Everyone probably made New Year’s Resolutions. I know I did. Unfortunately, most New Year’s Resolutions never manifest into habits. So I’m here to remind you to do a little checkpoint on your goals.

Have you been taking steps to reach your goals?

Perhaps you wanted to max out your IRA this year: Do you have at least 1/12th of the max in your IRA?
Maybe you wanted to pay down your $12,000 dollar credit card bill: Did you pay at least $1,000 toward your debt this month?

If you can’t say yes to this question, don’t worry. You’re just a little bit behind schedule. Tomorrow’s a new month. Try not to spiral into a sucky year.

It’s never too late to make massive changes.

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I know that there are a million different mortgage variations. The most popular is definitely the fixed mortgage.

The ultimate question is: Should I get a shorter term mortgage or a longer term? Here are some basic pros and cons with a shorter length mortgage (15 years) vs. a longer length mortgage (30 years).

Pros of a 30 year mortgage:

• You have “up to” 30 years to pay off the mortgage. If you have the extra cash, you have the option to throw more money at it.
• You have smaller monthly payments. You can use the extra money to feed your kids.

Cons of a 30 year mortgage:

• You pay nearly twice as much interest compared to a 15 year mortgage.
• It takes longer to pay off the mortgage.
• It takes longer to build equity.

Pros of a 15 year mortgage:

• You pay less interest over the life of the mortgage.
• The mortgage ends quicker.
• You build equity much faster.

Cons of a 15 year mortgage:

• Your monthly payments are larger.
• You have less time to pay off the mortgage.

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I checked my credit report a few months ago and boy was I disappointed. I had a 760. I paid all of my bills and credit cards on time. I should have a close to perfect score. Right? Nope. I guess I didn’t know a lot about my credit report.

The point is that nobody knows their credit report unless they check. There is no guesstimating. Here’s where you get your credit report.

Equifax – http://www.equifax.com
Experian – http://www.experian.com
Transunion – http://www.transunion.com

Some people recommend you get a copy from all three bureaus. They can have different information. It costs a few bucks for your report but it’s worth it to correct mistakes or general peace of mind.

A law passed says that all Americans are now entitled to receive free credit reports every year — no strings attached. Go to www.annualcreditreport.com, which is the only authorized source for consumers to access their annual credit report online for free. I think you get one a year.

Note: Don’t trust any other free credit reporting agencies.

[Photo Credit: carpe icthus]

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Tracking what you spend is the most important component of budgeting. I couldn’t build my budget without tracking. I can’t gauge how accurate my budget is without tracking. Here are a few things I do to keep track of what I spend.

Get receipts when possible.

Take the receipt and put it in your wallet. Don’t keep it in there to rot.

Keep a pen close.

I can’t always get a receipt for something. I keep a pen handy to write down expenses when I couldn’t get a receipt.

Update your spreadsheet ASAP.

I have a bad memory and I hate having a fat wallet. Empty your expenses into your computer when you get home so you can throw away the receipts from your wallet. Note: Anything more than 2-3 days old probably won’t get recorded.

Track everything no matter how small.

This is especially important if you’re just beginning to track your spending. If you start to make little exceptions, you’ll start making bigger exceptions more frequently.

Purchase what you’ve planned in the beginning of the month.

This assumes that you’ve got a little cushion of money. I like to pay rent and utilities, buy plane tickets, fill up on gas, and buy groceries in the beginning of the month. It gives me a more accurate picture of what I have left. More importantly, you get those expenses out of the way early in the month so you don’t have to deal with it later.

Track spending for at least 30 days.

Tracking your spending is like exercise. It’s useless unless you do it consistently. Better yet, track it for 3 months. Tracking for 3 months or more will allow you to build a more accurate budget.

Keep your budget sheet with you at all times.

I keep an excel spreadsheet (Pearbudget) on a USB stick so I can add an expense when I’m at home, at work, or traveling.

[This is a reprint of my original contributing article over at 1st Million At 33. Thanks Frugal!]

[Photo Credit: lomokev]

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Part 1 of the series is located here: Effective Budgeting: Why Budget? (Part 1 of 3)

Why did budgeting fail me?

1. It was too hard to manage. I tried using MS Money and other complex methods to get my finances in order. I kept a budget for 2 days before quitting. It took too long to manage everything. When I bought a can of beans from the store, I would have to input the following information:

• Did you pay with credit, debit, cash, or check? Credit.
• Which card? Amex.
• What date did you buy it? Um. Yesterday.
• What catagory did this purchase fall under? Food.
• What sub-catagory did this purchase fall under? Eating out? Groceries? Yeah. The last one.
• What was the sales tax? ARG. Food doesn’t have any.
• Where did you buy it from? Who cares?
• How many did you buy? A MILLION. LEAVE ME ALONE!

2. It was too inaccurate. There was always some emergency and I would end up going over what I expected. Way over. This was discouraging enough for me to throw most of my budgets away. What’s the point of having a budget if I’m just going to spend more than I thought anyway?

I needed to find something easier. I wanted to do the least work possible. Here are some of my main guidelines that have allowed me to keep a budget for the past 3 months.

