New Years is my wife’s favorite Holiday. I know that might sound a little weird. She loves it thought. She is all about the opportunity to set goals and get a fresh start. And to her credit, she really goes for it. New Year’s Day in our family generally means charts and posters stuck on the fall, checklists, and to do lists added to the fridge, and more. To give her even more credit where it is due, she almost always stays faithful in tracking those goals for the entire year. After watching this process several times, I have to tell you, it works. That’s coming from someone who hates goals. I hate writing out lists, taking notes of progress, all of it. BUT she has converted me. After watching how well it works for her, and how much progress she has been able to achieve by defining and tracking her goals, she has gotten me hooked on the process as well.
It is in that spirit that I wanted to write this post. In the hopes that it may offer guidance to the literally millions of Americans who will be entering the year 2022 with the hopes of making tit the year they finally get better with money. If you are up for a longer read, I would recommend Dave Ramsey’s Total Money Makeover. But, if you don’t feel like taking on an entire book, this post comprises what I feel are the ten simple steps that can help you take charge of your money.
1. Create a Personal Balance Sheet
This step along with step three are going to be the most painful. In the business world, a balance sheet is a list that a company puts together that includes everything they own, and everything they owe. You can do the same thing for your personal finances, and the reason I put this first, is this will help guide you in understanding where you stand, and help you determine what goals you should be working towards. Here is how you do it.
Take a sheet of paper, or an excel spreadsheet and create four columns. Label the first column “assets” and the second column “value”. Now begin the painstaking process of listing out the things you own. That should include things like bank accounts, retirement accounts, houses, cars, businesses, RV’s. I would use the rule of thumb of if something is worth more than $1,000, put it on the list, and include its value. At the bottom, total up all of the values, and you have a figure for your total assets.
Now do the exact same thing, but label column three “liabilities”. This column will include any and all debts that you owe. That can be mortgages, auto loans, credit cards, student loans, and many more. Make sure as you add the values, to include the total amount of the debt, not the monthly payment. Total those up, and you have arrived at total liabilities.
Completing this form will give you an excellent picture of how you stand financially. If you want to go one step further and calculate your net worth, simply subtract your total liabilities from your total assets.
2. Buy Term Life Insurance
If you do not have anyone who depends on your income (spouse or kids) go ahead and skip to step three. If you do have people depending on you, you need to pause everything at this point and click this link to get a quote for term life insurance. I can assure you that term insurance is cheaper than you think, and I can also assure you that it is vital.
Protecting your income by spending $20-$30 per month on term coverage is what can make the difference between leaving your family in financial ruin, and providing them with a long lasting legacy after you are gone.
I am a big enough believer in the stuff that I put it this high on the list, so if you don’t have it, go get a quote. Now. Don’t become a gofundme account.
3. Put Together a Cashflow Statement
Back to homework. If you thought the balance sheet was awful you will hate this step. I called it a cashflow statement for two reasons; first, if I called it a budget you wouldn’t still be reading, and secondly, it is a little bit different than a budget. See a budget would ask you to set limits for all of your future spending to match your income up with your expenses and make sure you didn’t run out of money. A cashflow statement is all about looking at the past.
I don’t want you to make a budget of what you think you. “should” be spending. I want you to compile a list of what you are actually spending. The best way to do this is to open up those bank and credit card apps, and start making a list. Remember to include the cost of the life insurance you just bought! It’s going to take a while to list them all out, but write down what it was, and how much you spent in the last month. I can promise you right now you spent more at amazon than you think you did. Additionally, keep track of how much money you brought in last month. Hopefully, when you total up your income it is a bigger number than your expenses, but all too often that is not the case. Nevertheless, if your expenses surpass your income there is still hope. In order to get your income above your expenses (or to just create more surplus if it already is) steps four and five are designed to make you stretch. The ultimate goal here is to create some surplus income that we can put to work.
4. Choose Three Things You Can Live Without
Everything up to this point has been difficult. Now is when it gets hard. Take a good hard look at your cashflow statement. Now, choose three things on that list that you can either do without, or cut back on. They don’t need to be huge things. Maybe it means one less trip to a restaurant. One less online shopping trip. Doesn’t matter. Just choose three of those things on the list, that you can eliminate from your life. Now, cross those off of your cashflow statement and rerun the totals to see if your income is now greater than your expenses.
5. Create an Additional Income Source
Cutting expenses is not the only way to shore up your cash flow. In the modern world the possibilities for earning extra income are endless. Do a quick google search for side income and see what you get. It could be anything from Instacart to flipping furniture you find at thrift stores. Just decide on something that sounds doable for you and start. If you absolutely abhor the idea of a side hustle then simply take a look around and see if you can pick up more hours at work or get a new job altogether. Add the extra income that you plan to make to your cashflow and see where you stand. If your expenses are still higher than your income you may need to repeat those last two steps a couple of times until you get to a point where you have some extra income that isn’t just going toward your current expenses.
6. Establish a Plan to Pay Off Debt
With your newfound surplus it is time to get to work. The first thing I would recommend is that you take 50% of that surplus and apply it to the debts side of you balance sheet. There are two methods you can use when paying down debt, the debt snowball, where you start by paying off the smallest debt and work your way to the biggest one. Or, the debt avalanche where you start with the highest interest rate, and work your way down towards the lower rates. Doesn’t really matter which you pick, just choose the one that sounds better to you.
7. Open a Roth IRA
Next, open up a Roth IRA account. These are savings accounts designed specifically for retirement that offer some excellent tax advantages. To make a long story short, all of the growth in the account will be tax free forever, so long as you use it for retirement. Once you have an account open, set up an auto draft so that 25% of your surplus is automatically transferred from your bank account into your Roth IRA every month.
8. Set Up College Savings Plans
If you don’t have kids, go ahead and skip this step. If you do have kids, you are probably aware that college is expensive. There are a lot of ways to help keep those costs down when the time comes, but the best thing you can be doing now as a parent is starting to save. 529 accounts are designed specifically for college savings, and they offer the same tax-free growth benefits of the aforementioned Roth IRA, only rather than being used for retirement, the funds must be used for education. Go ahead and open up one of these accounts and set up an automatic deposit of the remaining 25% of your surplus into this account.
9. Create an Emergency Fund Account
You have probably read or heard of one of the many studies that show the shocking portion of Americans who could not afford a $400 expense. Let’s make sure you are never one of them.
Open up an account at an institution OTHER than where your primary checking account is. We want this savings account to be harder to get your hands on than a couple of clicks. This is going to be your dedicated emergency fund and you need to work on getting it up to 3-6 month’s worth of expenses. Any time you get your hands on extra income or bonuses, this is where the cash needs to go. If it seems like you will never be able to get much money into this account, look at step 10.
10. Return to Step 3
That’s right, we are going to do this all over again. Ultimately it is up to you to repeat this step as many times as you want, based on how hard you challenge yourself. I will however give you some words of advice from what I have seen helping people with money for many years. The people I have seen be the most successful with money, are the ones who go hard. That means they really push to see what they can cut from here expenses, and they strive to make every extra dollar that they can until they reach their desired goal. I would encourage you to push that hard, at least until you have that emergency fund fully loaded. Life feels a lot better when you know there is money in the bank.
