All of us, regardless of our level of experience with money management, are capable of effectively managing our personal and family finances. You don’t need to be a money expert, but you do need to be willing to put in a little bit of effort and take action when needed.
This article covers seven specific steps that you can follow if you want to take control of your finances and ensure that you’re doing as much as you can to maximize the money that you have.
It doesn’t matter if you’re looking to plan for your retirement, pay off debt, or simply make an extra $1,000 a month to cover your bills, taking action will help you to get started on the right path.
Step 1: Set Financial Goals
We all have different goals for our lives, and this includes our finances. It’s important to know what matters most to you and to set specific financial goals. Those goals will provide direction for you and should impact all of the decisions that you make regarding your finances.
If you haven’t already created your own financial goals, that is the first thing that you should do. I would recommend creating short-term, mid-range, and long-term goals. Your goals should be specific, should be measurable, and should have a deadline.
For example, instead of having a vague goal like saving more money, you could set the goal of adding $3,000 to your savings account by the end of the year. That goal is specific and measurable, so when the deadline arrives, it’s easy to know if you’ve achieved the goal.
Step 2: Track Your Expenses
If you’re not already tracking your expenses, this is something that you should start doing as soon as possible. Without tracking your expenses, you can’t truly know how you’re spending your money. When you track your spending, you’ll know exactly where your money is going.
As you start to track your expenses, you’ll probably notice a few areas that almost immediately stand out. Most of us are surprised to see how we’re really spending our money, and simply by looking at the numbers, you’ll probably be able to quickly identify a few areas where you need to cut back.
You won’t be able to manage your spending effectively if you don’t know how you’re currently spending, so this is an essential exercise.
Tracking your expenses may sound tedious, but it’s really not that bad. You can use an app like Mint or Every Dollar to help with automating most of the process. Or you could create a simple spreadsheet and get in the habit of recording your expenses at the end of each day. Another alternative is to simply use pen and paper to record your expenses each day, and then total everything up at the end of the month.
Step 3: Create a Budget
Your budget will be a big part of the financial plan that you use to help achieve your goals. If your financial goals involve saving, your budget should be set up to keep you on target to hit your savings goals. If your goals involve paying off debt, you should use your budget to help you free up enough money to throw at your debt.
I recommend tracking your expenses before creating a budget because this helps you to create a more realistic budget. If you don’t know how much you’re actually spending in the different budget categories, your guesses are likely to be off, and you may wind up with a budget that isn’t realistic. Your budget won’t do you any good if it’s not possible to stick to it. But if you know how you’re currently spending money before creating the budget, you can use the budget to make reasonable and realistic adjustments to the way you spend.
Again, free apps like Mint and Every Dollar are great options that will help you to create a budget.
Step 4: Increase Your Income
If you want to improve your finances, you have two basic options:
- Spend less and save more
- Make more
Creating a budget and tracking your expenses will help to get your spending under control, but if you’re able to also increase your income, you’ll see a major improvement in your overall financial situation.
When it comes to making more money, the first option is to make more from your job. You could potentially ask for a raise, work overtime, get a promotion, or get a higher-paying job.
If none of these things are possible for you, another option is to start a side hustle. There are countless ways to make extra money outside of a job. It doesn’t matter what skills and experience you have, or what your schedule is like, there will be some options that could be a fit for you.
Making an extra $500 per month may not seem like a big change, but it can make a huge difference when it comes to reaching your goals. That $500 per month would allow you to pay off an extra $6,000 in debt per year, or you could save and invest that $6,000.
Starting and maintaining a side hustle on top of a full-time job will require some motivation and discipline, but millions of people are proving that it’s possible. You could look for a weekend job that won’t interfere with your existing full-time job, find a way to incorporate one of your hobbies into a side hustle, or put the skills that you’ve developed through your job to good use by making some extra money on your own time.
Step 5: Check Your Credit Report and Credit Score
Your credit score can impact your finances in several different ways like your ability to qualify for a loan, the interest rate that you’ll be charged, and even your ability to get a new job.
With that in mind, it’s important to know what your credit score is. You should also check your credit report periodically to make sure that it’s accurate since the details from your credit report will determine your score.
If you’re proactively monitoring your credit, you can address any issues as soon as they arise, rather than dealing with an unpleasant surprise when you’re turned down for a loan.
While there are a number of ways to get a copy of your credit report, the best and safest way is to go to AnnualCreditReport.com. This site is authorized by the government to provide you with a free copy of your report from each of the 3 major credit bureaus (Equifax, Experian, and TransUnion) every 12 months.
You can get them all at once or spread them out. If you spread them out, you can get one every 4 months, which helps to make sure that you’re on top of any issues quickly. If you see anything on the report that isn’t accurate, you can file a dispute with the credit bureau.
While these free reports are great, they won’t include your credit score. You may be able to get your current score through the online dashboard of one of your credit card accounts, or you can use a free service like Credit Sesame.
Step 6: Develop a Debt Payoff Plan
If you have consumer debt like credit cards, car loans, student loans, or other types of personal loans (especially high-interest debt), eliminating this debt should be a priority. Once your debt is paid off, you’ll have much more room in your budget for saving and investing, and you’ll be able to make progress with your finances much faster.
There are several different ways that you can attack your debt, but the two most popular approaches are the debt snowball (popularized by Dave Ramsey) and the debt avalanche.
The debt avalanche involves paying off the debt with the highest interest rate first, while the debt snowball involves paying off the smallest debt first. The debt avalanche makes sense from a mathematical point of view, but the debt snowball is great for seeing quick results and providing motivation that helps you to stay committed. For a much more detailed look at the topic, please see this comparison of the debt snowball vs. debt avalanche.
It really doesn’t matter which approach you choose since they can both be very effective. You’ll want to choose the one that makes the most sense to you and the one that you think will give you the best chance to succeed. The key thing is to choose a plan (regardless of which one) and to implement it.
Step 7: Start Investing
By this stage, you should have a pretty good grasp on your finances. Now, it’s time to look toward the future and start investing. The way that you invest may be impacted by your financial goals, but the most important thing is that you want to take action and get started.
Investing may seem like a confusing or overwhelming topic at first, but once you get a little bit of experience it will make a lot more sense.
You can also take a very simple approach to investing. There is no need to make it complicated. If you want to keep things simple, you could invest in a basic index fund and plan to keep your money there for a long time. Another easy option is to use a robo advisor that will manage your investments for you based on your goals and preferences. And of course, you could also hire a financial advisor to help you create a plan.
If you’re looking to get started, you may be interested in getting free stock from several different apps that offer sign up bonuses. Creating an account at Vanguard or Fidelity is also a great option.
While managing your money can seem like a tall task if you’re just getting started, it really doesn’t need to be all that difficult. By following the steps covered in this article you can gain control over your money and put yourself in a better overall financial situation.