Let’s say you are completely new to getting your financial house in order and have no idea where to start, or just need a gentle reminder to get back on the right path.
1. Get yourself cash flow positive.
This one is simple. The amount that you are taking in each month needs to be more than what you are spending each month. Consistently. We all have 1 off emergencies (see emergency fund below!) but that not what this is about. This is about your lifestyle month in and month out. Do you know what you spend? Does checking your account balance necessitate a glass of wine? Are you all too often relying on credit cards? Step 1 is to take an honest assessment of what you are spending each month and make sure that it is less than you are taking in each month. If it’s not, it’s time to cut – make alternate plans and/or increase your income. We could list out all the basic tips to cut back but let’s be honest, you probably know where you are overspending. Remember, cutting back for now, doesn’t mean cutting back forever. If you truly can’t cut back on your lifestyle (less shopping, less eating out, living alone) ask yourself: would I get a 2nd part time job to continue this lifestyle? The choice is yours. And hey, perhaps looking at your current income and the lifestyle you want is the motivational push you need to seek out that higher paying job.
2. Start saving each month.
Start small. But start. Maybe it 1% a month, maybe its 10% – but you need to start. Again, consistently. We are going to be saving for 2 things here initially: first your emergency fund, second your retirement account, especially if there is any type of employer match. These are both key so I would suggest taking the amount you are able to save now and splitting between these 2 goals. Even if you are starting small, it’s time to start. From there, you can pick up momentum. Anytime you get a raise or any unexpected cash inflow (tax refund, gifts, etc.), you need to put at least a portion of it into savings.
3. Build an emergency fund.
Not to burst bubbles here but 3 months isn’t enough. 6 months is questionable but a fair goal. We are talking enough to get you by if you suddenly lose your job, if the economy takes a downturn, if worst case scenario strikes. 3 months is barely enough to get your resume in the door and a 2nd interview down. You really need to aim for 6, then 9 and maybe even 12 months of income. 9 and 12 can come later. For now, we are aiming for 6 months. The idea is you want to feel comfortable – you want to build a real cushion. 1 little secret? It doesn’t have to be exactly what 1 month of spending looks like for you now. If you are really in crunch time Im guessing, there are some things you can pull back on: morning lattes? Cleaning service? Premium cable? Challenge your current list of “needs” for these temporary windows. The end goal here is to keep building until you have at least 6 months in an emergency fund.
4. Progress to debt free – for the most part
Yes, you are reading this correctly. This comes on the list after building an emergency fund. Im sure this is somewhat controversial but getting out of debt takes time and in my opinion, comes second. Set yourself up first. Then get yourself out of your prior choices – good (college loans) or bad (store credit card.) Let’s assume that you are at least paying the minimums on any debt that you carry. This step is about getting more serious about an out of debt plan. Once you have your 6 months in your emergency fund and are contributing to your retirement account, it’s time to redirect the savings that was building your emergency fund to pay off debt. When you hit the point where you are ready to begin, it’s important to prioritize debt by the highest interest rates. These are generally the ones that you are going to want to pay off first with a few exceptions. When you get to this point it’s best to put together a full debt pay off plan and follow a specific roadmap.
Alright, there it is – 4 simple steps to ensure you are well on your way to sound financial decisions and planning. Don’t jump to worries of step 4 or even more advanced financial concerns down the road – simply start with step 1 and build from there. You’ve got this!