Money is one of those things that stress people OUT. Did you know that it’s one of the number one causes of divorce? Whether you’re married or single, personal finances can cause some serious friction. As I write this, the stock markets are plunging and the outlook for the economy is looking bleak as people practice social distancing for COVID-19. Many people are going to be out of work for the next few weeks. Others are losing their jobs entirely. Now more than ever is a good time to review your finances and make sure you’re headed in the right direction. Most likely the question of how to get your finances under control is at the forefront of your mind.
I think one of the main reasons financial planning stresses people out is because they’re worried that they’re doing something wrong and just don’t know it. What if I told you that there are steps you can follow to get your finances under control so that, even if you haven’t made it to the last step yet, you will feel confident and expectant in your financial life? Sounds amazing, right? Sometimes just knowing where to start and how to take the next step is all you need. Today I’m sharing 11 steps you can take to get your finances under control.
As a side note, I’m sharing information I’ve gleaned from other sources and tips and tricks that have worked for me personally. I’m not a financial advisor and it’s always a good idea to talk to a professional before making important financial decisions.
11 Steps to Get Your Finances Under Control
Step 1: Start tracking your spending
The very first thing you need to do is figure out how much you’re spending and how much you’re making. It’s almost impossible to have a healthy financial life if you’re not doing this first. Thankfully there are a ton of great websites and apps that help you do just that. My favorite free budgeting website is Mint. We currently use YNAB, which we love. It’s a little pricey, but you can try it out for a month to see how you like it. If you’re a student then you can try it out for a year for free.
But even if you use a pen and paper, the important thing is tracking your income and expenses. The big thing is that you want to make sure you’re not spending MORE than you earn. From there, you can create a budget for yourself to plan out your expenses and reign in ones that are getting too carried away. Dining out is always a tricky one for us!
Step 2: Figure out your net worth
Your net worth is the amount of money you have (or owe) after you add up all of your assets and all of your debt. The goal is to have a positive net worth trending upward. When you have a lot of cash in your bank account but also a lot of loans, it’s tempting to feel like you’re doing GREAT financially and start spending money unnecessarily, when in reality you’re severely in debt and in the red. Tracking your net worth gives you a clear picture of where your finances really are. You can read more about that (and get my free net worth tracking sheet) here.
Step 3: Create a starter emergency fund
Do you have an emergency fund separate from your regular checking account? This is so important to help prevent you from getting further into debt. Emergency funds are reserved for things like unexpected car repairs, unforeseen medical bills, or losing your job. If you have a lot of high-interest debt, sometimes it can be a good idea to create a small emergency fund of at least $1,000 before you throw any extra you have at debt. It doesn’t have to be exactly $1,000, although that’s what Dave Ramsey recommends. Save whatever you’re comfortable with and makes sense for you. It could be more!
Step 4: Pay off high-interest debt
Once you have a starter emergency fund saved, paying off high-interest debt needs to be your number one goal. It is the biggest threat to your financial health and easily grows out of control. High-interest debt is usually for credit cards, but it could also be things like a car loan or medical bills as well. It may include student loans. Many financial experts state that anything with an interest rate of 8% and above is considered high, so you’ll have to use your discernment here.
If you have more than one high-interest debt, it can be tricky to figure out which one to pay first. Some people pay off the one with the lowest balance first and work their way up from there. Another great way to decide is to pay off the one with the highest interest first, which will save you the most amount of money in the long run.
If you’re anything like me, you want to know WHY you should do something. People have written whole books on why you should pay off debt, but I’ll just give you a couple of quick reasons here:
5 quick reasons to pay off high-interest debt:
- Being in debt makes you prone to more debt – If you have high monthly debt payments, it can be difficult to pay for other things that come up, which means you’ll have to take out more loans
- It can be almost impossible to get out of high-interest debt just by making minimum payments alone
- It eats away at your net worth – if you have $5,000 in credit card debt with a 20% interest, you’ll be paying $558 just toward interest in one year
- You also have the opportunity cost of what you could be investing instead – for example, if you put $100 into the stock market instead of toward debt payments, your money could be earning you 9% every year rather than costing you 20% every year
- Your credit score will go up – which makes it MUCH easier to get a good deal on a mortgage if buying a house is in your future
Step 5: Start saving for retirement
I’ll be honest. At 30 years old, saving for retirement still feels like something that I should be able to put on the back burner. I’m more concerned about buying a house than saving for retirement! But with longer lifespans and increasing healthcare expenses, saving for retirement is SO important. And the sooner you can start saving, the more it works in your favor. Check out this article from Vanguard that lays out the benefits of starting your retirement savings early.
