your nightstand, keep your budget where you will see it regularly. By living within your budgeted spending, you become empowered to reach prioritized goals that bring both peace of mind and long-term satisfaction.
Manage Your Credit
The Fair and Accurate Credit Transaction Act of 2003 gave all Americans access to a free credit report every twelve months from each of the three main consumer reporting agencies (Equifax, Experian, TransUnion). You can get one, two or all three at a time. Just go to www.AnnualCreditReport.com, provide your identifying information and answer a few security questions. Then, you will generally be able to view and download your credit report.
Check for accuracy and follow the instructions at the back of the report to dispute any errors. If you do have trouble accessing the report online (not uncommon), use the form found HERE to print and mail your request. You may also order your report by phone at (877) 322-8228.
These free reports do not include a credit score, but they are helpful in minimizing the impact of inaccurate information and even identity theft. In order to get your FICO credit score, you will either have to pay for it at MyFICO.com or ask a lender for it when you apply for a loan. Otherwise, you might consider using a service that provides an “educational score.”
Educational scores are similar to a FICO score but are typically never used by a lender or in other credit-based decisions. Still, scores from CreditKarma.com and CreditSesame.com can provide you with helpful snapshots and monthly patterns to help you better understand your credit rating. Your bank’s website might even provide an educational score if you have set up online access to your account.
Keep in mind that credit scores are numerical representations of the risk you pose to potential lenders of missing future payments. Based upon your recent history of payments, debts balances, credit limits, missed or late payments, and efforts to acquire additional debt, the score estimates your likelihood making payments on time in the near future.
The higher the score the better, with FICO scores ranging from 300 to 850. Since there is no such thing as a risk-free loan, even an 850 does not indicate a perfect score.
While receiving a score of 850 is possible, scores in the 750 to 775 range will generally qualify you for the same great interest rates and repayment terms that the lender would offer to someone with an 850. While scores in the 800s might provide you some bragging rights, they will not secure you any lower interest rates.
Manage Your Spending
Tracking your daily spending can be one of the most beneficial habits you could develop. If you are not already tracking your expenses, try it for at least the next four weeks. Write down where every penny you spend goes. It is a task worth far more than the energy required to complete it. Simply write down your expenses at the end of each day in 10-15 categories. Since this exercise helps you learn where your discretionary money is going, the categories will not include regular bills but spending such as dining out, vending machine purchases, clothing and shoes, in-app purchases, etc. Total these categories up at the end of the month.
Summing your expenses each day or each week can be an eye-opening experience, even unpleasant for some. Get into the habit of asking for and keeping receipts for all purchases, including any online and smartphone app purchases.
Use one of our free downloadable trackers below to simplify the process.