You might know how to get yourself in better physical shape, but what about your financial fitness? The five steps below can help you get organized and put your finances on a positive track for the future.
Track Your Spending
You probably know how much you make, but if you’re like most people, you aren’t sure exactly what you are spending. This first step is often a revelation for people, who had no idea before they tracked, what they were spending on groceries, takeout or late-night online shopping splurges. You can track your spending the old-fashioned way, by making a note of everything that goes out of your account, or you can get an app that will do it for you. You’ll need to log for at least two or three months to get an accurate picture of where every dollar is going.
Make a Budget
With the information that you have from tracking your spending, you can then construct a budget. As with tracking, you can create a budget on paper or with a spreadsheet, or you can use software or an app. A common budget pitfall is forgetting to include things you only spend money on occasionally, such as haircuts or birthday gifts. People also tend to forget about personal care items, such as shampoo, deodorant and laundry detergent. Another common mistake is creating an unrealistic budget. If you were horrified at how much you spend on takeout, the solution is not to ban all restaurant dinners from your life. You won’t be able to stick with it, and you’ll feel even worse. Moderation is the key.
If you have debt, you need a plan to pay it down. Look for ways to get lower interest rates, such as rolling your credit card balances onto a no-interest card. If you have student loans, you can roll your existing balance into one payment with a private lender. This can reduce your monthly expenses and the total that you pay back for your loans overall. Your aim should be for your mortgage to be the only debt that you have.
Many hit a debt spiral when they have an unexpected expense such as a vet bill, a car repair or a medical co-pay. You can swipe your credit card, but what if another expense comes along the following day, week, or month? Credit card debt can mount fast and can quickly become unmanageable. You’re much better off with several months’ worth of expenses in an easy-to-access account, so as you are paying down your debt, you should also keep this need for funding on your mind.
You should be putting as much money as possible in your employer-sponsored retirement plan. If your job doesn’t offer a plan, you can start one yourself. Once you are sticking to your budget, have paid off your debt and are regularly contributing to a retirement fund, you may want to consider investing. You don’t need to be rich or savvy about financial markets to be an effective investor. A meeting with a financial advisor or setting up a brokerage account with a robo-advisor and making low-risk investments, such as mutual funds, can increase your financial security.