Binary Dollar’s Budgeting Guidelines:

Do NOT budget more than you earn. This includes your income, rent from tenants, a conservative estimate of earned interest, etc. The ideal pool you should start with is 90% of your take-home pay for a little bit of added cushion.

Subtract your fixed expenses first. Pretend that you pay your utilties, rent, and savings at the beginning of the month. Even though the food bill changes each month, I subtract a rough estimate as a fixed expense. I don’t want to run out of money and go hungry. Your savings should be a fixed expense too. Don’t fall into the trap of saving what’s “left over” at the end of the month. There won’t be anything.

Things that I usually subtract from a month’s pay:

• rent - $500
• utilities (rough estimate) - $100
• food (rough estimate) - $130 (Are you calling me fat?)
• savings (this could be emergency funds, ira, etc) - $500
• car (rough estimate) - $40.00

Strip the catagories. Figure out what’s important for you to keep track of. You don’t need 75789347598374 catagories in your budget.

I’m not worried on a day to day basis about how much of my savings goes into an IRA, money market, or some mutual fund. I lump it into a catagory called “savings” on my budget sheet.
Use the bare essentials according to your tolerance of complexity and your priorities. I have fairly broad catagories. Here’s my list:

• rent
• student loans
• gym
• utilities
• car
• groceries
• savings
• spending

Evolve your budget. I used to write my budget and then try to spend according to it. I had it backwards. I had to spend and THEN write my budget. My budget did not become accurate until I started tracking my spending. My budget changed quite a bit in the beginning. It took me 3 months of tracking my spending to evolve my budget. What I thought I spent and what I actually spent were different. Don’t keep your budget the same month after month if it isn’t working. Tracking strategies will be covered in the next article.

[This is a reprint of my original contributing article over at 1st Million At 33. Thanks Frugal!]

[Photo Credit: Daniel R.]

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I started a Roth IRA a few years ago. After a year or so, I stopped my contributions because of my tiny income.

I finally got a good job and I was ready to contribute money again. I dialed mutual fund company Vanguard. A customer service person answered. The conversation went something like this:

Vanguard: How can I help you today?
Me: I would like to setup monthly contributions into my Roth IRA please.
Vanguard: Certainly. How much do you want to put in each month?
Me (after 10 seconds of silence): Um. I need to call you back.

I had no idea what to say. The following is exactly what went through my head in that 10 seconds of silence:

I wonder how much my utility bills are going to be? When do I start paying off my student loans? What’s the minimum? What’s in my checking account now? Don’t I have money in my savings account too? How much money do I make per month? How much taxes are taken out? How much do I need to save for a down payment for a house next year? Oh shoot! I spent a lot on my credit card this month didn’t I? Man, I wish I didn’t buy that heart rate monitor. How many months are left for IRA contributions this year? How much wood could a woodchuck chuck if a woodchuck could chuck wood? This sucks.

I had not planned or budgeted my money. There are plenty of reasons why we should budget but here are the 4 top benefits that I have personally experienced:

1) You feel less guilty.

David Allen, author of “Getting Things Done“, says that as long as your time is being spent how you think you should be spending it, you won’t feel guilty. He was talking about time management but the same twist holds true with money. As long as your money is going where you think it should go, you’ll feel good about your finances. A dead giveaway that you’re about to make a guilty purchase? You think to yourself: “Eh. Maybe I shouldn’t. I need to save money.”

2) You curb spending.

You’ve budgeted $400 for spending each month. It’s the 10th and you’ve already spent $350 to get that new iPod. If you want to buy something else this month, your brain will say, “Whoa there. You’re close to spending all of money this month already. Do you really need that luxury toilet paper?” Didn’t think so.

3) You do LESS number crunching.

Yes. I actually do less number crunching. Remember that 10-second internal monologue I had when the Vanguard person asked me how much money I wanted to contribute each month? We go through a variation of this monologue every time we’re about to spend money on anything. We do huge calculations in our heads every time a dollar leaves our pockets. If you keep a budget, the thought process and math becomes simple: “Will buying this put me over what I’ve budgeted? If yes, don’t buy. If no, you can buy.”

4) You spend less than you earn.

Budgeting rule #1 is that you don’t allocate more than you make. A budget system that violates this rule will not work in the long run. Even if you have a cushion of money in the bank, it can eventually run out. The general rule for building wealth, getting out of debt, saving for a house, and being an overall cool cat is: “Spend less than you earn”. Budgeting helps you do this.

[This is a reprint of my original contributing article over at 1st Million At 33. Thanks Frugal!]

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Go inside the mind of a spender. What goes through their minds before they buy something? How do they make peace with themselves before they purchase something they don’t need?

Once these justifications on spending are identified, it will be easier to catch yourself before spending excessively. You can use this extra money to build an emergency fund, invest in some index funds, or pay off some of your debt.

Here’s what goes on in our heads before we spend money on stuff we don’t need. I’m sure there’s more but these are the more common ones.

