It can be overwhelming to take the first steps in getting your finances in order and creating systems that will make things easier for you. I’ve outlined a roadmap of steps to take, tackling each item at a time until you feel you’ve built a strong foundation to set you up.
Budgeting: The first step should be understanding where you’re at because if you don’t know what you’re starting from, you’ll have no idea where you can go. Annotate this wherever/however is easiest for you and take note of every transaction in the past month and categorize it - I find that Excel is the most precise, but also the most manual and time consuming method, each method has it's pros and cons and it's imperative you find what works for you. You can categorize very broadly to begin with and just note fixed and variable spends. Fixed is anything that is non-negotiable and doesn’t vary greatly month over month such as rent, utilities, childcare, phone bill, etc. Variable will be everything else such as groceries, entertainment, shopping, etc. This will give you a good idea of where your money is going and where you can make adjustments and reduce variable spend. If you don’t want or have the time to do this manually, there are many apps that can help you keep track of your spending such as Monarch Money, Goodbudget, Empower., among others. Doing this the first few months will help you see trends and really get a full picture of what your current money values are based on your spending and where you’d like things to shift. For example, if most of your money is going to eating out but you'd like to save for a vacation in 3 months then you know what needs to be reduced and where you'll allocate that money instead. If you are tracking your expenses manually, your first budgeting template can be as simple as including only these three headers: month, category, and spend. This might be difficult at first but very eye opening for you - try to come to this step without judgement, but simply from a place of understanding. Shifting your mindset is also an important part of this process. Rather than seeing budgeting as limiting yourself and cutting back on things that bring you joy, see it as the first step to build your foundation that will allow you even more freedom and choice to do the things you enjoy in the future.
Financial overview: Once you have a good handle on your budgeting, it’s time to have a look at your overall finances. Take some time to go through all of your accounts, retirement, savings, checking and list your assets and liabilities. Assets include money in savings, the value of your home, car, retirement accounts and liabilities will be any debt (outstanding mortgage debt), loans, etc. Your net worth is your assets minus your liabilities. Once you have a good understanding of your financial standing, you can better plan for where you'd like to be in the future and what needs to be tackled first. An annual financial overview can help you reset as needed and change your priorities as your life changes as it inevitably will year over year. Grounding yourself with this financial overview exercise can help provide peace of mind for the rest of the year and will help you take a step back to take an honest look at what is working and what is not working for you. Again, empathy and kindness are a very important part of this process, you are not doing this to judge yourself or compare to others but rather understand where you are and where you’d like to go.
Emergency fund: If you have not started building your emergency fund, a general baseline is 3-6 months of living expenses so now that you have a budget and know what your fixed versus variable spend is each month, you can multiply your fixed monthly expenses by 3 or however many months you'd like to save for to know about how much you should have in your emergency fund. Also, now that you know what your variable spend is, you know what you can shift from and divert to your emergency fund and how long it will take to build that up throughout the year.
Sinking fund: When you feel comfortable with your emergency fund, you can build a separate account (preferably in a high yield savings account) for other annual expenses that creep up such as car maintenance, travel planning, clothing, gifts, annual fees, taxes, etc. This is different from your emergency fund as you will use this as needed throughout the year for earmarked things. List out these “unexpected” expenses, calculate/estimate the annual spend for each and then the total spend for all of them, then divide this total by 12 to have an idea of how much you need to set aside a month to cover these expenses as they arise. You'll be prepared.
Debt: Debt should not be this low on the list but should parallel path your financial overview step as you should make a comprehensive list of your debt, the interest on each, and listing from highest interest debt to lowest to know which one you need to tackle first. I recently finished paying off my student loans after a decade because a 3.4% interest rate was not a higher priority than building my emergency and sinking funds. I worked with my loan provider to pay the minimum of focus my efforts elsewhere. Learning where to prioritize based on your needs and goals is also a crucial part of the process.
Investing: I’m also not a huge fan of leaving investing so far down this list but for me, it was the scariest part of my financial journey and I needed to get over the initial hurdle of just getting started and wrapping my head around being an investor. The best place to start is with an existing account, perhaps an employer sponsored retirement plan and looking into where you’re investing, how much, and what your retirement projections look like using the compound interest calculator. Once you feel more comfortable in what you’re already investing in, ask yourself a few questions such as: what is my risk tolerance, risky or more on the conservative side? What are my short term and long-term goals (short-term can be 3-5 years while long-term can be over 5 years)? Do I feel comfortable investing on my own or do I need more guidance? If you’re starting on your own, I recommend making things as simple for yourself as possible and considering a robo advisor to start or choosing low index funds such a VOO that track the S&P 500 and investing monthly.
For me, the most important part of this process was not getting caught up in my perfectionism and the need to understand everything fully before taking action. I needed to be comfortable with the uncomfortable and making changes to existing accounts and eventually working my way to up to opening up a brokerage account on my own. It can be a scary step and it's easy to get caught up in our emotions and preconceived notions of what we should and shouldn't be doing but this is your journey and you're learning along the way!
Money ritual: Create a weekly and/or monthly ritual for yourself where you're doing pulse checks on your progress, your spending habits and overall making sure you’re on track to where you want to go. This can be an hour a week pairing it with something you enjoy like a face mask or your favorite podcast to make it less daunting and more enjoyable, make it a part of your wellness routine.
Support: No one can do everything on their own so be as honest and kind with yourself as you can and knowing when you need help. This can be in the form of a financial accountability buddy, signing up for an affordable financial advisor option like Financial Gym to get you started, calling your financial institution and asking questions about your investments and concepts you don’t understand, and any other way that will make navigating this journey easier for you. As the social creatures we are, everything is better and easier in community, so find and tap into yours.
Setting up your foundation and your systems are, in my humble opinion, the most important steps in your financial wellness journey and how you’ll set yourself up for the future and the habits you want to create. You got this!
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