Step by Step Guide to Tackling Your Finance Related Resolutions

Raise your hand if you’ve ever had the thought, “I should really start doing a better job of managing my money.” If you did, you are far from alone. It’s not uncommon to feel overwhelmed when thinking about one’s finances. But if you’re ready to move from “I should” to “I am,” keep reading. Gaining control over your financial situation won’t happen overnight, but if you start taking steps to achieve financial freedom today, by this time next year you’ll be well on your way.

Decide What Financial Freedom Means to You

Before you start thinking numbers, take some time to reflect. What are your big-picture goals? Do you want to stop living paycheck to paycheck? Enjoy a yearly vacation? Put your kids through college? Retire early? Your goals may change along the way, but having a clear objective in mind will help keep you motivated to stay on track.

Take Stock

Nobody likes this part, but it has to be done. Put on a pot of coffee, clear off the kitchen table, and grab a calculator. Gather up all of your bills, bank statements, pay stubs, and anything else finance-related. If you’re married, sit down with your spouse. Start totaling. How much income came in over the past year, and how much did you spend?

If you spent less than you made, pat yourself on the back, but don’t pack it in yet — you’ve still got work to do. If you’re in the red or close to it, take a deep breath and remind yourself that you are in the process of retaking control. Finally, if your income varies from month to month, make a note of both the high, low, and average values. You’ll need this information later.

Categorize

Next, start assigning your expenses to categories: housing, utilities, transportation, child care, food, education, clothing, entertainment/recreation, gifts, and any other significant expenses for your household. If a lot of your spending was in cash, create an estimate of where it went. If you’re comfortable with spreadsheets you can go that route, but paper and pencil are fine as well. If you like, unleash your inner nerd and start color-coding. If you’re a visual person, consider making a pie chart — anything that helps you see where your money is going.

Decision Time

Now it’s time to make some decisions. If necessary, refer back to the long-term goals you thought about in step one. Each household is different, but a couple of generalities apply. Paying off credit card debt should be the number one priority for most people. Households without credit card debt should look to increase their savings.

There is a wealth of tools available online to help you make decisions about how to move towards your goals. There are guidelines to help you determine the ideal balance of spending on needs versus wants, apps that can help you track spending, and blogs with instructions on negotiating lower interest rates. Educate yourself as much as you need to without getting overwhelmed. Remember that if you want to put more toward fulfilling your goals, you’ve got two options: increase the amount of money coming in, or reduce the amount going out.

To Automate or Not to Automate

Once you’ve identified your short term and long term goals, it’s time to put a system for managing your finances in place. The best systems are those you don’t have to think about. If you can set up your bills to come out of your checking account automatically and divert some of your paycheck into a savings account via direct deposit, that’s one less thing you have to think about every month. A strong word of caution, though: this strategy can backfire if you don’t have your spending under control, or if your income varies from month to month and you haven’t taken that into account.

Racking up overdraft fees will set you back, so you should only attempt this if you’ve been able to set up a cushion in your checking account and are willing to log in to your accounts periodically to check your balances. Most banks have a system that will text you an alert when your account drops below a certain balance that you specify, so take advantage.

If you are still trying to rein in your spending, on the other hand, then it’s a good idea to curtail your use of credit cards and use the cash-in-envelopes method so you can feel the pain of money leaving your hands.

Maintain and Reevaluate

So you’ve got a system in place and are checking your setup periodically. What next? As you start to achieve your short term goals, go back and look at your long term goals so you can make adjustments to your system.

Sometimes an unexpected expense will get in the way of your progress, which can be discouraging. You’ll need to readjust. Remind yourself that you’re doing the best you can and that you should feel good about facing a difficult situation head-on. Sticking your head in the sand may provide a brief sense of relief, but will only make things worse in the long run. If you need to, ask for help. Eventually, financial freedom can be yours.

Featured image credit: Pixabay