Back to Basics
There is so much financial advice out there. Even in this blog. This week I wanted to take it back to basics and look at what you do in the very beginning of your finance/debt free journey.
First, you are going to sit down and map out your financial situation. You will include your income, expenses, debts, and assets that allow you to calculate your net worth (savings and investments).
This can sometimes be jarring because while you may be aware you pay $437 in debt each month, when you list it out like this it can be a shock to the system. This is one of the reasons I created my course, because it helps with your mindset regarding money.
Once you have created your financial health analysis you will create your financial road map. You will ask yourself “where are you trying to go and how will you get there?”. Everyone has different goals, so there is no “right” answer. Maybe you want to be debt free but are fine working until retirement age. Maybe you want to retire early. Maybe you want the ability to travel 4 times a year and never put any of it on credit. Pick your plan.
After you know what your financial health looks like and you have your financial road map, next you want to make your budget. You need to see what you can feasibly do within your means. Create your budget, and decide how you want to budget. Are you going to use sinking funds? Budget by month? By paycheck? Do you have leftover money once your necessities are taken care of? If not, is there a way to cut back or tweak the budget? If that is not an option, can you increase your income? (Do not let toxic side hustle culture get to you! There are different ways to adjust your budget!)
Once your budget is settled you can move on. If you have debt your first instinct might be to jump right in and pay that off.
But no. First, you will want to look at your savings situation. Why? Because if one little thing goes awry you can easily be in a position to increase your debt. That is why building your emergency fund is the first part of the journey. There are differing views on this, but unless you are single, have no car, and live in your parent’s basement, $1000 will never be enough.
“At a minimum, you should have one month of expenses, more if you can afford it.”
If you own your home you should have more. A $5,000-$10,000 emergency fund is the best-case scenario. Yes, things that cost more than this could go wrong but for the most part, this should comfortably cover most emergencies and/or deductibles. Make sure you stick that emergency fund in high-yield savings. Here is my blog on why you need one of those.
Next, you will look at your debt.
You will want to list your current balance and interest rate and decide how you want to tackle your debts. The two most common ways are the snowball and avalanche methods. The snowball method has you pay your debts in order of the smallest amount owed to the largest. Each time you pay off a debt you snowball the amount of that payment into the next debt. The avalanche method has you tackle your debts based on the interest rate. You pay off the debts with the highest interest rates first. A free tool to help track your debt payoff is undebt.it On this site you can list your debts and the payoff path you have chosen. It will show you, based on the amount you have to put towards debt, how long it will take you to pay off your debts. So, say you have a spare $100 a month to put towards debt, it will map out your debt payoff journey for you.
Things to remember when you are starting out:
You can still invest in your retirement
You do not have to sacrifice fun or activities if they are within your means
You can always change the goals
If you fall off the path, that's okay, just try to rally and start over, no one is perfect
Do what you need to, to make it work. Do you need more moral support? That’s why I am a coach, I can help you! Get coloring sheets if need be, anything that will help you commit and stay focused.
