7 Ways to Make Better Money Decisions—Starting Now!

Even if you didn't start out in life to be a saver, you can learn to make smart changes now and be on your way to saving money like a pro.

It sounds simple but one of the best habits good savers have is simply making saving a priority. Before paying bills, they pay themselves first, socking away savings into savings or retirement accounts. Avoid these common money mistakes at all cost.

David Wolfson majored in finance at Indiana University because, he said, he felt it offered him the best shot at one day starting his own business. But by the time the 22-year-old graduated in May, the country had spiraled into a recession. Unable to find a job, he decided to take a year off from the “real world” to tend bar and teach skiing in Colorado. “My class feels cheated out of opportunities that existed just a few years ago,” says Wolfson. “It’s frustrating.”

It’s not just the kids who are frustrated. With unemployment at 9.4 percent, a 26-year high, it seems like everyone is buckling down for the worst economic storm in a generation. “If you’ve been teaching your child how to manage his money for a rainy day, this is that day,” says Kathy Stepp, a certified financial planner in Overland Park, Kansas.

It’s good to learn to live within your means when you’re just starting out. And that’s a lesson worth reinforcing for people of any age. Whether you’re struggling financially or looking for ways to maximize your bottom line, it’s time for the entire family to give our financial boot camp a go. Here are seven exercises that will put everyone on the path to fiscal fitness.

Low-Impact Moves to Start

1. Track Your Spending

Household incomes, adjusted for inflation, slid about 1 percent between 2000 and 2007, while total retail spending surged 16 percent. Are you outspending your income? If you haven’t revised your budget in the past few years—or if you don’t have one at all—it’s time to get a better sense of where your money is going.

The drill – For two weeks, write down every cent you spend—on every pack of gum, newspaper, and impulse buy. It all adds up, and quickly. Note your cash or debit purchases in your checkbook register. Or break out the BlackBerry and iPhone applications.

Next, log on to free sites like mint.com or wesabe.com. Using your cues, these sites will pull information from your banking, credit, invest-ment, and retirement accounts, and you’ll see at a glance, with colorful graphs and charts, where your money is go-ing. “At the end of the day or month, check to see where the leaks are,” says regular Mint user Dennis Bailey, 56, president of Savvy, a public relations firm in Portland, Maine. “I was amazed to see how much I spent just going across the street for coffee.”

Do you really spend a third of your paycheck on food—groceries, takeout, and eating out? Shoes? Bank fees? About 40 percent of checking accounts in the United States were hit with $240 in overdraft fees last year. If your spending in any category strikes you as high, that’s the first place to start cutting back. The sites can even create a sample budget for you but remember: The goal is to tighten your belt, not maintain the status quo.

The payoff – By the time you finish this exercise, you’ll know where your money has been going and, more important, how you’ll spend it in the future. At the very least, you should be living within your current means.

2. Automate your bill paying

When it comes to money, temptation really is out to get you. Professors at four universities looked at what drives economic decision making. It turns out our brain really is of two minds. When students chose a small reward now over a bigger gain down the road, the emotional brain battled for control over the logical brain—and won. “Our logical brain can see the consequences of our actions, but our emotional brain has trouble imagining the future,” explains Harvard professor David Laibson, an author of the study.

The drill – Cut your brain out of the loop, and put your money decisions on autopilot. Authorize your bank to pay your essential bills—mortgage or rent, phone, utilities, cable—directly from your checking account.

Computer consultant and frequent traveler Paul Robichaux, 40, of Perrysburg, Ohio, has been paying his bills automatically for 20 years. “I can manage my accounts and make payments from my laptop, desktop, or mobile device,” he says. Once the system is up and running, you eliminate the likelihood of paying a bill late. No late payments, no late fees, no damage to your credit rating. Just remember to check your statements regularly for mistakes and hidden charges.

The payoff – Your major bills have been paid on time. That’s worth your peace of mind. Now to the real work.

High-Impact Habits

3. Pay Down Your Debt

Americans under age 35 spend 19.7 cents out of every dollar they earn just to make payments on what they already owe. Debt burdens for all age groups have climbed since 2001, and it’s only getting worse as interest rates—and balances—rise.

Credit card rules signed during the Obama administration restricted card companies from increasing the interest rate on what you already owe if your account is in good standing. The bad news? If the current administration reverses them, it will give the companies ways to squeeze profits out of you once more, anyway, they can.

The drill – Avoid making new charges unless you can pay them off during the grace period, and use any extra cash to attack your highest-rate debt first. Even $5 a month more than the minimum payment will help you pay off that balance faster.

