Dad, my finances are a mess. What can I do? How about a financial cleanse?
You have probably heard people talking about going on cleansing diets. Some of them can be pretty weird and drastic, but the idea is to let all the toxins flush out of the body. What needs to be remembered when taking such action is that it won't take long to reverse any benefits you may have achieved, unless you change some of your habits.
This easily applies to your financial health.
How about flushing all the financial toxins you've accumulated out of your budget? Trust me. You'll feel a lot better!
The first thing you need to do when you decide to take the plunge with your financial cleanse is to figure out just what your financial situation is.
Pull your records together and look at everything. If you're married, get your spouse involved, too. Get all your investment, retirement account, and bank statements in front of you, along with your tax returns for the last few years. Include any debt statements, such as your mortgage, car loan, credit card, utilities, etc. Life insurance, disability, extended care insurance policies and anything else along this line should be on the table, as well as any other important financial documents you can think of. Put everything on the table.
Look at your monthly spending. Your bank statements for the last few months will show you how much you're spending on average per month, as well as what you're spending your money on.
What you'll notice is that you have three different kinds of expenses, your fixed expenses, like your mortgage, that are the same every month, variable expenses, such as groceries and gas, and incidentals, which are often (not always) things bought on a whim.
Then create a budget. Fixed expenses, like mortgage payments, are just part of life. Make sure to be realistic about the variable expenses. The more bank statements you have to look at, the more accurate you will be when you average the variable expenses. Then set a limit on how much “mad money,” - the money you can spend on a whim - that you can afford and add that into your budget. When you do this, you are more likely not to blow your budget.
Start focusing on paying off any bad debt you have. Debt for anything but your mortgage or sometimes a sound investment should be considered bad debt. Stop using credit cards until any credit card debt you have is totally paid off.
If creating your budget is the financial cleanse, changing your habits and sticking to your budget is what will keep your financial life happy and healthy.