• I deserve it. I work all day. I’m going to use what little money I have to bring myself a little bit of happiness.
• I got paid today. It’s Friday. I have a little bit of cushion to spend money and buy myself a little something. Friday nights are for having fun and going out.
• I “need” to buy it. I need a new laptop. I need a new mp3 player. I need new jeans.
• Buying this is more like an investment. This thing will pay for itself. Once I buy a new bread maker, I’ll never have to buy one again for the rest of my life.
• It’s been a while since I bought something new. My television is getting old. It still works but it’s time to buy a new one.
• I only live once. I want to spend my money while I’m still young. I’m not going to enjoy it as much when I’m younger. I’ll invest my money when I’m a little older.

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There are a lot of excuses on why we’re in debt. The environment around us says, “SPEND MONEY, BUY STUFF.” Here are some of the lamest I’ve heard.

Lame Scapegoat #1: It’s the media’s fault that I’m in debt. The media hypes every product imaginable and it makes me buy crap I don’t need.

What can we do? We can try to numb ourselves to advertising. Let’s fast forward the commercials using our TIVOs. Better yet, let’s turn the TV off. Don’t use the web. We won’t know the news so we’ll have to talk to “real” people to find out what’s going on in the world.

Lame Scapegoat #2: I get peer pressure from my friends. All of my friends have iPods. They all dress in fancy outfits. They all want to go out every night. If I don’t pay the fee, I’ll be stuck at home with no friends.

What can we do? Go out only once in a while. We don’t have to go to Friday’s happy hour every week. Our real friends will still hang out with us despite our lameness and free t-shirts. On top of that, let’s grab some additional friends who like doing things for free. Hopefully they’ll like things like running, writing, hanging out with the family, and other lame stuff.

Lame Scapegoat #3: Nobody taught me about money when I was younger. The public education system failed to teach me how to balance a checkbook or make a budget.

What can we do? Now is a great time to learn about finance. The best thing we can do now is learn all we can to get us out of the hole and pass that on to our children. We don’t want them to make the same mistakes we did.

Real Reason: I lack self-control.

No one’s twisting our arms to use our credit cards. We’re given this wonderful flexibility and we’re using it to destroy ourselves. When we have choices to either waste money or not, we need to make the right choice. Lather. Rinse. Repeat.

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What is financial paralysis?

You have bills and debt up to your eyeballs. You feel like a deer that is frozen in headlights. You don’t know what to do. You’re in financial paralysis.

Here are some tips to snap you out of the financial coma and help jump start your journey out of debt.

Write down your problems. This one is painful but it’s the big pinch that will bring you back to reality. Start by listing all of the companies and people that you owe. After that, write what you owe each of them. Afterward, list each individual monthly bill and how much you pay each month. Get it out of your head. It’s a good start to taking action and formulating a plan.

Start with super small goals. If you’re in financial paralysis, monthly goals aren’t for you at this point. You need constant monitoring at first. Start with weekly goals for a while. Try saving $50 bucks a week in a jar.

Stop guilt spending. You buy something because you feel guilty. You feel guilty because you buy something. Realize what you’re doing and stop the spiral.

Realize that it’s a marathon, not a sprint. People in financial paralysis are usually more than a few payments away from being where they want to be. Once you realize that slow and steady will win the race, it will feel less overwhelming.

Recruit a training partner. If you workout with a partner, you’ll be familiar with the concept. Find a buddy who is fighting the same battle as you. Both of you can converse openly about your money problems. The act of getting your problems out of your head will help tremendously. Plus, you can motivate each other to succeed.

Play with a debt consolidation calculator.  Maybe it’s the number of payments that’s bumming you out.  Try rolling all your debt into a single payment.  Crunch some numbers.  Investigate hypothetical situations.  Be careful though.

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I’m in debt. Good. I’m passed the zero-th step: Acceptance. I’m making progress. Very sexy.

Now all I have to do is pay down my debt. Bummer. Very unsexy.

The second step to paying off my debt is to pay off the student loan companies I owe. Before that, the first step to debt reduction is to stop accumulating debt.

Here’s how I stopped accumulating more debt.

Cut up your credit cards. Maybe not ALL of them. I do have ONE credit card since some things are credit card only.

Leave social status at the door. I live like a freakin’ hobo compared to my lifestyle a few years ago. Don’t be afraid to look like a bum compared to your friends. Who cares if they all got new TVs and you’re still turning the knobs to change the channel? When your friends say, “Want to go out tonight?” Say “No. I’m a hobo.” Click.

Don’t borrow money from friends. “Hey man, can I borrow 10 bucks?” is not in my vocabulary anymore. It’s a bad habit and it’s a burden on myself and my friends.

Use cash all the time. Have you ever wondered why they give you chips to gamble at the casinos? It’s psychologically harder for use to see cash leave our hands. When I started using cash for purchases, I noticed a massive decrease in spending.

If you have to use a credit card, put a Post-It note on it. I made a tiny paper envelope for my credit card and I pencil in a running balance on it. It’s a very good deterrent to using it since you can see the balance before you use it.

Here are some cool debt reduction blogs:

We’re In Debt

Blogging Away Debt

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