If you're just getting started organizing your financial situation, it's easy to feel overwhelmed, or even be scared to take a peek at your spending. But it doesn't have to be hard, and you're reading this because you're no longer scared. You're ready to get your finances in order.
So let's discuss some steps you can take to get heading the right direction financially. I've put together a quick list of 4 things you can do today that will cover some of the basics and motivate you to make more advanced money moves in the future.
Create a Personal Net Worth Statement
To take the steps towards a better financial life, it's good to understand where you are currently. I like the idea of a personal net worth statement. This isn't as complicated as it sounds. Just break out pen and paper, or spreadsheet, and create two lists: things you own (car, house, bank accounts, investments, etc.) and things you owe (credit card debt, mortgage, etc.).
Now subtract the things you owe from the things you own. That number is your personal net worth. Keep in mind that this is your baseline. Knowing that number alone doesn't do much for you. You need to make it move in a positive direction. For me, this can be done the easiest by increasing savings or decreasing debt.
Next Steps: Increase savings by setting up a periodic direct deposit from your paycheck to a separate savings account. Start with a small percentage and don't overwhelm yourself. If you need to decrease debt, investigate plans to legitimately reduce your debt.
Review Your Expenses
Now let's get into the fine details of your monthly spending. This can be a real eye opening experience. The best way to get to this type of information is to download your checking account data and categorize the individual expense items. A program like Quicken or Mint.com will help you do this quickly.
Once you see where you are spending your money, you're probably going to say a couple of things:
- I'm paying for stuff I don't use
- I'm spending too much on certain categories
The items in #1 should go now. Call up the company and get rid of the expense. The items in #2 take a little more work. For those items that are recurring and price-fixed in nature, see if you can negotiate a lower payment. A good example would be your cable TV service.
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Next Steps: Now that you know where you are spending your money, you can begin the process of reducing those expenses. I like to use a simple budget. You don't need to develop a budget for every category where you spend your money. Focus on the discretionary spending: clothes, dining out, personal care, entertainment. Those are usually some of the more controllable expenses on my list. Yet, I find that I can pretty easily set a budget in these areas and not feel like I'm sacrificing too much.
Check Your Credit Report
Next, I would suggest a quick review of each of your 3 credit reports. The only truly free place to get this done is at annualcreditreport.com. Visit that site, skip through all the advertisements, and download your free credit report. Review them for accurate information. If you see any accounts that you don't recognize or errors, do some research and contact the bureaus to have the errors removed.
Next Steps: If you're curious about monitoring your actual credit score, explore there are several free credit score options.
Take Advantage of Your Employer's Retirement Benefit Options
Many people never even get started with their employers retirement benefits. And that's a shame because there's usually at least some free money to obtain. I'm talking about the 401K matching contribution. Unless you have a very good reason not to, you should at a minimum be contributing enough to your companies 401K to get the match. This is a great way to get started with retirement savings.
Next Steps: Also look into any stock option plans that they might have available. If you don't understand how they work, ask your human resources or benefits department. There may be some risk-free opportunities here to earn a little extra money.
Hopefully those 4 things will get you headed in the right direction. You'll find that once you get going in each of these areas you'll be motivated to do even more and really improve your money management skills.