Your money isn’t just for your present needs. Of course, on payday, it sure feels that way. Your paycheck covers all those expenses—the groceries, daycare, mortgage payments, utility bills, car insurance… It’s easy to get caught up in your financial present. It’s the most pressing. But most people’s money is actually divided between the three sectors of your financial timeline: the past, the present and the future. Do you know where your money is going? Do you know what version of yourself your current money is benefiting? Knowing the answers to these questions is quintessential to relieving financial stress.
When it comes to determining where your money is going, your bank statements hold all the answers. Here’s how to find them:
- Print off your statements, and take a few minutes to go through them with different colored highlighters.
- Mark expenses that benefit your present life with one color. With another color mark the expenses you are required to make for your past, such as a car payment or a student loan payment.
- Lastly, mark expenses that benefit your future, like contributions to a college savings fund.
Once you’ve finished the exercise you’ll be able to clearly see where your money is going.
If a significant portion of your money is going toward your past, you have a serious issue. Before you can fix this issue, you need to understand how you got there in the first place. The “you” of the past didn’t save enough to pay for your present needs. So instead of buying a new car with money you’d saved up, you had to take out a loan. This created a financial relationship with your past in the form of debt.
Debt is a financial relationship linking you to past purchases you couldn’t afford at the time, so you’re still paying for them now. This is why paying off debt is so important. If you continue to spend your present money on your past purchases, you’ll be unable to prepare for future expenses, which leads to more debt. The cycle has to stop, which brings us to present spending.
After examining your spending, if you realize the majority of your purchases are for present needs, know that this is normal. But normal isn’t always best. For example, if you still have expenses from the past (loans, etc), cutting present spending to pay past financial needs is the best way to get ahead. You will always have present financial needs—but you can always cut back.
Adjusting present expenses can benefit both your past and future financial identities. It can free up money to help you accomplish debt pay-off goals, and it can help you prepare for the future.
As for the future, saving for the future is a habit, plain and simple. If very little of your present income is going toward the future, you aren’t in the habit of saving. You can change this. Hopefully you are currently contributing to your employer-sponsored retirement plan such as a 401(k). Any contributions to your retirement fund will be directly funneled to your financial future.
You may also have savings for an emergency fund, a college fund, or for a specific major purchase. This also includes any investing you may do. And while you may be ahead of the curve if you are saving for the future, the amount or percentage you are saving is just as important. Don’t limit yourself to just your employer’s retirement fund match. Do the math. Only saving a small percentage of your income will not be enough to sustain you for 35 years in retirement. You have to do more.
Same goes for a college fund. It’s great that you contribute $50 a month toward your kids’ college fund, but you are kidding yourself if you think it will be enough to send your kid to school. And your emergency fund? Just throwing what’s left into savings isn’t enough. You need a plan for your money. Your emergency fund should be three months’ worth of expenses. Are you there yet? If not, make a plan and contribute as much as you can to the emergency fund, and then move on to another goal.
Remember, moving forward is your ultimate goal, but often this means spending some time getting out of your past first. Allowing yourself to save for the future now means you can break the cycle of debt and, most importantly, erase financial stress for good.
Peter Dunn, aka Pete the Planner, is an award-winning financial mind who has authored five books, hosts the popular Pete the Planner radio show and travels around the country offering financial education. His signature wit will have you laughing as you learn. For more from Peter, visit www.petetheplanner.com.