Normally this type of article runs in mid-January, when the holiday credit card bills bump in and many of us have that ugly moment of financial panic. It’s like stepping on the scale for the first time in years, being shocked by the number we see, and running (or waddling) to dust off that old gym membership.
This year I decided to try something different and encourage people to take control of their personal finance picture before the holiday spending. For many, holiday expenses actually start in October as Halloween has become one of the biggest, and most expensive, nights out for many Americans. So here’s your step-by-step protocol for turning your financial life around, starting today, and it involves building a process for financial success. A reliable process will help you get good results.
To figure out where you’re going, you need to first know where you are. The two qualities you need for this step are honesty and thoroughness. It’s always a surprise to me how often people lie to themselves about personal finance and expenditures, either deliberately or through oversight. Don’t forget the little things, like a gym membership fee that comes directly out of your paycheck. Yes, that counts as an expense! Just because you don’t see the money doesn’t mean you’re not spending it.
Step one thus entails creating a spreadsheet with all your debts and contractual obligations. That would include credit card payments, student loan payments, rent or house payment and your phone. We’ll add more later but just keep it simple at first. Use a spreadsheet to do the figuring, like the one included in GoogleDocs, with the bonus that your work is automatically backed up online. For each deb,t enter the due date and the payment amount. In a separate column list your income and paydays. This step is letting you start visualizing your cash flow. You can see your expense and debt obligations, payment amounts and the due dates and how those line up with your paychecks. Money in, money out. Simple, right?
Now, the Hard Part
It’s easy to visualize your contracted obligations and paychecks, but many of your expenses every month are not fixed, like your grocery bill, gas and entertainment, including meals out. The next step involves creating a new spreadsheet that accounts for every penny of your spending. That means every single penny. There are phone apps that can make this task easier. The reason it’s important to track your spending to the penny and do it for years is that in the next step we’ll need to free up some cash, and those pennies that slip through your fingers are where we’re going to find it. That’s why you need to include every single expense, no matter how small. Do this for at least three months.
A Pattern Emerges
The reason you track your expenses for three months is to establish a trend. When you start tracking expenses you’ll be self-conscious about it, and just by noting the amounts your spending habits will change. It usually takes a couple of months for your spending to stabilize. With three months of data you start looking at areas where you can save. Software subscriptions, your cable bill, your food bill and your phone bill are all places you can start looking at what you’re really spending—and start thinking about where you can keep money instead of giving it away.
Having the data will lead you into the Valley of Hard Choices when it comes to your spending. Spending too much on eating out? There’s an opportunity for savings. The idea behind analyzing your spending is to free up cash so you move onto the next step.
Building Your Emergency Fund
The first bill to pay with that cash you saved is your emergency fund. Your extra money goes there first, until you have $1,000 for emergency medical expenses and car repairs.
Now Start the Snowball
Okay, you have some savings and now you’re ready to start tackling your debts. Credit cards are a good place to start because those are typically your most expensive debts. Start with the cards that have the smallest balances and store credit cards. Once a card is paid off, take the money you were putting towards that payment and add it on to the payments you’re making on the next-highest-balance card, and so on. By the time you get done you’ll be throwing a lot of money at debt payments every month, saving yourself a ton of interest fees.
Once you have a those debts falling like dominoes, then it will be time to start learning about investments, which we’ll save for another column. Misery loves company, so Reddit’s personal finance forum can be both a source of support, advice and encouragement.