ASK Blog: Manage Your Money Before it Manages You

Renee Pelletier ’03, ’08, ’16 has worked in the Office of Financial Aid and Scholarship Services for 17 years. For the last five years, she’s served as a financial literacy and default management specialist. She also oversees Stony Brook’s Money Smart Seawolves financial literacy program.

Do you ever get stressed out over your financial obligations? Does it sometimes feel like you don’t have enough money to do all the things you want to do? Are you a recent graduate stressed out about your future student loan repayment? You’re not alone! Managing your personal finances is not always easy, but knowing what you’re doing helps.

Everyone has a different experience when it comes to learning financial management skills. Some have had the opportunity to take a class or attend a workshop. Others may have learned these skills throughout their upbringing from parents or other relatives. However, for some, learning about personal finance is something that happens as they go along. In other words, some lessons are learned through trial and error and learning from mistakes. While you may learn not to make the same mistake twice, the first bad decision could be quite costly.

The key to being successful with your finances comes down to a few basic concepts:

1. Become financially literate. The internet is a wealth of information right at your fingertips that allows you to arm yourself with knowledge and enables you to make informed decisions.
2. Have a plan for you money and use tools to keep you on track. Mapping out what you want to do with your money, or setting financial goals, will give you a starting point and help you set priorities. Creating and using a budget is akin to a compass, it’s going to help you to stay the course towards achieving those goals and letting you know if you’re starting to go astray.
3. Start saving ASAP! Allow time and the power of compound interest to work for you. The earlier you start, the more you will have in the long run.
4. Know your credit history and how your decisions affect your score. Maintaining good credit is a lot easier than trying to repair damaged credit history.

Here are some actionable steps you can take right now whether you’re just starting down the road to financial independence or you’ve been there for a while, but you’re either feeling a bit lost or not happy with the way things are going.

Know Yourself

A good starting point is to take a close look at yourself and how you approach your own spending decisions. What motivates these choices? How do you prioritize your spending? Do you make purchases on a whim that you’ve later regretted?

In order to change financial habits, you need to be aware of and understand your own unique relationship with money. Identifying and categorizing your needs vs. your wants may help prioritize where you want to focus your funds, but discerning mandatory vs. discretionary spending is not always simply black and white. My suggestion to you would be make a list of all the things you spend money on (daily, monthly, etc.) and list what you typically spend on each thing. Next, make a notation next to each one, N = need and W = want or M = mandatory and D = discretionary. This will give you a visual, particularly items that maybe you could cut back on if you have to.

If You Fail to Plan, Then Plan to Fail

You’ve likely set some type of goals for yourself before, but have you ever set goals for your money? If not, it’s time to create a road map of what you want to change or achieve. Think about the things you want done in the short-term (1-2 years), mid-term (2-4 years) and long-term (5+ years). As you do this, consider how what you do in the short-term should complement your mid/long-term goals, with your mid-term goals serving as the building blocks for the long-term. If you haven’t had the opportunity to go through a formal goal setting exercise, Mind Tools has a great write-up on SMART goals that’s helpful to any type of goal setting.

Don’t just keep this as a list in your head — write it down and visit it often. It’s so easy to get wrapped up in the day-to-day commitments and push these thoughts to the edges of our minds and maybe not think about it again until much later on. As time goes on, assess your progress. As you achieve your goals, set new ones.

“A budget is telling your money where to go instead of wondering where it went.” —Dave Ramsey

As I mentioned before, your goals are your map of where you want to go, and a budget/spending plan is the compass that’s going to help stay on track. I tend to use the terms budget and spending plan interchangeably, as some people are completely turned off by the word “budget.” Whatever you want to call it is up to you, but I cannot advocate enough for using one.

There are a number of methods out there: pen and paper, software, smartphone apps, etc. Ultimately, you want to choose a method that provides you with enough information so you can use it to guide your financial decisions, while not being so complicated or time consuming that you easily abandon it. You may need to experiment a bit to find which method works best for you. Here’s a list of a few apps you may want to consider.

