Always broke? Burdened by debt? Living paycheck-to-paycheck? Here’s a list of seven simple but effective steps you can take to seize control of your money instead of letting your money control you.

~ Track every penny you spend ~

The authors of Your Money or Your Life admonish readers to “keep track of every cent that comes into or goes out of your life.”

[This is] the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes…This is the step that somehow makes the biggest impact.

It doesn’t matter how you track your spending, so long as you do it. You can use a cash notebook. You can use an on-line tool like Wesabe. Or you can use a piece of software like Quicken or Microsoft Money. (Many modern computers come with one of these pre-installed!)

Whichever method you choose, stick with it. Make it a habit. Don’t fudge numbers. Record your transactions as soon as possible. Most of all, don’t judge yourself. This exercise is merely for data collection; it’s not the appropriate time to make changes to your habits.

~ Develop a budget ~

After you’ve tracked your spending for a few weeks (or months), use the data you’ve collected to develop a budget. According to The Millionaire Next Door, budgeting is one thing that sets the wealthy apart from the rest of us — 55% of millionaires keep a budget.

They become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

Many people — including myself — fail to budget for a variety of reasons: it’s boring, we don’t need it, we don’t know how. But this simple act provides a roadmap for your money. There are a variety of budgeting methods you can choose, from Andrew Tobias’ three-step budget to the 60% budget (which I’m considering for 2007). You might also try PearBudget.

~ Start an emergency fund ~

For years I lived paycheck-to-paycheck. I spent everything I earned. This worked well until something went wrong. Something always went wrong. Suddenly I’d find myself without money to pay for a car repair, or facing an expensive doctor’s bill. So I financed emergencies with credit cards. Years later, I’m still paying for these emergencies.

Starting an emergency fund is an important first step to taking control of your finances. Some people believe it’s more important to pay down debt than to establish an emergency fund. Debt elimination is important, but I recommend that you start a small emergency fund first. In The Total Money Makeover, Dave Ramsey explains why he believes an emergency fund should come before anything else:

Since I hate debt so much, people often ask why we don’t start with the debt. I used to do that when I first started teaching and counseling, but I discovered that people would stop their whole Total Money Makeover because of an emergency — they felt guilty that they had to stop debt-reducing to survive.

After you’ve saved $1000, then you can attack your debt.

~ Attack your debt ~

Are you struggling under a debt burden from credit cards or student loans? Make it a priority to attack that debt in 2007. If you’ve tried and failed before, use a debt snowball. Pay off the debts starting with the smallest balance first. Here’s how:

  1. Order your debts from lowest balance to highest balance.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except the one with the lowest balance.
  4. Throw every other penny at the debt with the lowest balance.
  5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

This goes against the conventional wisdom, which says to pay the highest-interest debts first. But the debt snowball can give you awesome psychological payoffs, keeping you motivated to eliminate all your debt. It works for me.

~ Open a retirement account ~

If you’re young, you probably don’t think you need to start a retirement account. You’re wrong. No matter how old you are, now is the time to begin saving for retirement. Why? Because compound returns favor the young, and in a big way! (Here’s an illustration of the cost of waiting one year.) In The Automatic Millionaire, David Bach writes:

The single biggest investment mistake you can make [is] not using your [retirement] plan and not maxing it out.

After reading The Automatic Millionaire last Christmas, I opened a Roth IRA at Sharebuilder. It was easier than opening a checking account. I didn’t fully fund the account in 2006, but you can bet I will in 2007! (Ad: Buy Stocks for $4 at ShareBuilder.)

~ Spend less than you earn ~

This is the fundamental money skill. It’s common sense, yet many people never learn do this. Only by spending less than you earn can you hope to build wealth. This is easier to do if you track your spending or develop a budget, but those steps aren’t completely necessary. Even if you do nothing else in this list, spending less than you earn can put you ahead of your peers.

~ Read! ~

Knowledge is power. Personal finance can be a mystery, but it doesn’t have to be. Subscribe to this site. Visit other personal finance blogs. I recommend:

Read personal finance books and self-development manuals — personal finance and personal success are deeply intertwined. Money is more about your mind than it is about math. Your best bet is to borrow books from the public library, or to purchase them cheap at garage sales or thrift stores. (I’ve built most of my personal finance library this way.) In addition to the books I’ve mentioned in this article article, I recommend:

You don’t have to agree with everything in a book to get something out of it. If you’re not Christian, ignore Dave Ramsey’s proselytizing. If you’re conservative, ignore the liberal bent of Your Money or Your Life. These are great sources of information, but you’ve got to learn to pick and choose those pieces appropriate for your life.

~ A final word ~

This last skill may be the most important of all: Do what works for you. THere are few hard-and-fast rules for taking control of your finances. I can suggest methods that work for others, but only you can determine if these methods are appropriate for your own life.

Best wishes for a prosperous new year!

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