Putting the cart before the horse.

A lot of people across the United States are scared about the financial crises we are currently facing. It’s made a lot of us take a hard look at our finances and try to find ways to make a change. We are trying to pay down our debt, save, invest and live more frugally. Tempting as it is to try and do everything at once, it’s very important to come up with a sensible plan. Otherwise you run the risk of getting off to a big start and then failing when you can’t live within the very restrictive budget you set yourself.

There is a school of thought, which is very sensible , that says you should start by paying off your debt, then save the equivalent of a few months of expenses in an emergency fund and then, when you have completed those two steps, start saving for your retirement. When you have enough “extra” money saved to have a sizable emergency fund and have fully funded your IRA, or other retirement vehicle, you can begin to look at non-retirement investments. This is excellent advice.

Having said that, I have written before about how step one, paying off my debt, ended up, several years later, with my still having unretired debt and no retirement savings. At 46, I really couldn’t wait to start saving for my retirement. I decided to implement everything all at once. I was saving 25% of my salary, paying several hundred dollars a month against my credit card debt, contributing to my Roth IRA and investing in a non-retirement account with Sharebuilder.

At some point I realized that, although I was tracking my spending, other than my weekly grocery allotment, I really didn’t have a budget. I also realized that I was $65 a month short on maxing out my IRA, which was stupid. I decided I’d better make a real budget and see if I could find that extra $65. I took my eighteen months of recorded expenses, averaged them and came up with a monthly “budget” figure for each expense item. After I added all those dollars up I discovered that I was leaving myself exactly $15 a month unallocated and that didn’t include money for gifts, uncovered medical expenses or postage. It was fairly obvious this plan was not going to work.

I was clearly guilty of putting the cart before the horse when it came to my new financial awareness. I immediately cut out the non-retirement investing, which amounted to $162 monthly and upped my monthly IRA contribution. I also realized that I may have to let up on the 25% savings for the time being. I’m going to try 20% for awhile. If everything goes well, my credit card debt should be paid off in about six months. I will then be able to use that money to get back on track with my savings and investing.

Making all the pieces of your financial life come together seamlessly takes some work and, for me, some serious record keeping. Make sure you review your plan regularly to see if it still meets your needs. If you never have any money, no matter how much you are saving, donating and paying down on your debt you will be much more likely to backslide than if you give yourself a small allowance for fun money.

Don’t be afraid to ratchet back your lofty goals if you need to. Better to keep going at a slightly slower rate than to get frustrated and quit when you can’t make everything work as quickly as you would like.

What about you? Have you had to revamp your financial plan?