How To Make Over Your Finances in the New Year

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New year, new you, right?! We want to help you make over your finances in the new year. And we have a list of 4 simple things to help you do it.

1. Make a Real Grown-Up Budget

Making a budget is like Adulting 101. It’s not as complicated as most people think. A budget is basically just a list of your monthly expenses. Then you compare those expenses to your monthly income to make sure you’re using your paycheck wisely to cover all your necessities, savings, debts, and the fun stuff you can’t (won’t!) live without.

Those of you who’ve been following Savings and Sangria for a while know how much I LOVE budgets. Truly. Why? Because budgets give me permission to spend money on stuff I need and stuff I love. I never have to feel anxious about whether I’ll be able to pay a bill because my budget shows me exactly how my bills will all get paid. And I never have to feel guilty about dropping big cash on travel or books because I fit them into my budget.

But what if your budget shows you that you can’t pay all your bills this month? Or you don’t have any money to spare on the things you love?

Well, you can ignore it while you dig yourself deeper and deeper in debt, then have to move back in with your parents when you can’t make rent or find someone willing to rent an apartment to you because of your debt and poor credit.

Or you can use the new year to take an honest assessment of your situation and make over your finances. So you’ll be able to support yourself and maybe a family of your own. No, not just support yourself and your family, but elevate yourself and your family. Build a little wealth so you never have to rely on a job you hate or work so many hours you never see your kids.

Budgeting is the first step to making this happen.

Now, if you look at your budget and you don’t have enough to cover your bills or enough to buy some of the things that make life happy, you have two options to make over your finances: cut costs or make more money.

Painless Ways to Cut Costs

Start by cutting costs on the things you’ve been in the habit of spending on, but you don’t really care about.

Taking eating lunch out, for example. It might be habit to run to Qdoba for a quick lunch on working days. But you don’t really love it; you don’t even really think about it. Make the effort to change that habit. Bring your lunch from home and take it to the park to save some serious cash painlessly.

Or makeup. I’m not super into makeup, so I stick with Maybelline instead of MAC and save a small fortune.

Or TV. Cut the cable and just stick with Netflix and/or Hulu.

Need more ideas? Check out 35+ Ways to Save Money This Month.

Fun Ways to Make More Money

No more painless cuts to make in your budget? Time to make more money!

Making more money doesn’t have to be difficult. It might take some hard work, sure, but if you’re doing something interesting or fun to make that side money, your life will be a lot happier.

Wait, before you start a side-hustle, is it time for a raise at work? We can show you the Do’s and Don’ts of Asking for More Money.

Now, if you decide a side-hustle is the way to go, you have a million options! Many of which can be done from home. This comes up a lot at Savings and Sangria, so we’ve got some awesome posts on money-making:

2. Start a Fool-Proof Emergency Savings Plan

Emergency savings is the foundation to a strong financial plan. See, you’re working so hard to make over your finances, but some fluke emergency could undo all your efforts if you don’t have money set aside to cover it.

Maybe your transmission goes out, and you need $700 to fix it asap. You don’t want to add $700 to your credit card debt when you’re trying to pay off those cards! Or what if you lost your job unexpectedly? That could screw over your finances for years if you’re not prepared.

So building a stash for emergencies is priority #1 as you make over your finances in the new year.

Ultimately, you want to have enough to cover 3-6 months’ worth of expenses. So the monthly expenses total from your budget? You want 3-6 times that much in your emergency savings. If that sounds like an impossible fortune, start with a goal of just $1,000.

Your mission is to find $200/month to set aside for your emergency savings. You might need to cut some other expenses or start a side-hustle to make this happen. But at the end of the year, you’ll have a sweet $2,400 cushion for when life inevitably pushes you down.

Oh, and you need to fool-proof this plan. You want to make it as difficult as possible to fail. Here’s how:

Open a separate savings account just for your emergency fund.
Set up automatic transfers to move $100 from your checking account to your new savings account after every payday.
Bam, the money will be automatically transferred out of checking and into savings before you get a chance to spend it on anything else. It’s a set-it-and-forget-it solution. You’ll be saving money without even thinking about it!

3. Pay Down Debt Faster and Cheaper

With emergency savings addressed, you can make over your finances with a smarter debt payment strategy.

Anyone else swimming in debt? I think I just heard a resounding “yes” from our entire generation.

Before you pay the minimum on your credit cards or pay your student loans on their payment schedule, you need to know about the Champagne Waterfall method of paying off debt (aka the snowball method).

