We’ve made it to the end of Financial Literacy Month! Now we’re asking you to spend the next month working on your financial life. Using all the tips you’ve learned throughout April, how many of these money goals do you think you can achieve?
Step One: Committing to Change
It’s simple. The first step to a better financial future for you and your family is commitment. Start by examining your philosophy about money management. Be prepared to take responsibility over your finances and watch as the benefits roll in.
Step Two: Assessing Your Finances
The second step is to determine your financial situation. What are the areas of your life that are financially thriving? What are the areas that could use more attention? This is a broad assessment of your finances. We’ll get into more detailed expense tracking later.
Step Three: Organizing Your Financial House
Now here is where we start to get technical! It is absolutely essential that you be an organized and diligent bookkeeper of your personal finances. Start by collecting all necessary financial information like debts, mortgages, car payments, loans, investments, etc. Anything that brings money in or sends money out, you want to document it for an accurate picture of your financial status. Organization is key!
Step Four: Cleaning Your Financial House
Get copies of your credit report from all three major credit bureaus: Equifax, Experian and TransUnion. To get your free report, simply visit annualcreditreport.com. Consumers get one free credit report from each agency annually. Once you receive your reports, review them for errors and fraud. You can dispute any inaccuracies directly with the bureaus and potentially increase your score by doing so.
Step Five: Calculating Your Net Worth
Financial education isn’t just for those with large net worths. If you have an income you can calculate your own net worth too. All you need to do is compare what you owe (liabilities) and what you own (assets). For example, if you own your car, that would be an asset, and if you pay student loans or other kinds of debts, those would be your liabilities. Now that you have an honest assessment of your current financial standing and know your net worth, you can begin to dive deeper into your finances.
Step Six: Needs vs. Wants
Make a list. What do you NEED to pay for no matter what? Food, housing, clothing, health care, transportation, are some of the most common needs. What do you WANT? Things that aren’t required for you in your daily life like jewelry, entertainment, nonessential commercial goods, and so on. Once you have your list you can start budgeting!
Step Seven: Track and Reduce Your Spending
If you haven’t been already, you need to start a spreadsheet or other tracking method for your spending. This helps you quickly and easily identify where your money is going and where you can afford to spend less. There are three kinds of expenses you can separate your spending into . . .
1) Fixed expenses: which stay the same every month, like rent or car payments.
2) Periodic expenses: these expenses are not always the same amount, and do not occur regularly. An example of a periodic expense would be things like vacations.
3) Variable expenses: groceries, clothes, gas, etc. Items that fluctuate individually in price and varies each time you purchase said product or service.
Once you have your beautifully organized expense sheet, you can start targeting areas where you might be able to save money. Fixed expenses are the most difficult to change, so focus on your periodic and variable expenses. Could you vacation during the off season and travel more affordably? Can you shop at consignment and thrift stores to get your wardrobe at a discount? Be honest with yourself about where you can cut back in your expenses and then start doing it!
Step Eight: Budgeting and Setting Financial Goals
No one wants to give up their daily coffee order or skip a vacation, so don’t think about budgeting as a punishment. One way to budget is by setting financial goals. So instead of thinking about what you’re losing (that delicious oat milk chai latte from your local cafe), focus on what you will gain by putting that saved money towards your financial goals.
When budgeting and setting goals you need to determine the specific cost of your goal and a desired target date. What is something you've been wanting for a long time? Do you want to go on a nice, long vacation this year? Do you want to pay off all your credit card debt? Do you want new patio furniture for your house? The target is up to you, and you can always save for more than one goal at a time, but we recommend starting with an attainable short-term goal first to get started.
Step Nine: Pay Down Your Debts
If you remember one of our earlier posts this month we talked about debt management. There are two popular methods that people use to pay off debt. The first is to pay off the debt with the smallest balance, and then keep moving to the next smallest debt until all debts are paid off.
The second popular method is to repay the debt with the highest interest rate. This method will save you the most in interest charges over time. Choose whichever option is best for your personal financial situation and makes the most sense. Remember you can always change strategies if your circumstances change.
Step Ten: Plan for Emergencies
An essential part of your financial goals should be saving for emergencies. It is recommended to have three to six months living expenses saved in case of emergencies like job loss, economic downturn, or any unforeseen incident that would cause you a significant financial burden.
Now that you have begun to adapt these changes into your financial routines, you have the skills and knowledge necessary to ensure a successful financial future.