By Gary Aaron on The Capital
Gaining control over your personal finances is the biggest key to building long term wealth. No matter how much money you make, if you don’t understand how to properly spend your money you will still be broke or stuck in the cycle of living paycheck to paycheck. By following these simple steps you should be able to fast track your goal of obtaining financial stability.
Step 1: Create a Budget
Creating and adhering to an effective budget is one of the keys to ensuring you are able to build long term wealth. A budget is designed to ensure you have enough money for not only your essential needs but also for things you may want. By sticking to a budget you should also be able to avoid getting into unnecessary debt since your money is already allocated for specific spending. A good budget should give you complete control of your money and help you organize your spending. In order to create a budget, you must first figure out your monthly income. You can accomplish this by using your paystubs, viewing your direct deposits, or just adding up the cash you receive if you get paid cash. Knowing the exact amount of income you have is important to ensuring the budget works for you. The more accurate the budget is the more effective it will be. After you know how much money you bring it’s now time to find out how much is going out! Tracking your spending can be a wake-up call for many people. The average American spends $1200 on fast food a year, for some this number is much higher. These bad spending habits are some of the leading causes of people’s money woes. To effectively track your spending make a list of all your essential spending. Add up bills such as your rent, car note, insurance, and groceries. Remember, just like with figuring your monthly income it is important to be as accurate as possible to ensure the budget is as effective as it can be.
Once you know your monthly income and monthly spending it’s time to set your financial goals. Do you need to cut your spending to save for a car? Do you want to save for retirement? Using your new budget you should be able to allocate funds for both long and short term goals.
Step 2: Create an Emergency Fund
Life happens. Car’s breakdown, kids get sick, and during this pandemic, jobs have shut down. Having a safety net is of the utmost importance to combat the curve balls life can throw our way. Using your budget allocates funds toward an emergency fund. According to a recent poll, around sixty percent of American’s wouldn’t be able to cover a thousand dollar expense! Start by saving $1,000 as quickly as possible and then adding to it as often as possible. Having an emergency fund in place can give you a sense of security and help you make better financial decisions knowing you have money available if something unexpected happens. It will save you from having to get payday loans or liquidate valuable assets to cover unplanned expenses. Remember the emergency fund does NOT have to be in an account. It can be placed in a safe at home or in your mattress. As long as it is easily accessible it will work. Due to it needing to be liquefiable it is not suggested to use a CD or 401k account as your emergency fund. The eventual goal of your emergency fund is to have three months of living expenses in one account. While this may take time to achieve it is important to realize the more you have put back the better prepared you are for anything.
Step 3: Pay off Debt and Reduce Spending
It’s easy to get into unnecessary debt. Credit card balances can add up fast and personal loan payments can get too much for us at times. Getting out of debt is paramount if you wish to ascertain financial freedom. Start by listing all of your debts and finding the exact amount it will cost to pay each off. As a big fan of Dave Ramsey, I would recommend using the snowball method to get out of debt. The snowball method involves paying off the smallest debt first then using the funds freed from paying off that debt to quickly pay off the next. You will repeat this process until you have completely paid off all of your debts. Freeing yourself from debt frees up money for other purposes such as investments, savings, and even hobbies you otherwise couldn’t afford. Being debt-free or reducing your debt adds more disposable income to your budget meaning while you might not make more money you’ll feel like you do. To free up even more money try finding deals and reduce your spending. See if you can get cheaper car insurance from a different company. Stop eating out as much and try to cut your budget for entertainment purposes. Anything you can do to save money do it and it will greatly increase the amount of money you have to spend.
No matter how well crafted a plan is it will never succeed if you don’t execute. Stay focused on achieving your goals and following your budget. It is easy to stray away from your financial plan but sticking to it will be well worth it. Your budget will be the foundation for building your future wealth and gaining assets. It’ll help you build an emergency fund to provide you financial security and allow you to allocate the needed funds to pay off debt and free up disposable income. All of this is very doable you just have to trust the process!
Post fetched from this article