3 Simple Ways to Take Control of your Finances in 2021
By: Lacey Hunter
Tags: Budgeting, Personal Finance, Financial Planning, Saving, Finance

1) Review your spending.

Most of us struggle to accurately estimate how much we spend on what — and this can prevent us from achieving our financial goals. As the saying goes, ‘what gets measured gets managed,’ so having a clear idea of where your money is going will enable you to more easily set and achieve saving and spending goals.

Per the US Bureau of Labor and Statistics, the three largest consumer spending categories are housing, food, and transportation — by starting with these three categories, plus one additional “everything else” bucket, you’ll be able to quickly start reviewing your spending without the dreaded ‘analysis paralysis’ that results from trying to consider too many things at the same time.

Actionable next steps: Pull your most recent two or three months of credit card and bank statements. On a single sheet of paper or spreadsheet, label these four categories (‘Housing,’ ‘Food,’ ‘Transportation,’ and ‘Everything Else’) as rows, and list the months you’re reviewing as columns, as shown below. Now, you’re ready to categorize and review your spending!

Grouping expenses into just four major categories will enable you to work more quickly.

Work through your statements to identify and sum up expenses in these four categories, with a total for each month you’re evaluating. For example, ‘Housing’ would include things like rent/mortgage, homeowners or renters insurance, property taxes, HOA fees, utilities, and so on.

Before you total the amounts, take a minute to estimate how much you think you spend on each of these categories every month and make a note of it. If any of these categories sums to a total much larger than you expected, you’ve now got both the details of why it was larger as well as a great idea for where to focus with a spending reduction goal.

Key Takeaways: Now that you have a baseline idea of your spending, you can pinpoint one area to improve.

For example, choosing a category in which to reduce spending (eg, ‘reduce monthly spending on takeout from $125 to $100’) is much easier to track against than a general goal, like ‘spend less money on food.’ The more specific you can be, the better — and the better your chances of success.

Bonus points: Do this for the entire trailing twelve month (“TTM”) period and break out three additional major categories that you notice from the first exercise.

Why? Because we behave differently depending on the time of year and spend our money on different activities. Your credit card statement likely looks quite differently in July vs. December, so by including an entire twelve month period you will normalize for seasonality and have a realistic picture of where your money goes.

You are also much more likely to notice things that escaped your attention when they occurred, like late fees or subscriptions that you pay for but don’t actually use. Doing a manual self-audit is a much more effective way to find and address low-hanging savings fruit. Apps like Personal Capital and Mint are theoretically an automated time saver as they try to categorize your expenses for you, but they leave you blind to the details and require manual work to categorize anyway — so you might as well DIY your spending review! Better yet, get in the habit of doing this once a month.

2) Automate your saving.

If you’re like most, you find spending money much more enjoyable than saving money. We are all prone to the instant gratification trap, and one of the best ways to circumvent our own goal-derailing tendencies is to simply remove the temptation. How? One of two easy ways that take minutes to set up, and run automatically going forward.

Option A: Set up a separate, high interest checking account at a reputable credit union or bank with no fees or minimum balance requirements (Capital One is my personal favorite; no fees or minimums, great UX, helpful and speedy customer service), and create an automatic monthly transfer to take a set amount from the account where your paycheck is deposited and move it to your newly established, separate account the day after you get paid. The one day waiting period ensures the funds have posted to your primary account and that you don’t mistakenly overdraw. By scheduling this in advance, you’ve removed the temptation to wait until the end of the month to save, by which point, any amount you wanted to put aside has (probably) magically disappeared. A word of advice here is to think of this like ‘paying yourself first,’ making sure that you’re putting away some hard-earned cash right away every month just for you, before you go about paying everyone else.

If you read that and thought — “Ha! No chance I would wait the one day for that money to clear. I will have already found something to spend it on. What else have you got for me?” then you could go with Option B, which is to still set up a separate high-yield checking account at another bank, but then call your HR department (assuming you’re a W2 employee) and request that a set amount of your paycheck gets deposited directly into that other account so you literally never see it when your paycheck clears.

Whether you choose Option A or B, the reason for the separate account is twofold — the first is that we all tend to do ‘mental accounting,’ thinking of money in separate buckets such as “$1,000 is for rent, $300 is for my car, and $250 is for my student loans” instead of as a lump sum ($1,550 in the preceding example). Given this, you may as well use that tendency to your advantage by physically designating that money as savings. By doing this, you’ll be much less likely to spend it on things you don’t need.

The second reason is much more compelling; it pertains to delayed gratification. By housing your savings at another financial institution, you’ve suddenly created a barrier to immediately accessing the money. Further, your savings are now “out of sight, out of mind” by virtue of being housed somewhere other than where your paychecks get deposited. It takes extra effort to even see the funds!

Just as critically, there’s typically at least a two-business day delay on transfers back to your primary checking account. Said another way, if you knew you were going to make a large purchase and needed to access your savings, you would have to initiate the transfer at least two days beforehand to ensure the money arrived in your checking account on time. This will necessarily prevent impulse buying things with that money and help ensure that when you’re choosing to access it, you’re dedicating time and effort to doing so.

You may be thinking “Um. Wait a minute — couldn’t you just get a debit card and pull it out immediately anyway?” Sure — but you don’t need to actually get or activate a debit card for your new account (I didn’t, when I first set mine up). Chances are you’d rather not have another physical card to deal with anyway.

