Personal Finance Crash Course

There are many reasons you may want to start getting your personal finances under control. Some people are going through a divorce with separate bank accounts. Some people are working together to pay off debt. Some people are saving up for their dream house. Maybe you have a combination of a few of these reasons or others not mentioned. Whatever your reasons, there are steps you can take no matter where you are to work towards financial freedom and reaching your goals. 

Start Where You Are

It is important that you take steps to reach your goals, but those steps should be small and sustainable. You need to start where you are and take an honest look at your finances before you can get where you want to be. If you try to move too quickly all at once, you will likely only get frustrated and not make much progress. 

Budgeting

It is important to start by making a budget. This will help you get a good idea of your current financial affairs and what your next steps should be. Before you can make adjustments to your budget, you need to see what your current operating budget is each month. Even if you have not been following one on purpose, the way you spend it should create a pattern that you can find. 

Start by making a list of all your necessary expenses each month. You should start with the biggest first like mortgage or rent, insurances, and utilities. Then move on to other necessary items like gas, groceries, and phone bills. Then take into account all the extra spending like subscriptions, clothes, and entertainment. 

You may not have an accurate idea of how much you are spending each month because small amounts of money can add up without you noticing it. One way that you can make sure you are getting accurate numbers is to go through your bank statements and add up how much you are spending in each category. It is important to start with the right numbers if you want to make progress. You may be surprised by the numbers that you see. 

Once you know how much you are spending each month, you also need to calculate how much you are making each month. This should be easier to figure out because it is your net income from your job. It is important to now work with the number from the gross income, because you need to calculate using the actual amount of money you will have to work with each month. 

Make Adjustments

Once you know how much you make each month and how much you are spending, you will be able to see where you need to make adjustments. The amount you make should be more than the amount you spend. If it isn’t, then you are going into debt, and making those adjustments is going to be your first priority. 

You can make adjustments by reducing the amount you spend on extra areas like entertainment and clothing. You can also look into bundling insurances to reduce the monthly premiums and finding ways to lower your utility bills. You can even look into a less expensive phone plan. 

Emergency Fund

You should start by having an emergency fund built up in your savings account. You should start by building up $1,000 that can be used in case of emergency like unexpected car repairs. Once you have that built up, you should work up to having a few months of expenses saved up. That can help you if you unexpectedly lose your job. You will be able to pay your bills while you search for a new job. This cushion will help you stay financially independent even if something happens. 

Pay Off Debt

You also need to examine the amount of debt that you have. Paying off your debt can really free up more money in your budget and help you have more financial freedom. Paying off debts early will also save you a lot of money over the course of your life. 

Smaller debts like credit cards are what you should pay off first. They usually have higher interest rates, so they are the most important to get out of the way. You shouldn’t just pay the minimum payment each month, but you should pay as much as possible each month. Now that you know how much surplus money you have each month, you will be able to pay off your debt in larger amounts.

Make the minimum payments on all your debts, but then start paying larger amounts on one debt at a time. Start with smaller debts and those with higher interest rates first. Once that is paid off, then you can make those larger payments on the next debt and slowly pay them all off. 

You can pay off all your debt, even your car, and house early with this method which will give you more freedom to use your money in other pursuits. If you reduce your debt and live by a budget, you can be in control of your money instead of it controlling you. 

Avoid Future Debts

Once you have debts paid off like credit cards, you should avoid debt in the future. Some debt is unavoidable, like buying a new home, but if you use your money wisely, you can avoid a lot of debt. If you are aware of your budget, then you should be able to put money on your credit card knowing you can pay it off each month. Avoiding the interest on your credit card will help you build up your credit score and help you stay out of debt. 

You can even avoid debt on larger items like cars by saving up for them before you need them. If you paid off your car early, then you should keep putting a “car” payment into your savings each month. This will build up over time, so when you are ready to buy a new car, you won’t have to go into debt to do it.