While you may owe a lot more money on a student loan, knock out your credit cards first because the Stafford loans generally charge about 6.8 percent in interest, while credit cards range from 9 percent to 14 percent or higher. Ask your student-loan servicer to extend your payback period. Stretching ten years of payments on a $20,000 Stafford into 20 years will free up almost $1,000 a year. Once you’ve retired your credit card debt, switch back to the original schedule so you’ll avoid racking up additional years of interest charges.

Next, apply your savings to your highest-rate card balance. People are understandably perplexed by this, but do the math: You’re losing more money paying interest on this debt than you’re earning on your savings. It’s smart to keep a small cash cushion, at least $1,000, for emergencies.

Ask your credit card companies to lower your interest rate. If they won’t, transfer debt from your highest-rate card to your lowest. Before you do this, take into account transfer fees (typically 3 percent of the money you move). Otherwise, the transaction may cost you more than it saves.

If you can, refinance your other types of debt. For example, local credit unions and community banks may let you borrow cash at relatively low rates to retire a high-rate car loan. And mortgage rates have dropped to record lows (a 30-year fixed rate was 5.74 percent in June), so if you have enough equity in your house, it may make sense to refinance. After you’ve killed your highest-rate debt, don’t relax. Take the money you were spending on that account and apply it to your next-highest-rate debt.

Now it’s time to set up another automatic transfer: Move 10 percent of your remaining discretionary income out of your checking account and into a savings account the day your paycheck clears. It may seem impossible at first, but if you can spare even $25 a pay period, it’s a great habit to develop.

Once you commit to a debt-free life, the sacrifices get easier, says Michael Roberts, 42, of Charlotte, North Carolina. “I eliminated $60,000 worth of debt in two years, and I’ve been able to build up my savings and retirement accounts,” says the marketing director of a home textiles company. “It’s frightening to me that we don’t teach enough of this in high school or college.”

The payoff – Now that you’ve conquered your debt, start saving.

4. Pay Less, Earn More

Most families are facing an income squeeze of some kind. Salaries are stagnant or lower, hourly workers are seeing their shifts cut, and about half the people who’ve been laid off and found new jobs over the past year have had to settle for less pay. No matter which camp you’re in, it’s time to get serious about making every dollar you earn count.

The drill – This is a two-part routine: Find the lowest purchase price, and maximize your post-tax salary.

Phase one. The world is full of things to spend money on, but your cash is limited. You need to differentiate between needs and wants. A few years ago, conventional wisdom said, Go ahead—stretch your budget and buy the most expensive home you can. We all know how that worked out.

Today, mortgage rates are attractive, and the stimulus package means up to an $8,000 rebate for first-time homeowners who purchase before December 1, 2009. But the credit crunch has made people like Julia Scott, 31, reevaluate how much she’s comfortable owing to a mortgage company. “My husband and I really want to own a home,” says Scott, who writes a blog called bargainbabe.com. “We envisioned a three-bedroom house in the nice part of Los Angeles, but now we’re thinking of a condo in the not-so-nice part of town. We probably won’t borrow even half of what we’re eligible for.”

In some cases, it might make more sense to rent. Before you sign the lease, try to negotiate a better deal. Landlords in many parts of the country may be receptive to reducing the rent or giving you a month free.

If you’re in the market for a car, ask yourself: Is a used car good enough? Remember, there are plenty of deals on all cars right now. (If you bought a new car after February 16, 2009, or plan to buy one before January 1, 2010, you may qualify for a tax break. Check irs.gov for details.)

Once you know what you want—big purchase or small—hit sites like shop.com, pricegrabber.com, and shopzilla.com for the lowest prices on everything from candy to couches.

And don’t be afraid to bargain with local merchants or to pay cash. According to a study by professors at MIT’s business school, people who charged their purchases spent more than twice as much for the exact same things as people who paid with cash.

Phase two. Whether you want to supplement your Social Security or stretch your paycheck, look for ways to earn more cash. Apply for extra shifts, overtime, or a part-time job. Terry Justice, 49, of Arley, Alabama, has headed up a university procurement office for nearly a decade. Last fall, he started moonlighting as a small-business consultant and personal finance counselor. “I put in roughly 50 hours a week in my formal career, which limits the hours I have available,” he says. “But anything is possible if you’re determined.”

The payoff – More money means more options—and more security.

