There is a ton of advice out there on how you could be managing your money better. There are complicated debt repayment plans, investing strategies, spreadsheets, rules, and more. It can all be extremely overwhelming when you’re first starting out. Sometimes the advice isn’t very applicable to your own situation and sometimes the tips being described aren’t practical. This can leave you feeling even more overwhelmed and discouraged.
Instead of getting bogged down in unnecessary details, here are five basic steps that you should take to improve your financial situation today.
Before you can take the steps necessary to improve your finances, take some time to figure out your current situation. It’s especially important to know how much debt you currently have, how much savings, and how much money you have in retirement accounts. The best indicator of where you stand financially is your net worth, which can be found be taking your assets and subtracting your total debt from that amount. Typically the higher your net worth, the more healthy your financial state is in.
If you have a lot of debt, don’t be disheartened, everyone has to start somewhere. Don’t compare yourself to your friends’ perfect social media posts. Instead of beating yourself up for past mistakes, change your mindset about money and look to the future. Think about how much better your life can be if you start taking small steps towards improving your finances.
After you’ve examined where you currently stand financially, the next step is to figure out where your money is going each month. How much income are you bringing in? How much are you saving and spending on a monthly basis?
Take some time to write out a list of your paychecks, as well as your recurring monthly bills. Then go through your bank statements from the last month or two and categorize your expenses. The categories can be broad, this is just to give you an overall picture on how you’ve been spending your money. You can also use apps such as Mint, to significantly help with this process.
The most important aspect of this exercise is that it helps you clearly see whether the way you’re spending your money is an accurate representation of what you value most. Is traveling your favorite way to spend your time, but you’re always lacking the funds to do so? Changing your spending habits by cutting down on the expenses that mean the least to you can free up money to put towards your true passions.
It all comes down to spending less than you earn, and trying to increase the gap as much as possible between your income and your spending. Then use that extra money to save and invest for your future.
This step takes a few minutes to set up, but as soon as you do it’ll make your life much easier. Instead of trying to remember when all your individual bills are due, go through and set them all to auto-pay. I set all my bills to be paid with a credit card so that I earn cash back, and then I pay off my credit card bill every week. You should also set up auto-transfers into your savings account and investment accounts. Completing this step saves you a ton of time and hassle in the future, and lets you have a plan for your money.
Over 70% of Americans are living paycheck to paycheck, without the ability to come up with $500 if an emergency arose. You’ll never start to get ahead with your finances if you’re stuck in this rut. To begin to change your financial outlook, pay yourself first! This means that as soon as your paycheck is deposited into your checking account, have a portion of it re-directed into an online savings account (bonus points for setting this up as an auto-payment like we discussed in the previous step).
Building up a savings account for emergencies (emergency fund) should be your first goal when it comes to improving your finances. Many top financial teachers like Dave Ramsey suggest saving up $1,000 before focusing on any other goals. Even this small amount can have a big impact. It gives you some peace of mind and can also help you avoid putting emergencies on a credit card that you’re unable to pay off. Start with this amount first and then eventually increase your savings to 6 months worth of expenses.
After you’ve built up at least a $1,000 emergency fund in a separate savings account, start to get serious about eliminating your debts as quickly as possible. There are various debt repayment strategies, and we’ve discussed the best ways to get out of debt in previous blog posts. Generally it’s best to order your debts by interest rate. Begin putting as much money as possible towards your debt with the highest interest rate, and make minimum payments on all the rest. After you’ve paid off your first debt, move down the list and use all that money to put towards your next debt. This is often going to be a process that takes some time to finally pay everything off, but don’t get discouraged. Small steps will lead to huge successes as long as you make your debt repayment a high priority.
Sometimes personal finance can seem complicated, which leads to people being too intimidated to start trying to change their financial outlook. By focusing on these simple steps you can improve your financial state significantly in a shorter amount of time, without losing motivation. Examine where you’re at and where your money is going by taking stock of your various accounts, debts, and expenses. Automate your bills, savings, and investments. Build up an emergency fund of at least $1,000 as quickly as possible, and then begin intensely paying off all your debts. These steps won’t all be able to be completed immediately, but small progress over time leads to the accomplishment of big goals.