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!
Move on to the next article in this series by clicking here: Finances 101 – Part 1: Getting Started