1. Become comfortable with the word budget
Whether you are a young or old adult, budgeting
is critical, as it allows you to see how much money is coming in and going
out every month. Although most people understand they should budget, the
reality is most just don’t do it. Getting started on a budgeting system as
soon as possible is vitally important. Learning to review how you are
spending your money, so you can make adjustments if necessary, to ensure you
are living within your means and able to save for your financial goals. I
have an easy to use system called the Cash-Flow Tracker
that’s free to set up and use. Click here to learn
more and get started.
The basic budget formula for after-tax income is:
50% for fixed expenses, such as housing (28% or less for
housing expenses), basic food, insurance premiums, etc.
20% for financial goals. This would include extra debt
payments, your cash cushion, retirement, etc.
30% for variable expenses, such as dining out,
entertainment, travel, etc.
2. Set up weekly cash-flow dates
Set up weekly money dates to review your cash flow and plan out your finances. During your money date, you should pay your bills (although most should be set up as auto-pay), update and review your budget and take care of any other financial concerns. By calling this allocated time with your money a “date,” you can begin to bring a fun, exciting element into your financial life to help you stay committed for the long haul.
3. Open up a savings account if you don’t have one
Most people don’t save because they make it way too
difficult for themselves. Instead, review your budget and aim to start
saving toward your financial goals by following the “pay yourself first”
strategy. Under this method, you set up your savings to be automated every
month and you save before you spend money on variable expenses. The goal
is to save 20% of your net income–but don’t let that amount scare you. Even
if you can only start with $10 a month, that’s better than nothing. Every
year, review and see if you can increase your savings amount.
4. Build up an emergency fund
The goal of an emergency fund is to have three to nine
months of your fixed expenses in a savings account to pay for life’s
unexpected incidents. Life always throws curveballs—your car breaks down, your
computer crashes or you receive an unexpected medical bill—and having money in
the bank to cover those expenses will help you maintain your financial
peace of mind. If your fixed expenses are $3,000 per month, you should aim
to build a cash cushion of anywhere between $9,000-$18,000, depending on
your comfort level, job security, etc. That sounds like a lot, I know. But
remember, just start with what you can to build you cash cushion over a
few years. Again, even if it’s $10 a week, that’s still one step in the
5. Keep an eye on your credit score
Our credit score affects nearly everything in our financial
lives. It affects the interest rate on the car loan we apply for, the
mortgage loan, the credit cards–and even employers and landlords can
reference your credit score when reviewing your application. By monitoring
your credit score, you can see where you stand and what you can do
to improve it if necessary. Use websites like www.creditkarma.com to view
your credit score (not your actual FICO) regularly for free and then pay
to see your actual credit score at least annually using
6. Create a debt reduction plan
The first step is to make a list of all your debts. Get clear about how much you owe, the interest rate of each debt, and the minimum payment due. Then review your budget to determine how much you can realistically add toward extra debt payments and start with the debt with the highest interest rate while paying the minimums on the rest. This will allow you to save the most in interest payments. Once the debt with the highest interest rate is paid off, move on to the second-highest, and so on.
7. Start saving for long-term goals
If you have the ability to start investing into your
retirement accounts after you’ve allocated some monthly funds toward
building your cash cushion and paying off your debts, then set up an
automatic contribution into your retirement account. By starting early,
you can allow compounding interest to work in your favor on your
investment accounts. If you are new to investing, make sure you do your
homework and read investment books so you are clear about what to expect
when investing for your future.
8. Focus on building your earning potential
Income is one of the biggest factors in wealth creation over time. After all, if you don’t make money–or don’t make enough money–it is very difficult to save for your financial future. So if you can’t save as much as you would like to due to your income level, focus on ways to increase your earning potential for the long run. Consider starting a business to create extra cash flow. Think outside the box, and continue to focus on increasing your earning potential every year.