Before writing about personal finance, I was terrible with money. Impulsive, unorganized, and not really thinking about the future.
I would satisfy my own selfish desires by buying whatever I thought would make me happy in the moment and whatever newest gadget my friends were raving about.
It was no big deal. I could pay cash at first. Then the purchases became larger and I got some credit cards that I could use. I would pay them off at the end of the month with my next paycheck.
The money from my paycheck went toward something else and then more went on the credit cards, but I was still making minimum payments so it was no big deal. Out of sight, out of mind.
Add a car payment into the mix, then a wife and two kids as well as a mortgage.
Houston, we have a problem!
I think that a large percentage of personal finance bloggers were in the same situation at one point in their lives. It takes coming to a crossroads and making a huge decision to change your financial life for the better.
A huge part of changing your financial life is changing your financial habits and the way you look at money.
Your financial habits, just like any of your other habits were not formed in a single day or week and it will take longer than that to change them.
My wife and I ended up climbing out of this pit of despair the best we could. We did research, developed a plan, put our grown up pants on and made it happen.
I wanted you to know that I have gone through it myself because I want you to know that I understand how lost you probably feel right now. If you are literally drowning in debt that has been building up over years and now you are finally ready to do something about it, you are probably lost.
I felt like I was in a pitch black room feeling around for a light switch so I could find a way out.
After a ton of research, discussions, and trial and error, I find my light switch. That’s why I am going to share with you the “7 everyday Steps To Understanding Your Money”.
1. Understand The Why
If you don’t know why you want to change your life, you will never be successful. You need to find your drive and motivation to reach your goal. Your kids, a happier marriage, less stress, etc.
When you find what motivates you, use that to keep you going throughout your debt free journey. Post motivational notes around your home or office.
You also need to understand why you were making poor financial decisions for all of those years before.
Practice changing those habits and replacing impulse purchases with some other type of activity like a walk or jog. It will also help your physical and mental state.
2. Build Your Emergency Fund
Life happens and you can’t stop it. Something is going to go wrong and you are going to have to pay for it.
Building an emergency fund of at least $1,000 is a must. The ideal number would be 3-6 months of expenses, but for a quick start, $1,000 is a good number.
Do not skip this part, I have had to use this fund more times than I care to mention and it seems that things happen at the least opportune time.
Also, do not connect this account to your checking account.
3. Understand Your Cashflow
You have heard a million times by now. You need to create a detailed monthly budget. This is perhaps the most important step of understanding your money.
List your income from all sources. Not your estimated income, your true income. You really need to understand your finances at this point.
Gather all of your expenses and list them under the expenses area. Expenses like utilities, insurance, fuel, gym memberships, etc. will go here. Your mortgage and vehicle payments will go in the next area.
Now list your debts. Include your mortgage, any vehicle loans, personal loans, student loans, credit cards, etc. List these items with the minimum monthly payment and the interest rate.
Add up what you pay per month in expenses and debts and then subtract that from your income. That number is what you have left over each month to put on your debts as an additional payment.
You can use our monthly budgeting tool if you like.
4. Eliminate Waste
Now that you have a detailed roadmap of where your money is going every month, you can begin to identify where your money shouldn’t go.
Do you see any areas where you may be able to cut back? Do you need the Himalayan Turtle Racing channel on satellite? Do you need to eat at those fancy restaurants? Is unlimited data really necessary on your cell phone?
See where you may be able to shrink your budget a little and you will be surprised how much it impact you on a yearly basis.
5. Pay Down Your Debt
Now that we have a solid number that you are able to pile on to your debt each month, it is time to light this candle.
There are two schools of thought to paying down your debt at this point. The debt snowball method and the debt avalanche method.
With the debt snowball method, you will list your debts from lowest balance to highest balance. You will then add the dollar amount left over from step 3 to the debt with the lowest balance each month.
When that debt is paid off, you will then add that amount, plus the minimum payment that you were paying on the debt you just paid off to the debt with the next lowest balance. You continue this way until all of your debts are paid off.
The debt snowball method allows you to achieve quick, small victories and tends to keep you motivated, but may take a little longer to pay your debts off. You may also pay more in interest over the long run.
With the debt avalanche method, you will list your debts from highest interest rate to lowest interest rate. You will then add the dollar amount left over from step 3 to the debt with the highest interest rate each month.
When that debt is paid off, you will then add that amount, plus the minimum payment that you were paying on the debt you just paid off to the debt with the next highest interest rate. You continue this way until all of your debts are paid off.
The debt avalanche method tends to take less time to pay off your debts and you tend to pay less interest in the long run.
6. Increase Your Income
If you want to pay off your debts even faster, increase your income. I can see your faces now. “Why didn’t I think of that moron?”
I know, if you could be making more money, you would be. That’s what I thought too.
There is literally an unlimited number of side hustles out there. I am a wedding DJ for goodness sake. Be a Uber driver, pizza delivery person, retail sales, etc.
Will you sacrifice time with your family and friends, absolutely. Will it be worth it for financial freedom, no doubt about it.
The smallest change in income, combined with cutting your budget, can reap huge rewards in the long run.
7. Stay Motivated
The best laid plans can fall apart if you lose interest or lack motivation. You need to keep track of your progress and celebrate your small victories along the way.
Human beings are wired to stick with things that make them feel good. Seeing positive progress and achieving small victories with some sort of small reward, either mental or physical, is essential to making this work.
I think this is a big reason that people like to blog and tweet about their personal finance and debt free journeys. It allows them share their milestones and receive affirmation from others. This gives them the reward they need to stay motivated.
Wrapping It Up…….
When you find yourself in the darkness that I call debt, you need to find your light switch. You need to understand your money, how it has not been working for you, and how to change that.
It is overwhelming and so many people don’t even know where to begin because their habits have been so engrained for years.
The above steps were a roadmap for me on my journey and took a long time to master, if anyone can say they have mastered them at all.
The best weapon you have is understanding why you are where you are and what you can do to get where you want to be.
If you recognize the steps above and integrate them into your life, you are well on your way to becoming financially independent and living the best life you can live.
Q: Will these steps work in your life?