Despite what the poets say, money, or at least financial security, can be one of the most important steps toward happiness. On the other hand, money mismanagement and debt can result in financial anxiety, which can cloud decision-making and lead to a bad cycle.
There are three basic moves those who want to be smarter about finances should make: gather information, plan and execute.
Step 1: Gather information
Some may think making a personal or household budget is too tedious, but it’s the most essential part. Itemise spending into 17 categories. Then for each category, estimate what you think you spend each month versus what you actually spend - and then what you’d ideally like to spend for each. It may sound like a lot, but it can usually be accomplished in under 30 minutes each month.
Step 2: Plan
Compare your spending to your income. Money management requires facts. The exercise may be cringe-inducing, but people who don’t budget are more likely to fall into debt.
Once you have a clear budget, it may be helpful to bring in a third party like a financial planner. Any adult can benefit from a session with a non-conflicted, and importantly, fee-only planner they can trust.
Avoid conflicted advisers who are brokers, since they don’t advise; they sell investment products. If you are young, low-income or in debt (or all three), try low-fee non-conflicted advisers, many of whom are subsidised by a non-profit or government agency.
A financial planner will help with the basics like how much to set aside for an emergency fund and what to invest in for retirement, along with how to achieve medium-term goals such as a down payment for a home or a car.
Step 3: Execute
Put your plan into action - whether that means increasing retirement contributions to the maximum amount or paying down credit card debt.
Money management is often depressing, tedious and no fun. But the upside is you gain leverage over the boss who wants you to keep working, the bank that wants your interest payments forever, and the retailer that wants you to overspend.
When you think of it that way, feeling free of money worries and taking control over your financial reality could offer up a lot more fun and happiness in the coming new year.
*This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research.