Living paycheck to paycheck? Feel like you’re drowning in debt? I know what you feel like… I’ve been there. It kind of feels like you’re just treading water and not really getting anywhere. And depending on your specific situation, it may actually feel more like you’re sinking. Although it may not feel like it, getting a handle on your finances is something that can be achieved. The following are, in my opinion, the top 5 steps to help you take control of your finances.
Step 1: Improve Your Financial Literacy
The first thing you can do to take control of your financial situation is to improve your knowledge base. You can think of it as equipping yourself with some basic tools. I think everyone would be well served to read at least one basic personal finance book.
Step 2: Take Stock of Where You Are Financially
In order to get somewhere you first need to figure out where you are. In finance, this involves figuring out your net worth. In simple terms, you add up all of your assets and subtract all of your liabilities. What you’re left with is your net worth. This, for some people, can be the most difficult step to take. Who wants to see how much they’re in debt? But it’s important to know how much you have and how much you owe. You can think of this step as the “facing your fears” step. Once you’ve faced it, you can then take steps to overcome it. If you’re having trouble getting things started, there are a lot of net worth worksheets available online.
Step 3: Set Specific Goals
I think of financial goals as the “somewhere” that I alluded to in the previous step. It’s your destination, so to speak. Everyone will have different financial goals. Some will be short-term, long-term, or a combination of both. Your goals should be specific rather than generic. For example, while “save more money” is technically a goal, it’s a bit too vague. Instead, saying that one of your goals is to “save $1,000 over the next five months” is a clear, specific goal. Your goals should also be realistic and attainable. You don’t want to set the bar too high so that you feel frustrated in trying to achieve your goal. “Make one million dollars in the next year” isn’t very realistic (at least for me, but if it is for you then great!). But you also don’t want to set it too low that you feel like you didn’t accomplish anything.
Step 4: Budget, Budget, Budget
This is the part where to track your income and expenses. How fun (insert sarcasm)! Back in the day, you used to have to do this by hand. Now, there are a number of budgeting programs and applications that can automatically track your income and expenses for you. I’m a glutton for punishment so I did mine the old-fashioned way… well, old fashioned in that I used Excel. Creating a budget can be tedious, but it really is the only way to see where your money is going and figure where you may need to cut back, and you’ll need this information when it comes to making a plan.
Step 5: Devise a Plan
If only it were as simple as make money, get rich. This step is where you take all that financial data you’ve just gathered and come up with a plan to accomplish your goals. So if your goal is to save $1000 in five months, then your plan could be to save $200 every month until you reach your goal. Now go over your budget and see where/how you can come up with that $200. You might find out that you spend $100 a week on “entertainment”. Do you really need that much entertainment a week? Cut back on $50 a week and, bam, you have your $200 a month. Once you have a plan in place, it’s important to remember regularly review your plan and revise it as necessary.
So there you have it. Some Random Guy’s five important steps in taking control of your finances. Hopefully they can help serve as a launching pad on your own financial journey.