We all know the old adage that “money doesn’t grow on trees”, but I have met very few people that take an active role in managing their finances. This brief post is intended to be a starting point for anyone that wants to better themselves financially.
Know where you are
The first, and most important, step in improving your financial situation is to understand exactly where you are today. Once you know the details of your current situation, you’ll be able to plan for making improvements.
While everyone understands that major components of your financial health are you current income, your current money on deposit, and your current debts. But, there is more. Anyone that is paying attention to their financial health should be able to answer all of these questions:
- What is my credit score?
- What is contributing to that score?
- How can I improve it?
- How is my credit score hurting or helping me?
- How many credit cards do I have?
- How many do I carry balances on?
- What are the interest rates that I’m paying on my credit cards for carrying balances?
- What are the interest rates on my bank accounts?
- How much am I spending on eating out every month?
- How much am I spending on “little things” every month (like buying a coffee in the morning instead of making one at home)?
Know where you’ve been
Is your current state of financial health better than it has been in the past? The same? Worse? If you’re currently just “treading water” like so many are, then a few small changes can help start making improvements. If you’re trending downward, then you may need to make more changes or make larger ones to correct things.
If you are continuing to increase your total debt over time, even if it’s happening slowly, you’re on the wrong path. Conversely, making slow progress toward reducing debt works in your favor and is helping you make things better.
Do you understand how your spending has changed over time? Do you understand why it has changed? If your spending has been increasing, is it absolutely necessary spending?
What is truly necessary?
If you genuinely want to improve the health of your finances, you have to be completely honest… with YOURSELF. You can’t make excuses or justify ANY spending – you have to admit when things you are spending money on can be eliminated. You need to think of the exchanging of money as a game, and you need to be out to win. Merchants and retailers are doing absolutely everything in their power to get your money. You need to arm yourself with a strategy to prevent this.
Taking necessary steps
Step 1: Review your spending at a detailed level. You need to involve everyone in the household and go through every bit of money coming in and going out. Review paystubs and bank accounts for income as well as detailing out every expense you have. Rent, electric, gas, food… Sure, these all count. But, so does your morning coffee and bagel, eating out at lunch, buying a candy bar, or getting a bag of chips out of the vending machine.
Step 2: Make a budget. This is where everyone seems to get overwhelmed, but it really isn’t that hard to do. Don’t try and create a budget for the future – create it from the past! You already have details about spending you’ve done previously, so use that as your starting point.
Step 3: Look for items that can be reduced or eliminated. If you go to a coffee shop just twice per week and get a coffee and a pastry for breakfast, you’re easily spending $10 on those items each week. And, while you may not WANT to remove those from your routine, you HAVE to. I promise that it isn’t the end of the world. Instead of spending $40/month on those two trips per week, buy a quality insulated travel mug (I like the Contigo West Loop ones) and make your coffee at home.
Speaking of coffee, get rid of the K-cups, too. I much prefer making drop coffee with grounds which is MUCH cheaper to do and creates far less waste for the landfill. Coffee grounds and the paper filters can go right into a compost pile if you have one!
Step 4: Learn your credit score and monitor it. Many credit cards will provide you access to your actual credit score and there are additional web sites and apps that can even provide you with a better understanding of details of your credit history and how it’s hurting or helping your financial health. What’s more, some will even go further to make recommendations to improve your score.
Step 5: Improve your score. Track your credit score over time, look for things you can do to improve it, DO THEM, and make your score better.
Step 6: Take advantage of your improving score to improve your financial health. Some things, like car insurance, are priced based on your credit score. Be sure to regularly shop around for car insurance and other similar items to be certain you are always getting the best price. Do not be afraid to switch companies! Companies rely on you being uncomfortable about switching to a new company and raise your costs. Be sure you always know what your business is worth to the competition and don’t be afraid to move to a new company or ask for more discounts from your current one.
Step 7: Use someone else’s money when you can, but know the costs of doing so. “No interest financing!” “No downpayment!” “Rent to own!” Be careful out there… As I’ve already said, it’s a game and you need to play to win. You have to be able to see through all of double-speak and misleading information to protect your money.
Is the store charging you a fee to pay with your credit card? Pay cash instead. No fee for using the card? Ask if they offer a discount if you pay cash. Pay the credit card off in full every month. Every. Single. Month. Do not view a credit card as anything but a convenience tool – it does NOT provide you with more money in your bank account, so be sure you use it that way. Make certain you are keeping track of your spending at every turn and know your balance at all times.