I know it can be overwhelming deciding where to start and how much to save. If you’re not currently saving anything at all, the first thing you should do is see if your employer has a company match. If it does, contribute at least the minimum amount needed to get the full match. That’s free money! If you don’t have a company 401k or equivalent, look into opening an IRA or Roth IRA. I promise they’re much easier to set up than you’d think!
Step 6: Build a full emergency fund
So you’re tracking your expenses, know your net worth, have paid off your high-interest debt, and have started saving for retirement. Honestly, you’re killing it! Next up is building a full emergency fund. An emergency fund is there to ease some of your money anxieties and give you a financial buffer from the world. Most financial experts recommend saving 3-6 months of expenses in an emergency fund, depending on your circumstances. You can read everything you need to know about emergency funds here.
Step 7: Pay off the rest of your debt
If you haven’t finished paying off student loans, car loans, or any other loans with a “low” interest rate, now’s the time to do that! At this point, you’ve dealt with your most dire financial situations: you’ve paid off the high-interest debt, started preparing for your future to maximize compound interest, and created a financial buffer between you and the world. Now you get to pay off the rest of your debt (except maybe the mortgage) so you can maximize your future paychecks. By now you should have lots of experience in working toward your financial goals, so it probably won’t be quite as overwhelming as when you first started to get your financial life in order. You’re doing amazing, and paying off all your debt is going to feel so good.
Step 8: Maximize retirement savings
You’re debt free! Congratulations. This is huge. Now that you are, you want to throw as much as you can toward retirement savings so that you can get the greatest benefit from compound interest as possible. This will look different for everyone. You’ll have to use your best discretion to figure out what maximizing retirement savings looks like for you. Utilize some calculators to figure out what you think your income needs will be in your retirement. If you’re just really killing it financially, a goal to shoot for is to max out your contributions to your 401k and IRA. The most you can contribute to a 401k as an employee is $19,500. The max for an IRA is $6,000. For most people, that’s more than they can realistically save for retirement each year, but it’s a worthy goal to work toward.
Step 9: Pay off your mortgage
If you’re like me, this step seems so far in the future that it almost doesn’t even make sense to think about and can be a little discouraging. Take heart; you’ll get there! Once you’ve paid off all your other debt, have a full emergency fund, and are saving for your retirement, you can put your extra money toward paying off your mortgage. Think about how much more money you’ll have in your monthly budget without your mortgage payment or how good it’ll feel to have the financial security of owning your home outright.
Step 10: Invest
A lot of times we have this nagging sense that we should be investing much sooner than we actually should. In reality, your finances will be in much better shape if you wait to invest until you’ve taken care of all the previous steps first. Once you are ready to invest, take a look at this book. I found the info in it so helpful!
I should mention that some people like to start investing before they pay off their mortgage. The reason for that is usually the interest you would be paying on your mortgage is lower than the interest you could be earning from investing. Emily Thomas has a great post about that and shares their family’s own mortgage plan here.
Step 11: Be Generous
I list this as the last step because this is the most exciting thing about being in such great financial health. My hope is that you would be generous throughout your entire financial journey, though it will look different in Step 2 than it does in Step 11. It’s popular to grumble about rich people for being selfish with their money right now. Let’s be people who remember how abundantly blessed we are and share what we have.
The point of all this
My hope in writing this is not that you will feel burdened or defeated, but that you will have a plan for moving forward. Just knowing if you’re going in the right direction can be such a relief. You’re probably not going to get there this month, or maybe even in the next 10 years. But making some small choices now will set you on the right path for financial health and give you one less thing to worry about when times are tough.
What excites you most?
Leave a comment and let me know which step you’re most excited about getting to.