5. Get Health Coverage

An aspiring singer in her mid-20s was shopping around for health insurance after doing without for five years. The sudden revelation that she needed coverage came after her boyfriend crashed his motorcycle and ended up with $75,000 in doctor bills.

Health-care expenses cause more than half of all bankruptcies. A five-day hospital stay can easily cost $9,000. Yet about 2.4 million people have lost their insurance during the recession, and the number rises daily. Every member of your immediate family needs to be covered, no matter how young or old.

The drill – If you can’t find a job that offers affordable health coverage, don’t give up. Young people may be able to continue on their parents’ plan as dependents until they’re well into their 20s, depending on where they live (check statehealthfacts.org).

Once they age out of that plan, they may have to buy an individual policy, unless they qualify for a state program (covertheuninsured.org) or there’s a trade group they can join. Monthly premiums for coverage that carries a higher deductible tend to be cheaper, but deductibles can run as high as $10,000 a year. Think long and hard before purchasing a policy that requires an enormous out-of-pocket payment before it kicks in.

If you’re running out of options, there are short-term plans that will protect a relatively healthy person from the worst medical situations. These policies—from companies like Assurant Health and United Health One—last six months to a year but can cost as little as $30 a month. Compare plans at ehealthinsurance.com.

The payoff – It’s a no-brainer. According to research from the Kaiser Family Foundation, a think tank in Menlo Park, California, people with health coverage tend to live longer, healthier lives because they don’t put off their medical care.

6. Save, Save, Save

In 2002, Social Security paid about 40 percent of what typical retirees were making in their last year on the job. By 2030, experts like Alicia Munnell of Boston College’s Center for Retirement Research predict, the “replacement rate” will drop to 30 percent. Like it or not, we’re all going to have to save more for retirement.

The drill – Sign up for your company’s 401(k) plan, especially if it matches all or part of what you contribute. If you’ve been in a plan for a while, stay in it, even if you’ve suffered big losses in the market. It’s not just a good idea; the free money from your company, plus the tax advantages, makes this the best investment.

You can cash out your 401(k) if you get laid off, but don’t. You’ll have to pay tax and a 10 percent penalty. Instead, if you make less than $100,000, roll it over into a Roth individual retirement account. (Starting in 2010, there will be no income cap.) Unlike a traditional IRA, which limits the reasons for early, penalty-free withdrawals, you can take out every dollar you contribute to a Roth IRA for any reason, at any time, without paying penalties. Anyone 50 and older can contribute a maximum of $22,000 to a 401(k) and $6,000 to any IRA annually.

The payoff – You’re on your way to building a nest egg that you can tap for more than just retirement.

Cool Down With a Family Powow

7. Talk Honestly and Openly About Money

If someone’s thriving, share the good news. If someone can’t pay his car note or is drowning in debt, share that too. “It’s better to call in the family reserves early when your problems are relatively small,” says financial planner Kathy Stepp. “Everyone will have more options.”

The drill – Just start the discussion. This economic environment has been challenging for some and downright painful for others. But once the subject of money is on the table, everyone can share ideas about how to get back on track. Relatives who are doing well may be in a position to lend money, cosign a loan, or pay a few bills.

The payoff – You get good advice, fewer intrusive questions, and the security of knowing that your family is behind you when things get tough.

Here are some financially savvy folks offering tips they wish they’d learned a lot sooner:

? “There is nothing more important than the incredible impact of compound interest when it comes to saving for retirement. Say you want $1 million by the time you’re 65. If you’re 20, you’ll have to save about $3 per day. If you’re 45, it’s $45 a day. Who has the more difficult task?”

—Ric Edelman, author, Rescue Your Money

? “Figure out the difference between wants and needs. I don’t buy things to impress other people. I buy only things that I need or that make me happy. So when I’m in a store, I always take that extra second to picture in my mind how disappointed I would be if I didn’t make that purchase. Most of the time, I don’t buy it.”

—Adam Bold, author, The Bold Truth About Investing: Ten Commandments for Building Personal Wealth

? “Save for a goal, and then save some more. I opened my first savings account when I was nine years old. I think if I’d had tangible goals at an earlier age, I’d have saved even more.”

—Carrie Schwab-Pomerantz, president, Charles Schwab Foundation

? “You can never get enough of what you don’t really need. It’s why people overspend. They’re looking to satisfy some underlying need.”

—April Lane Benson, author, To Buy or Not to Buy: Why We Overshop and How to Stop

? “Invest in mutual funds instead of individual stocks. Here’s why: Trying to time the market is folly because for every buyer, there is a seller. And one of them is always wrong.”