4 Steps To Take When You’re Starting To Get Your Financial Shit Together
Taking control of your finances is exciting and powerful. You’re about to take a big step in improving your life. While it may be a new chapter in your life, it can also be an overwhelming and intimidating one… at first.
Cut back on uncertainty and start working on your financial situation in an effective way when you follow these four steps.
Assess Your Current Financial Situation
So, you’ve decided you’re ready to get your financial shit together. Congratulations on this huge step forward in your life.
The first thing you need to do is assess your current financial situation. That means taking stock of these numbers:
Income each month: How much money are you bringing in each and every month? This can include:
Your normal 9-5 job
Any side hustles you have
Anything you sell
Alimony
Child support
Any money that comes into your bank account during the month.
Bills each month: What reoccurring bills come out of your account each month? This can include:
Rent/mortgage
Heath insurance
Car insurance
Life insurance
Electric
Water
Internet
Cell phone
Minimum debt payments
Car note
Anything that you need to live your life.
Debt owed: The biggie. This is never fun, so I’m sorry. You need to figure out:
How much debt you owe
When those payments are due
What the interest is on each of those debts
Make sure you have all of the logins securely saved so that these accounts are easily accessible.
Credit Score: Credit matters. A good credit score gives you access to better interest rates and lower payments. Not only that, but some employers check it during the interview process and a low credit score can impact your ability to rent.
Your credit score is between 300-850 and calculated by 3 credit bureaus, Equifax, TransUnion, and Experian.
720+ = excellent credit
690-719 = good credit
630-689 = fair credit
629 or below = poor credit
Knowing this important number will allow you to start working on improving it.
Net worth: Net worth is super simple. You calculate your net worth by adding your assets up and subtracting them from your debts. The goal is to get your net worth in the positive and is a good indicator of your wealth.
Your assets can include: cash, home equity, car equity, jewelry, collectibles, all investment accounts, anything you have worth value.
Your debts can include: student loan debt, credit card debt, home debt, car debt, anything you owe money on.
Amount invested + 401k match: If you’re contributing to your investment accounts through work, how much are you contributing per month? What is the company match? Do you have other investments in a Roth IRA? These are things you need to know and have to know to calculate net worth.
This step will more than likely take the most time. It’s not a five minute project if you’ve never done this before, but it is extremely important for you to know these numbers.
Give yourself a week or two to gather this data so you can assess your current financial situation.
Track your spending
Tracking your spending is not the same as budgeting, but it is the first step to working your way towards it. I always recommend doing this before you jump into budgeting.
Track your spending each day for a month. See where the patterns are, where you’re overspending, and where you’re not spending as much as you thought.
You can write your spending each down in a notebook or download Mint and track it on your computer or phone. I don’t really care what you use to track your spending, as long as you do.
This will be a real eye opener into where your money is really going.
Lower your cost of living
Once you know your numbers and begin tracking your spending, you’ll have a great idea of where you need to cut back. Before you start limiting things you enjoy, look at the not-so-fun things.
I’m talking about car insurance, cell phone, internet, car payments, and things you don’t really get a huge amount of joy out of. I’d rather lower those expenses than my eating out budget.
Like step 1, this will take a bit of time, but it well worth it. I do this once a year, usually in January. I assess where I can get a better deal, negotiate with current providers, or cut subscription services I no longer need or use.
When you cut your cost of living, you have more room to reach your financial goals.
You can read here for more info on negotiating bills.
Prioritize an emergency fund
The first thing you need to do after you figure out where you are in your financial journey, is create an emergency fund.
With inflation, higher cost of living, a recession, a bear market — it’s so important to cover your own ass… and a great way to do that is to have cash on hand.
I recommend starting with at least one month of bare bones budget. That should include:
Housing
Utilities
Minimum payments
Transportation
Food
For me, that’s about $3,000 per month. Your amount will depend on your geographic location. Someone living in New York City won’t have the same emergency fund amount as someone living in Branson, Missouri.
Having an emergency fund ensures that when something shitty happens, you can take care of it without it putting a financial strain on yourself, in addition to the emergency you’re dealing with.
It also prevents you from going back into high-interest credit card debt or getting yourself into an awkward situation with family.
I recommend saving your emergency fund in a high yield savings account. I use Ally.
If you follow these steps, you’ll be well on your way to making headway toward your new financial future. Let me know how it goes!