Managing finances is such a critical component in life. Its a life skill that is not really taught in the public school system and is something you almost have to go out and learn on your own if not taught by your parents as you grow up. Most Americans do not have their finances in control, with recent data showing that the average American has $90,460 in debt. This includes all types of consumer debit, credit cards, mortgages, car loans, student loans, etc… What is even crazier to hear is that at the start of 2022, 64% of Americans were living paycheck to paycheck.
Many people in the US struggle deeply to properly manage their finances. What is odd about this is that it is not that difficult to stay on top of. Managing your finances is not aligned with making more money either. This is a common misconception that many people use to cope with not really putting the time into getting their money organized. When it really comes down to it, there are a few easy ways for people to start getting on top of their financial situation.
1. Creating a Budget and Sticking to it
This is the big kahuna as they say. Creating a realistic budget and doing your absolute best to stick to it is so vital for being financial free. So many people struggle with not creating a budget, but making an effort to stick to it as well. When creating a budget, you should list out all the essential bills you have to pay in order to live – rent/mortgage, utilities, insurance, phone, groceries, saving, and investments. Writing out a detailed budget and making an effort to sticking to it is the first step in becoming financially free.
2. Tracking All Expenses
Documenting all your expenses (EVERYTHING YOU SPEND DOWN TO THE PENNY) is essential in improving your financial situation. This will broaden your lens on exactly where your money is going and all the money you are wasting on things you should not be spending on. Without properly tracking your spending, its an out of side out of mind type of deal, where you really will not have a grip on where your money is going. You will just see your account get smaller and any credit card bills getting higher. There are great tools available for this to be an automated process like Mint, rather then the old school pen and paper or Excel/Google Sheet.
3. Tackle Your Debts
The earlier you tackle your debts the better. There is a wide variety of advice out there on eliminating your debt. Most of them will say the same things. DO YOUR ABSOLUTE BEST TO STAY OUT OF DEBT! Do what you can to pay off your debts as soon as possible. The best way to do this is by minimizing your spending and throwing the excess at your debts. It is incredibly easy to rack up a ton of consumer debt because credit cards and loans are handed out like candy these days. The earlier you pay off the debts, the closer you will be to financial success.
4. Build an Emergency Fund
You can start small and set goals for yourself like saving $100, $250, $500, $1000, and so on until you can save about 6 months of living expenses. This will provide a financial buffer for you to rely on in times of emergency – losing a job or needing an emergency root canal. You should then start to automate savings to whatever you feel comfortable contributing, like every paycheck saving a certain amount, lets say $100 or $500. Everyone’s incomes will fluctuate so just contribute what you can even if it is not that much. Anything will help.
5. Develop an Investment Strategy
There is a reason in every single piece of investment literature you can find that it will state somewhere the earlier you start investing the better. There is no such thing as being to young to start investing your money. Developing some well-rounded investment vehicles will payoff when you are older and no longer work and have an income. Prior to developing a good investment strategy, it is key to follow the step above and build your emergency fund first.
A great way to invest your money is through an IRA account (Investment Retirement Account). They are simple to open and utilize and can even be automated. Some of the platforms I would recommend utilizing for an IRA are Vanguard, Fidelity, or Charles Schwab, my personal favorite and platform I use myself is Vanguard. But most of the bigger name brokerages are all good and will offer the same types of services and quality of customer experience. An IRA will allow you to invest your money with excellent tax break benefits. IRA’s are limited in the amount of money you are able to contribute to them each year, with the cap amount being $6,000. If this does not show you that they are incredible investment tools, then I don’t know what else to tell you. Once you setup an IRA, you can choose to invest your money in a wide variety of different funds – individual stocks, ETFs, mutual funds, bonds, etc… While mutual funds are going to be the most well-rounded investments in terms of their diversity, they typically require a minimum investment to start with, typically over $1,000. A great way to utilize an IRA is through automatic deposits. You can automate deposits into your account and choose which funds you want to put your money into. If you can, max out your IRA every year. If you can’t, then contribute as much as you possibly can each month.
Another amazing investment are 401k’s. If your company offers a 401k, use it! Especially if your company matches your contribution. It is a great way to automate an investment while also essentially getting contributions from your company which will increase your investment total even more. Contribute what you feel comfortable doing, but if possible make sure it aligns with the limit for your employer to match.
6. Cut Back Your Spending
This should be pretty obvious. But to so many it will not be. Eliminating any excess in your spending on non-essentials will be huge for improving your financial status. This will go hand in hand with tracking all of your expenses. You will be able to see all the stupid things you are spending your money on. No you don’t need the latest iPhone or the newest car or that designer shirt. Trim whatever you can and do your absolute best to cut where you can without diminishing your quality of life. Not eating out is another huge one. Purchasing groceries, especially in bulk and cooking your meals at home will cut your spending a ton. Making anything you can at home will almost always be cheaper. Remove any subscriptions you are not fully utilizing. Stop going on trips you cannot afford. The list goes on and on. Cutting back your spending will open up huge opportunities for you financially.
7. Increase/Diversify Your Income
It is easy to say “just make more money”. Well yeah that is not always easy. Do your best to increase your income either by looking for new job opportunities, negotiating your compensation at your current company, or doing freelance work. Using any skills you have to bring in extra income will help you in many areas of your financial status. If your company offers overtime, use every second you can. If you have a creative or freelance skillset that is in high demand you can utilize platforms like Fiverr or UpWork to find some freelance gigs. Or even through your own network, word of mouth can be huge for freelance or consulting gigs. Diversifying your income sources is a major way of getting to a better place financially.