Actionable next steps: Open a new account today at a different financial institution than where you have your paychecks deposited (or where you do day to day banking, if you’re self-employed).

Once your new account is open, set up a $15 recurring monthly transfer from your regular checking account to this new account the day after your next paycheck is scheduled to be deposited. You read that correctly — just $15. The point here is to get used to the action of deliberately saving, not to swing for the fences and save a ton of money immediately. Set a calendar reminder to revisit the transfer two months from now and plan to increase it by $15 (to $30), if you can comfortably afford it.

Key Takeaways: You may find that you don’t even notice the money is gone! Continue on like this, increasing your savings amount by increments of $15 until you start to feel the pinch. You can always reduce your automated savings amount, but by experimenting with ratcheting up how much you’re putting away, you’ll gain confidence in your ability to consistently save money.

A friend of mine once did this starting with $50, and promptly forgot. Upon reviewing the account months later, she found over $600 that she’d squirreled away without realizing it!

You can also download the Acorns or Digit apps and link them to your primary checking account, which do the same thing but at a greater frequency and in smaller amounts. However, each service comes with a cost — no need for these if you’ve got the DIY discipline!

Bonus points: Refer back to your spending categories in Step 1. Are any of these known, recurring expenditures, such as pet food and supplies, birthday gifts, or travel? Since most of us are creatures of habit, the answer here is likely ‘yes.’ Create additional, separate savings accounts for these line items at your new ‘savings bank’ and begin a $5 recurring monthly transfer into each one. Plan to revisit these amounts every two months and increase them by at least $5 each time. By completing this exercise, the next time you take your pet to the vet or go on vacation, you’ll find that you’ve effectively pre-paid at least part of that expense! Instead of reacting to expenses as they crop up, you will have proactively planned for them.

Double bonus points(!): Still make the purchases on your credit card of choice (ideally one with cashback or airline miles awarded for every dollar spent), and then promptly pay off the charges with the money you’d saved. Not only are you avoiding incurring debt and the associated interest expense, you’re now being compensated for buying things that you knew you’d need eventually anyway!

3) List all of your debts in a single place.

Its easy to forget all of the different ways you might owe money — perhaps you have a mortgage, student loans, a car payment, credit cards… the list goes on! In fact, the average American has $6,194 in credit card debt, and carries four different credit cards. That’s a lot to keep track of, and nearly impossible to conceptualize until viewed all together in a real-time snapshot.

Actionable next steps: Using your same spreadsheet (open a new tab) or second piece of paper, list out all debt that you currently owe, including what its for, the amount owed, and the interest rate — as shown in the example below. Before you complete your list, take a minute and see if you can remember how much money you owe in total. If you aren’t sure, thats ok! That’s the entire point of taking the time to do this.

After you’ve listed out and totaled up your debt, highlight the debt that carries the highest rate of interest. In almost every scenario, credit cards are the winner — often with rates of 15% or higher, credit card debt is often what's costing you the most money every month. Not only is this ‘expensive’ debt, there’s an opportunity cost associated with the interest you’re paying. Money spent on interest expense is money that can’t be saved or invested otherwise!

Flipping back to your results from Step 1, were there any items that you realized you could cut out or cut back on immediately without even noticing; unused subscriptions and late fees are a great example, but this could also include something more involved, such as committing to make dinner at home one extra day per week instead of ordering DoorDash.

Make a note of at least three items you can cut out or cut back on immediately and total them up. Bingo! You’ve just found extra money that can be applied to the balance of your most expensive debt next month. To bring this full circle, you’ll want to pay your most expensive debt off as quickly possible so you can free up cash to add to your automated savings transfers set up in Step 2.

Key Takeaways: As in Step 2, you may find that you don’t even notice the items you’ve cut out or cut back on. This should feel like “found money,” or the equivalent of picking up some cash on the sidewalk, or getting a raise at work without having to actually do anything for it! By having a closer eye on your expenditures and your debts, you’ll be able to more clearly link your spending to your current financial situation, and make more prudent decisions about what you truly need.

Don’t forget — it is critical that you continue to make at least the minimum payments on all of the debt that you owe so as to avoid incurring late fees and penalties! Once you’ve paid off your most expensive debt, you can then aim that extra cash at eliminating your next most expensive debt until all of your credit card balances are paid off to $0 at the end of the month. It may not make sense to pre-pay your mortgage (if you have one), but paying off credit cards, student loans and auto loans as quickly as possible will serve to free up your budget AND reduce your stress level, especially when unexpected expenses arise down the road (and unfortunately — they always do).

Keep in mind that using every extra bit of cash to pay down debt and forgoing building up your savings is not advisable! Without also contributing to savings, you’d leave yourself with little option but relying on credit cards should an expensive emergency like a car repair or dental work crop up. Having to use a credit card for this sort of thing will wipe out your hard-won financial progress! By completing Step 2 and automating some savings each month, you’re ensuring that you’re building a financial cushion concurrent with reducing what you owe.

One word of caution: You may receive debt consolidation offers in the mail, indicating that you can transfer several credit card balances to a single lender, with the benefit of streamlining and possibly lowering your monthly payments. These types of transfers typically carry at least a three percent fee assessed against the amount being transferred, which is almost never worth it — for example, consolidating $100,000 of debt for a 3% fee will cost you an additional $3,000 immediately, with nothing to show for it! You’re far better off tackling your debts strategically, starting with the highest rate debt first.