In a post dedicated to paying off debt with the Champagne Waterfall, we saw how $93,638 of debt (student loans, a car loan, and credit cards) can actually end up costing you $157,480 and can take 20 years and 10 months to pay off. Gross!

Then we worked our champagne magic. Instead of only paying the minimum amount due on each debt, we decided to add $200 every month to pay down our debt faster. But we didn’t split up that $200 between all the debts; we put the full $200 toward the debt with the highest interest rate.

Then we kept doing that until the debt with the highest interest was totally paid off. The next month, we took the amount we usually spent on that first debt and put it all toward the next highest-interest debt in line. And on and on until all debts were paid off.

So we had to spend an extra $200/month on debt. That’s the sucky part.

But here’s the great part: instead of costing $157,480 and can take 20 years and 10 months to pay off, our debt now only cost us $118,895 total and took just 7 years and 7 months to pay off.

That’s a savings of $38,585 and over 13 years of your life!

Seriously, go check out that Champagne Waterfall post for the details and a chance to get our totally free Champagne Waterfall Calculator to see how much you can save!

If you’re thinking, “um, I’m already putting $200/month into savings…how am I supposed to find another $200 for debt?”, you’re smart to be thinking ahead.

You have a couple options:

try to cut your expenses even further if you can
try to earn even more money if you can
wait until you have at least $1,000 saved in your emergency fund, then stop your automatic transfers and use that money toward debt until your debts are paid off. Then you can use all the money that was going toward to debt quickly finish your emergency fund
split up your $200 so you have $100/month going toward savings and $100/month going toward debt. Just know that you’re tempting fate; it’ll take you twice as long to build your emergency fund, and who knows what will happen in the coming months.

4. Start Your Retirement Plan (Even if You’re Only 20!)

This sounds like a bad idea, right? You’re struggling to pay your bills plus save for emergencies plus pay down debt, and now I’m telling you to also start saving for retirement this year. How is that supposed to happen?

That’s a legit question. But before we go there, let’s answer a more pressing question: Why do I need to start saving now when retirement is like a lifetime away?

The answer is compound interest.

What exactly is compound interest? It’s friggin magic is what it is! Compound interest is making money on the money your money is making!

Wait, what?

Ok, you probably know about earning interest. Interest is the amount the bank pays you for storing your money with them. You stash your money in an account, and every month a tiny amount of money shows up in your account. So your money is making money.

But compound interest takes this to the next level. That interest your money earned is now sitting in your account and able to earn interest of its own. So now you’re making money on the money your money is making.

This is exponential growth. The more time your money has to grow, the faster and higher it’ll grow.

One of our first ever posts was The $831,751 Reason to Save for Retirement While You’re Young and Broke. It compares two women’s savings. One woman, we’re calling her Aurora, started saving at 25. The other woman, Maleficent, started saving at 40. They saved the same amount each month, but Aurora ended up with $831,751 more at retirement because of compound interest.

Aurora saved just over $200,000 but ended up with over $1,200,000 thanks to compound interest.

Just look at Aurora’s exponential account total growth!

How to Start Saving for Retirement Now

So this compound interest sounds great, but you’re already building your emergency fund and paying down debt. You may not have money left for this.

Here are your options to make this happen:

try to cut your expenses even further if you can
try to earn even more money if you can
wait until you have at least $1,000 saved in your emergency fund, then stop your automatic transfers and split that money between debt and retirement until your debts are paid off. At that point you can use all that money that was going toward debt to quickly finish your emergency fund and bolster your retirement.
split up your money so you have some going toward savings, some going toward debt, and some going toward retirement.

Retirement is a long game. You want to start now, even if it’s a small amount of money. Every dollar invested in retirement when you’re 25 could be worth $15.21 when you retire. So start now, even if it’s just $10/paycheck.

There are other ways to add to your retirement savings as you go:

Every time you get a raise, automatically transfer that monthly increase directly to retirement. You were already used to living without that money, so you’ll never miss it!
When you finish funding your emergency fund and paying off your debt, the monthly amount you were spending on that can all go directly toward your retirement. You were already living without that money, so again, you won’t miss it!

The ultimate goal is to keep increasing your retirement contributions until you’re saving 12% of your paycheck for retirement. But again, long game, so you can start small and work up to 12% over time. Just start!

Of course, you need to know what kind of retirement account to open and how to set one up. Check out 3 Easy Steps to the Retirement of Your Dreams for the details.

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Are you going to make over your finances this year? Do you have any other tips for making it happen?

How To Make Over Your Finances in the New Year