The basic steps to using a budget are:

1. Set your financial goals.
2. Determine your net income (including frequency) and expenses (consider all the things you spend money on, not just your monthly bills). Think about how you want to categorize these expenses. How many categories you have depends on how detailed you want your budget to be. Try to find a happy medium between too much and not enough.
3. Assign a dollar amount to be spent for the expenses/categories you’ve just identified. It’s important to track your spending as you spend it and use your budget to guide you. For example, maybe you’re trying to limit your monthly dining out expenses and have a determined an amount you don’t want to exceed. It’s the third week of the month and you’re trying to decide if you want to order takeout or go out to eat. Take a look at your budget! If you’re close to hitting your monthly cap, maybe opt for the takeout that tends to be cheaper, or better yet make something at home! Lastly, be sure to include the “fun stuff.” If you make your budget too rigid it’s going to be unrealistic and when you spend outside your budget it may feel like you did something wrong. Keep it fun, keep it flexible and keep it simple.
4. Review your budget at the end of the month and adjust as necessary. If you find that you are consistently over spending in one area, maybe you’ve set your cap for the month too low. If you always have funds not spent in one area, then reduce the budget amount and put those funds towards something else.

If this is new to you, it’s going to take a little practice. If you learned to ride a bike, did it happen overnight? No, practice makes perfect and you only fail if you give up, so stick with it! Over time you will get faster and faster and it becomes a breeze.

Pay Yourself First

As Warren Buffett put it, “Don’t save what is left after spending, but spend what is left after savings.” At first glance, this approach may seem easier said than done, but it goes back to some of the questions posed at the beginning of this blog post: What are your priorities?

We all know that saving is important, yet according to MarketWatch, 50% of Americans are distressingly unprepared for a financial emergency. Nearly 1 in 5 have nothing set aside, and 1 in 3 don’t have at least $300 to cover an unexpected emergency. How do you compare?

Common advice among financial advisors is to have an emergency fund of covering 3 to 8 months’ worth of expenses. The number of months you need to set aside may depend on your marital status, whether or not you have other dependents to care for, your age, etc. No one expects job loss or illness, but if it were to happen to you, don’t you want to be prepared?

Shouldn’t I pay off all my debt before I start saving? Well, it depends. If the rate of return from saving/investing is higher than the interest charged on the debt, mathematically it makes sense to put your efforts towards saving. If you’re carrying high credit card debt with interest rates +15%, and a regular savings account with a rate under 1%, reducing the debt will save you money in the long run. However, it’s not as simple as picking one over the other. Delayed savings is going to cost you money as well. If you have nothing set aside for an unexpected expense, you’re likely to turn to that high rate credit card to cover it. Then you’re back to square one, or worse.

Find a balance and work on both if you can. Treat savings like one of your expenses, put it in your budget and pay it each month. Setting aside smaller amounts will be more manageable and over time it will add up. If you receive your pay via direct deposit, consider having a set amount or percentage of your weekly/bi-weekly pay put right into your savings account and use what goes into your checking for your budget income.

Treat Your Credit History Like a Baby, With Love and Care.

If you’re not familiar with what goes into your credit score, or what’s on your credit history file, it’s time to do a little reading and become financially literate in that area. There is a wealth of information on the web, including from the three credit monitoring agencies: Experian, Equifax and TransUnion. Be aware that they all promote accessing your report and score, but you’ll end up enrolling in their credit monitoring service for a monthly fee. Instead, you can view your report for free from all three by visiting www.annualcreditreport.com (it’s the site required by federal law that you can get this info for free).

Knowing where you stand and how your behavior affects your credit score is key to building and maintaining good credit. Not only will this affect your ability to obtain financing when you want it, but it’s going to affect the cost of credit. Those with lower scores are charged higher interest rates.

It only takes a short time for your credit score to take a major dip, but it can take years to get it back up. Know what you can afford before you make the purchase, pay your bills on-time and keep your credit card balances low.

Becoming savvy with your finances is not going to happen overnight, and that’s okay. Dedicate some time to educating yourself, read some of the vast resources on the web, create your own financial plan and take action to get to where you want to be. Stony Brook University’s Money Smart Seawolves webpage is a great site if you need a place to get started!

The views expressed by ASK guest bloggers are those of the authors and do no reflect those of Stony Brook University or the Stony Brook Alumni Association.

Making educated career decisions can be difficult at any stage of career development. The ASK (Alumni Sharing Knowledge) Blog is intended for Stony Brook University students and alumni to learn career knowledge and get advice from experienced alumni, working in various career fields, about lessons learned from their career experiences.