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Avoiding facing financial problems inevitably leads to more irrational, knee-jerk spending. Mel O, a certified financial planner and host of the podcast Finances: The Other F Word, says budgeting is the most productive solution to combat self-destructive purchases and to shed financial stress.
Ahead of hosting a free Budget Bootcamp online on September 15 (register at freebudgetbootcamp.com), she offers some tough love advice on money management.
Understand your cash flow.
Budgeting begins with understanding your cash flow, which means poring over your statements.
“I will tell you that you spend more money on the s**t you choose to spend money on than you think. That’s a given,” O says.
To understand cash flow, she says to categorize your spending over the past 30 to 90 days into four buckets: fixed bills, fluctuating bills like power, fixed discretionary spending, such as gym memberships, and variable discretionary spending, the fun stuff.
“Once you rip the Band-Aid off and you look at where you are right now, it’s scary at first, but then it is so empowering,” she says.
Have an emergency fund.
O says that nearly 60% of Americans can’t cover a $1000 emergency, and that’s because of a misunderstanding of cash flow.
An emergency fund covers at least three months of expenses. It’s a worthy financial objective that keeps your budget on track by preventing future credit card charges and the endless loop of debt.
Set financial objectives.
Befriending your cash flow allows you to set goals—whatever those may be. “I don’t care if it’s going to Burning Man. It doesn’t matter,” O says.
Once you know your goals and how much money you can allocate toward them, you can work toward accomplishing them overtime. For instance, in “the first 12 to 15 months, your objective is to pay off that credit card,” she says. “Bam, it’s done! … Before you know it, you’re knocking s**t out and you’re making marketable gains.”
Pay off easy debt first.
It’s rare to have permission to postpone difficulty. But with paying off debt, O says, do it. Most people assume it’s smarter to try to pay off the credit card with the heftiest balance and interest rate. But prioritizing that big balance card can block progress.
“You are not freeing up any cash flow to put towards your true financial objectives,” she says.
Paying off smaller debts first—while always paying all minimums—gives you more cash than tackling bigger balances.
Save a little at a time.
O says many people have the good intention to stow away a large chunk of each paycheck, but inevitably end up transferring it back to checking, bit by bit.
“Each time you do that, you’re reemphasizing to yourself, I’m bad with money,” she says. “That little euphoria of moving over that $800 lasts a second, and then you just slowly stab yourself to death as you pull more money out of it .”
She says to start with a doable number, however small. “Yes, it’s a lower dollar amount, that’s for sure, but unless your kid needs to get a staple removed from his eye, you’re not touching that money,” she said.
The slim gains fatten your wallet over time and transform your view of what you’re capable of.
401k matching: A common, costly misunderstanding
Certified financial planner Mel O says she often has clients who have never taken advantage of employer matching contributions to 401k retirement plans. One CNBC survey shows that one in four people don’t contribute at all.
O says companies with a matching vesting schedule, where the employee gradually gains full ownership of the employer’s matches over time, trips people up. People assume that if they leave their job before the vesting schedule is up, they will lose their money.
“People think that they’re giving it to the employer, and this is real. This happens all the time,” she says.
She says with employer matching, you always get your initial money back, plus a return.
“Casinos would be bankrupt [operating] like that,” she said. “So for you not to take advantage of your matching, it makes absolutely no sense.”
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