If you follow the news, you’ve probably read a lot about the state of American finances.
But according to theU.S. Financial Diaries, that isn’t the case. The Diaries—a research project conducted by New York University’s Financial Access Initiative, the Center for Financial Services Innovation and consulting firm Bankable Frontier Associates—tracks low and moderate-income families over the course of a year to get a detailed picture of how they handle their money.
The families profiled in the Diaries—from the Bangladeshi immigrants whose impressive education credentials don’t translate to the U.S. to the dual-income foster parents living in Mississippi—are doing the best they can, but there are lessons we can all learn from them about financial basics we could be doing better.
In reading about their experiences, you’ll not only appreciate all you do have but glean tips for ways you could improve your own financial well-being.
Read on to find out which steps to financial security these Americans aren’t taking—and many of us may not be, either.
1. Creating (and Sticking to) a Budget
The Adrians*, a Mississippi couple in their early thirties, have a wildly fluctuating income. It depends on whether they’re currently acting in their role as foster parents: When they aren’t, they rely on income from her part-time job in a preschool and his full-time hotel job, and when they are, they’re given an average or $1,400 per month from the foster care system. That money isn’t guaranteed, though—even when they get these checks, they’re sometimes for less than $500. Consequently, although they’re aware of what needs to be paid when, they often have trouble making payments—such as utility payments—on time and have to “catch up” when their bills are past due.
Operating without a consistent and comprehensive budget hardly makes this family unique. A 2012 LearnVest survey found that only about 40% of respondents had a monthly budget. Worse, less than half were aware of how much money they had available for monthly spending. Spending more than you earn is a problem that stretches across all incomes—in fact, a 2013 FINRA survey found that 19% of Americans regularly spend more than their income.
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How to Do It Better: When most people hear the word “budget,” they equate it with a spending “diet.” But a budget is simply a plan for where your money will go—not a restriction on how much you’re allowed to spend. Without a budget, it may be hard to anticipate your expenses and make sure there’s enough money allocated to cover them.
A budget is one of the very first steps toward financial security, says LearnVest Planning Services CFP ® Elizabeth Sklaver. “Without a budget, it’s really difficult to move on to things like paying off debt or saving for your financial goals. You should know how much you have coming in and where pretty much every dollar needs to go. Guesswork adds a lot of unnecessary financial stress.”
The first step in creating a budget is to monitor your spending and see where those dollars are going, which you can do automatically in the free LearnVest Money Center. If you’ve already done that, check out your next steps in our simple guide to budgeting. And if—like the Adrians—you have an irregular income, we have a guide for you too.