Gaining control over your finances isn’t something that happens overnight. It takes a healthy dose of patience, some diligence, and, of course, a little know-how. Like any journey, the road to financial stability starts with a plan. With a financial roadmap in place, you'll be better able to focus on your financial goals and understand what it will take to reach them.
In this series, we’ll explore some basic steps to take across your entire financial outlook. This series isn’t going to cure your financial burdens or magically make your debt go away— but it will give you some of the knowledge that you need to create a plan and put it into action. Our goal is to ensure you have the resources you need to achieve financial security whenever you’re ready to start the journey. There are two main areas we’ll cover today: creating a financial plan and managing your debt.
Creating a Financial Plan
The first step to wrangling your finances is to make an effective financial plan. This can be broken down into four manageable parts:
- Get a clear picture of your current financial situation.
- Create a budget.
- Set financial goals.
- Create a savings strategy.
The goal with this series is not to totally transform your lifestyle overnight and make huge sacrifices: the goal is to gain understanding, to make small changes, and to put lifetime habits in place that can increase your financial stability. Let’s dig into these four components of a financial plan further.
Step One: Get a clear picture of your current financial situation.
The first step to making a financial plan is to develop a clear picture of your current situation. We’re not making a budget yet—we’re just getting a bird’s eye view on your financials.
Grab something to write with and let’s start with the basics:
- What’s your income? Be sure to include other types of income other than wages, such as dividends, interest, and child support.
- Write down all of your fixed expenses—what you need every month. Include housing, food, transportation, and clothing.
- Write down your discretionary expenses—what you usually want every month. This covers things like entertainment, special treats, and hobbies.
- Think about any of your expenses that don’t have a monthly pattern, like holiday gifts, vacations, car maintenance, and others. Add those toward the bottom, away from monthly costs.
- Add monthly expenses together. Multiply those by 12 (the number of months in a year). Add your expenses outside of monthly costs. This is your annual spending.
- Take a second look at your numbers and make sure you included everything. The more you put down on paper, the better.
Step Two: Create a budget.
Armed with your real-life numbers, now you can start crafting your budget. It’s time to set limits or spending goals for each category of spending.
- Go ahead and identify the categories of spending across your year. You can make this as simple or as complicated as you want. For instance, you might consider using a single category like “Food” to include groceries, restaurants, takeout, and drinks. You could also keep these as separate categories—it’s up to you.
- After identifying categories, take a look at what you spent in each category over the year. Does any category make your jaw drop?
- Take any category that makes you feel uneasy and consider it. Could you cut spending in that category?
- Set limits for each category. Resist the urge to cut spending drastically and be realistic. If you need more in one category, consider cutting spending in another.
- Compare your income to your budget. Do you bring in enough money to afford everything in your budget? If not, it’s time to reconsider your category limits.
- Repeat steps 3-5 until you have a workable budget that fits your needs.
- Make budgeting a part of your routine. Set aside some time each week or each month to go over your spending.
The steps above are a very simple outline--there are a lot of additional budgeting methods to choose from. There’s no wrong answer: finding a budget that works is a personal process.
It may not feel wonderful to budget for the first couple of times, but as you move forward with it, you may start to look forward to knowing exactly where your money is—or isn’t—going. This brings us to our next step: goals!
Step Three: Set financial goals.
Budgets can open your life to achieving goals you never thought possible.
Budgets can open your life to achieving goals you never thought possible. ”
Start out by making a list of things that you would like to achieve. It may help to separate the list into two parts: short-term financial goals and long-term financial goals.
Short-term goals should include building an emergency fund or paying off outstanding credit card debt. As for long-term goals, you can ask yourself: Would you like to purchase a home? Save for a car? Would you like to start saving for your child's college education?
Once you have established your financial goals, you'll want to prioritize them. It may not be possible for you to pursue all of your goals at once, so make sure to balance what you need now with what you’ll need later. We’ll incorporate these goals into your budget in the next step!
Step Four: Create a savings strategy.
After you have decided what your financial goals are, figure out how much it will take to achieve each goal. Remember: you don’t need to set aside a large amount of money each month to make a difference. Any amount, no matter how small, starts to add up when you save consistently!
If you have a comfortable emergency fund and little to no debt, you might start to consider investing. We’ll be covering that in our next blog post in this series—watch for Take Control of Your Finances: Part Two.
While you were going over your budget and spending, you may have written down some loan or credit card payments. This is a key aspect of getting your finances getting under control: paying off debt.
Whether it is debt from student loans, a mortgage, or credit cards, it all has the same effect: it’s taking energy, time, and money away from other financial goals. Here’s how to start chipping away at debt:
- Identify exactly how much you owe.
- Make sure your budget includes at least the minimum payments, so you can avoid late fees.
- Can you afford to pay more money towards your debt? You can put these payments toward high-interest debt first, which means you’ll pay less over the long term. You could also focus on paying off as many accounts as possible by putting the payments toward smaller balances. Whatever you choose, make sure you stick with it!
- Consider debt consolidation, especially if it will get you a lower interest rate.
If you find yourself with a lot of debt, it’s often a good idea to make debt repayment one of your main financial goals.
Find a balance between saving and paying off debt.
It’s not always possible to save and pay off debt. It can be complicated, but most experts agree that saving an emergency fund should be your first step. Here’s why: an emergency fund can save you from going into even more debt and paying more interest as a result. The amount of that emergency fund can vary, but it really comes down to this: what amount of money would you need to cover most emergencies, including unexpected time off or job loss? Start with a number that’s small enough to cover a lot of things, but not so large that it would take a year to save.
After you have your bare-bones emergency fund, then you can start looking at your debt. Some find success by saving one month and paying off debt the next; others like to spread equal payments to both every month. However you decide to pay off your debt, make sure it’s not coming at the expense of your emergency fund.
Regain Control of Your Money
When you’re ready to start the journey towards your financial goals, remember these steps. They can help guide you, whether you’re trying to pay down debt, buy a house, or simply feel more secure month to month. The road won’t always be smooth, but making a financial plan will give you a clearer path to follow!
In part two of Take Control of Your Finances, we’ll go over credit cards, loans, and credit history. Stay tuned!