Take Control of Your Money: A Step-by-Step Guide to Financial Health
You’ve decided that you are ready to get your financial life in order. Maybe you don’t want to be stressed by your credit card debt anymore. Maybe you no longer want to have the fear of an unexpected expense without an emergency fund to cover it. Maybe you realized that you may never retire with your current savings. Or in light of the current job environment, you realize that your stable job and in demand skills are not as invincible as it once was. How would you manage a layoff and no income for over a year?
Lifestyle creep is real. With every pay increase, you’ve spent a bit more. But you don’t actually know where that money is going and you don’t have anything to show for it.
Here’s a step by step guide to organize your finances:
1. Define your objectives
Think about your short term and long term goals. Your goal will keep you motivated when you are committing to your financial plan and avoiding impulse buys.
Pay off credit card debt - With interest rates for existing balances hovering around 22%, paying off your credit card debt is a fantastic objective to reduce your stress and get ahead financially. Consider calling your credit card company to ask about lowering or pausing your interest for a specific period of time. If you’ve been a good customer with a stable payment history, your card issuer may be willing to help you.
Save an emergency fund - How would you fund an emergency car repair or an unexpected medical bill? How would you pay your bills after a sudden job loss? The job market is incredibly unstable and job seekers are taking months - even years - to secure a job. Conventional wisdom to save 3 - 6 months of living expenses for your emergency fund may need to be extended to one year or more.
Save for a major expense - Do you want to save a down payment for a house? Do you want to take a dream vacation?
Plan for retirement - Social Security is unlikely to provide enough income for your desired lifestyle at retirement. Employers no longer offer pensions. So it is up to you to fund your retirement.
2. Review historical spend
For your annual financial plan to be successful, you need to understand your past expenses, so assumptions in your financial plan are rooted in reality. Otherwise, you may end up with unrealistic expectations that are doomed to fail and discourage you. If past transactions tell you that you spent $300 per month on dining out, it may not be realistic to set a $100 monthly spend in your financial plan.
To get started, download 12 months of transaction activity from your credit cards, debit cards, and bank accounts. This time period allows you to view seasonal fluctuations and infrequent expenses, like annual subscriptions. Sort by merchant name and categorize each spend. Your bank provides categories that you can use as a starting point, but you will need to consolidate categories. For example, Groceries and Food & Dining can be combined into ‘Groceries.’ Restaurants, Fast Food, Food & Dining, and Alcohol & Bars can be combined into ‘Dining Out.’ Sometimes a category, such as ‘Food & Dining,’ can include merchants that rightfully belong in different categories so you will need to categorize based on the merchant name and/or purpose.
3. Calculate average spend by month per category
Create a spreadsheet with these categories in a column. In the next column, add the average monthly amount that you spent by category, such as:
Housing
Mortgage/Rent
Property tax (if applicable)
Insurance
Security monitoring
Maintenance
Utilities
Electricity
Water/Sewer
Heating Gas
Internet
Mobile phone
Auto
Loan payments
Insurance
Gas
Maintenance
Food
Groceries
Dining Out
Entertainment
Subscriptions- List each streaming subscription separately
Other entertainment- Include live event tickets, sport event tickets, etc.
Other
Gym membership
Club membership
Medical - Includes deductibles, co-pays, etc.
For a majority of these categories, the amounts stay the same every month until the contract renews. These averages will form the basis for your financial plan.
For those categories with bold italicized font, go to step 4.
4. Estimate variable expenses
You have more control with how much you spend on variable expenses. This presents an opportunity for you to be mindful of how much you spend each day or week.
We will cover this topic in greater detail in this blog series.
5. Negotiate / Eliminate expenses
As you review your expenses, you may find easy expenses to eliminate - gym membership you don’t use or subscription that you forgot about. Take care of those first. Then, you have necessary services that renew monthly. Research those expenses and call customer support to negotiate lower rates. For those that renew annually or later, keep a list of contract renewal dates. I have a notecard with contract renewal dates tacked to the whiteboard in my kitchen. Finally, you have the expenses that require more time and effort - refinance loans or move housing. You can address those when the right opportunity comes up.
We will cover this topic in greater detail in this blog series.
Update the spreadsheet that you created in step #2 with the new negotiated rate or delete the row if you eliminate the expense!
6. Build your financial plan
You now have all the inputs to build your financial plan. Start a spreadsheet with your categories in the first column and planned monthly spend in the next column. Subsequent columns are where you will input your actual spend each month so you can track how you are doing against your plan. I like to add an average column at the end so you can track how you are doing for the year so far. At the bottom, you will subtract your total spending from your total monthly income. Hopefully, it is a positive number that you can use for your objectives in step #1.
You can use this template to start.
7. Track your actual spending
At the end of each month, input your actual spending by category and compare it to your plan. If you overspend in a category one month, you can reduce your spend next month. Maybe you splurged on a birthday dinner so your dining out spending was unusually high this month. That is ok! We still want to enjoy life, while managing spend fluctuations. My family also limits grocery spending for some weeks and focuses on eating what we have in the fridge, freezer and pantry. It is amazing how many meals we can make with ingredients that we already have.
It will take some practice to remember your plan and update your habits. Watching your credit card balance go down or your emergency fund go up will feel really good. Pretty soon, you won’t even need to think about your plan and you have built a new habit to spend thoughtfully.