Step 8: Skip all non-essential spending. That means going without something that you don’t need and postponing absolutely necessary purchases as long as you can. Have an older car that needs some work done to keep it safe and operational? If you use a private mechanic that’s trustworthy, odds are they will keep your car running for far less than what it would cost you to replace it.
Step 9: Know the true cost of something. How much does it cost to buy a car? Wrong. It costs car + sales tax + registration + excise / property tax + insurance at a minimum. The total cost of buying that new(er) car can easily be 10-15% higher than the price of the car itself. It’s necessary to understand the total cost of something before you can honestly decide whether buying that item makes financial sense.
Step 10: Have goals. Know exactly what it is that you are focused on achieving and be certain that everyone in the household is aligned with those goals. You should be focused on things that are within your control that you can change in the coming 30, 90, 180, and 365 days. And you should be evaluating and re-assessing these timeframes every 30 days.
Summing it up
Everyone’s current and desired state of financial health is a bit different. There is no one way to do any of it or any one set of goals that works for everyone. The only common items are that the only one that improve your financial health is YOU. Take the initiative and start making yourself a better tomorrow today.
I will be publishing additional items around this topic that go into more details. Be sure to subscribe so that you are notified of when they get published, and thank you for reading!
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Move on to the next article in this series by clicking here: Finances 101 – Part 1: Getting Started
Comments
Well written Mark. Posts like these are needed. I am amazed at the number of people who weren’t taught personal finances from their parents or in school and make poor financial decisions. #10 is a good reminder for me, we have goals but I don’t sit down and review our progress with my family as often as we should.
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Thanks for the kind words, Ben.
No one that I know was ever taught anything about finances, including myself. It was covered in school and I honestly don’t remember being “taught” anything specific by my parents. The only thing I ever remember my mother telling me was how they created a budget by using envelopes. The paycheck would get cashed and they would make the necessary weekly contribution to the various envelopes so that the money was there at the end of the month to pay that bill.
Even for me, much of the information I shared here came through learning it first-hand. It wasn’t easy, and it took time. And I also benefitted from working in Sales and having a couple of very good years to help with some additional income that wasn’t planned for. I plan to draw this whole thing out into a series to drill down into much more detail and share more about what I learned.
Awesome, I am looking forward to seeing more in the series!
Well, now you know one person who was taught finances. When I was in 6th-grade, my dad showed me how to keep a ledger, a budget, and taught me how to use Quicken (for DOS) to track my transactions–and I still use Quicken today. He taught me Biblical stewardship and instilled in me how to make wise choices in the long-term. As a result, I quickly realized a $1400 mortgage payment was actually less expensive than a $1200 apartment in the long-run …when you consider at the end of 30 years I’ll have a rent-free house instead of continuing to pay rent (at likely a much much higher rate) forever. Risk can be rewarded and the longer your time frame the more likely you’ll come out ahead so stocks are usually a good long-term investment, etc.
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Rent vs. Own is always touted as “it’s better to buy”. But, there is actually a LOT of math that goes into determining the best answer.
On the surface, it is easy to justify mortgages being the winner because you have an asset with value after some number of years that you can sell and recoup some of your costs. But, here’s a couple of things to think about as part of that:
– What do you do with the “leftover money” every month if you rent? If you can afford a $1400 mortgage and rent would be $1200 (using your example numbers), what happens to that $200 in your favor? Are you putting it into a savings account? Investing it? What’s the annual yield on that amount? At the end of a mortgage term, this would ALSO be an asset.
– Are you factoring in your annual real estate taxes as part of your expense for the house? Maintenance costs?
– When you’re evaluating the sale of the house, are you accounting for the 6% in commissions you’re paying out as the seller? What about a 5-10% cost to get the house in sellable condition with repairs or similar?
There are a lot variables that go into evaluating the two options to determine which actually makes better financial sense over different lengths of time. And it has taken me owning two different homes, in two different states, and dealing with two different levels of “updates needed” with each to better know where money goes when homes have advantages or disadvantages in certain areas.
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Wanted to let you know that A) the next article is published if you haven’t seen it yet and B) I’ve finally had the ten minutes necessary to add a Subscribe option so that you’ll know about new articles automatically. 🙂