One common challenge amongst individuals is making the most of every dollar they earn - money management. Even the most educated persons find themselves struggling with improving their finances. While there are many reasons for this, one primary cause would be our upbringing (what we were taught about the utilization of money) and habits we have formed over our life span based on what we have witnessed from others we've come into contact with. This is actually great news because good habits can be re-enforced and bad habits can always be transformed into good ones.
This guide will identify six steps (or new habits) you can take to be on your way to improving your personal finances. Well, let’s get on with it!
Step 1: Review your current relationship with money.
This step involves you tracking your monthly spending. Feel free to download our cash flow/debt management worksheet to perform this step. After you have tracked your spending, pay close attention to the percentage of your income that was used towards household bills versus payments towards debt (i.e. credit cards, loans, etc.) and savings.
Step 2: Decide on a new money model.
If step one shows that most of your money is used towards paying off debt and household bills and very little to nothing goes towards savings, it is time to decide on a new financial model that will determine how you will use each dollar earned going forward. The successful entrepreneur and personal development speaker, Jim Rohn, suggested a 70/30 Rule where no more than 70% of each dollar will go towards debt and household type of expenses with the other 30% being split between charitable, reinvestment in you or a business you own, and investments, using a ratio of 10%-10%-10%. If you are already consumed by debt, you may not be able to start with these percentages, so feel free to adjust the ratio to accommodate where you are in your financial situation.
Step 3: As you pay down debt, avoid creating more!
It is very easy to be enticed to charge more to a credit that now has an available balance, but avoid this temptation. When you are focused on getting out of debt, the least desireable thing to do is create more of it. Your goal at this point is to pay down your debt in order to create cash flow that can be used towards savings and other longer term goals that will help you progress towards financial independence.
Step 4: Use tools and resources that help analyze your finances.
There are many websites, today, that allow you to review your credit card debt, establish savings goals, find cost savings for common expenses, monitor your cash balances and more, all in one place. This capability makes it a lot easier to manage all the different components of your financial make-up. One website to consider is mint.com.
Step 5: Review your credit report regularly.
Monitoring your credit is another important component to managing your finances. Staying abreast of what is being reported by third parties, disputing any inaccurate information and ensuring you are not a victim of identity theft is a critical to maintaining success in managing your overall financial profile.
Step 6: Make sure your finances have a strong foundation.
Having a strong financial foundation entails making sure you are protecting the assets and other forms of wealth you may have accumulated up to this point. Having insurance coverage on your life and important assets that if they were taken away or harmed in any way, could cause a financial catastrophe, like your house, car, or business. Make sure to annually review your levels of coverage to ensure they are still adequate for your situation.
In closing, you can see immediate benefits to your overall financial situation by taking some simple steps that can be summarized in the following manner: understand your financial make-up, commit to a new spending strategy, avoid creating more debt, use software that help you analyze everything in one place, and protect your valuables.
We would love to hear about ways you implement any of the suggestions into your financial life. Tweet us and let us know how it goes!
You may be interested in reading our blog about life insurance and determining the appropriate level of coverage for you and your family.
