Over the course of our lifetimes, we’re going to make some smart money moves, and some dumb ones.
I’ve certainly made my fair share of bad financial decisions.
My 20s were spent in the 2000s, and the only way I’d know if I had any money in my checking account was when I went to an ATM and it invited me to “check my balance.” That was always a tense moment.
During that time period, I didn’t pay attention to what, or how much, I was spending money on. I abused credit cards, and my long-term planning centered around weekend nights.
Fortunately for me, when I hit 30, I accepted responsibility for my life and finances, and started digging out of the hole I dug.
I want to share the 7 steps I followed to get out of debt and on my way to financial security and success. I can also report that over the subsequent 13 years, I’ve made a lot of smart money moves, but that’s a story for another day.
Here are the 7 steps:
- Know your “facts.” When talking about personal finance, your facts are your current financial situation, meaning your cash flow and budget.
- Know yourself. It’s imperative to get clear on your beliefs about money and your goals and priorities.
- Set your initial emergency fund. Get $1,000 saved in an account separate from your everyday checking account.
- Pay yourself first. Enroll in your company’s 401(k) or open an IRA and begin contributing.
- Grow your emergency fund. Get one month’s worth of living expenses saved.
- Pay off credit cards. Develop a plan to eliminate credit card debt and execute the plan.
- Complete your emergency fund. Get six month’s worth of living expenses saved.
Before we get into the 7 steps, know this: following them will be an example of “sounds easy, does hard.”
Depending on where you’re at, you may have a long way to go. And that’s ok. That you’re here suggests you’re ready to make the difficult decisions and changes required to become financially secure and successful.
Making change is hard for a lot of reasons. The first step is committing to the process and persevering when you encounter adversity.
It means sticking to the plan when you’re tired and not feeling like it. When your ego tries to get in the way. When old patterns and behaviors try to work their way back into your life.
When those come up, know this: these steps work. They’ve helped me personally, they’ve helped countless others, and they can help you.
Let’s get started.
Know your “facts”
When talking about personal finance, your facts are your current financial situation, meaning your cash flow and budget.
This isn’t a complicated concept, but it’s an integral one. You have to know how much money you have coming in each month and how much is going out. Odds are, you have a better sense of how much is coming in, because it’s probably more consistent. Our spending is more variable, but when you track it, you’ll get a clearer picture.
To track your cash flow, review the statements for every way you spend money (credit cards, debit cards, etc). As you’re getting started, do this monthly.
The first time you do this, I want you to go through the previous 12 months’ worth of statements, here’s why. You’re looking for recurring charges and for things you’re spending money on that you no longer value. I remember going through this exercise with my wife the first time and finding hundreds of dollars of monthly expenses for things we no longer used.
If you find expenses you’re not sure about, pause them to see if you’ll miss not having them. You can always sign up again.
Budgeting is simply having a plan for your money.
I don’t love budgeting, and my wife keeps our household budget. Over the past 10 years, I’ve come to appreciate the benefits of having a budget. We know we’re on track to meet our goals and objectives. We know if we can afford something, and when we can’t.
A budget is empowering.
There are a lot of ways to keep a personal budget. You can use a spreadsheet or an app. Here’s a post on finding the method that’s right for you.
The 50/20/30 budget guide is a great way to get started. It’s also a great indicator of whether or not your spending is going to lead to long-term financial success. Here’s a post on how to get started with 50/20/30.
Whatever you choose, keep this in mind. Budgeting is not a game of perfect. Some months you’ll be on budget, some months you’ll be over. What’s important is you continue to track and refine it.
As you’re getting started, review your budget monthly. Once you’ve been budgeting for a year, you can shift to quarterly reviews.
It’s imperative to get clear on your beliefs about money and your goals and priorities. In this section, you’re going to dig into how you’re wired (your beliefs about money) and where you want to go (your goals).
Beliefs about money
If you’re serious about changing your life, this will be the most important section. You’ve heard Henry Ford’s quote “whether you think you can or you can’t, you’re right.” That applies here. If you think you’re going to be financially successful, you have the chance to be. If you don’t, financial success will be very hard for you to achieve.
It all comes down to our operating system. Just like our phones have them, so do we. They’re constantly running in the background, taking in information and formulating responses. Think about a polarizing subject and what your response to it is; Donald Trump.
What was your response? Don’t overthink it. What was your initial gut response?
For financial matters, we have beliefs about money which influence our thinking and our behavior. These beliefs were installed when we were kids and while we’re constantly getting updates, the original programming will be there until we proactively change it.
That’s the good news. You can change your beliefs and your brain.
How do you know if you have negative or limiting beliefs about money? Pay attention to your triggers and your behaviors. Are you triggered by people you perceive to have money? Are you triggered by certain cars or brands? Do you avoid certain activities like budgeting?
When you become aware of what you’re triggered by and or what you’re avoiding, you can then investigate their origins.
For example, I was raised by a single mother who was a teacher and we were middle class. There was never enough money to go around. Once a month, my mom would “pay bills” and my brother and I knew to stay out of her way.
That experience of scarcity caused me to avoid financial matters (even though I worked in finance). I didn’t keep a budget, I waited till the last minute to pay bills, and I put off filing taxes for as long as I could.
Once I made the connection, I could change my beliefs and therefore, my behaviors around money.
In order to reach our destination, we need to figure out where we want to go. That’s what goal setting is.
I’ve always intellectually known the value of having goals, but it took me until I was 35 before I actually did it. Goal setting was always abstract to me and I didn’t know where to start. To help make this process easier, I encourage you to think about what you want to accomplish in these six areas.
- Personal Development
It’s really important that you think hard about what you want in each of these areas, and that you actually write it down.
Getting clear on what you want your life to look like will help you prioritize your financial decision-making today. For example, knowing you want to help your kids with their tuition in 15 years and that you’d like to be able to stop working in 25 years will help you be more prudent with your spending today.
If you’re ready to dig into your beliefs about money and your goals, you can access our Goals Course at no cost.
Set your initial emergency fund
Several years ago, research came out that over 60% of Americans wouldn’t be able to come up with $500 in case of emergency. That’s a problem.
The third step in this process is to get $1,000 saved up. $1,000 is enough to cover most minor emergencies like car trouble. Your emergency fund needs to be a bank account that is separate from your everyday checking account. This is a practical decision so you don’t accidentally spend it. It’s also a psychological decision to show yourself you can save money.
If your bank tries to charge you to have an additional account, find a new bank like Chime. There are plenty of online banks that would love to have your business.
If you don’t have $1,000 saved, stop doing any other saving and investing until you get there.
Pay yourself first
Enroll in your company’s 401(k) or open an IRA and begin contributing.
The Golden Rule of personal finance is “pay yourself first.” It’s because if you’re in the habit of paying everyone else, and then paying yourself, you’ll get to the end of the month and there won’t be any money left for you. If you’ve ever lived paycheck to paycheck, you know this to be true.
Even if you’re only contributing 1% of your earnings, you’ve gotten started. Saving money is an activity that is best automated, especially as you’re getting started. I can attribute a lot of my success in life to forming good habits.
As time goes on, and you accumulate money in your account, your confidence will increase as well.
Grow your emergency fund
Get one month’s worth of living expenses saved.
Setting up your initial $1,000 emergency fund was an important step, now it’s time to increase it. By going through your cash flow and setting up your budget, you should have a good handle on your monthly expenses. Put a plan together for saving one month’s worth.
For example, if your monthly expenses are $5,000, and you’d like to get to that number in one year, you’ll need to save around $417 a month. If you want to get there in six months, you’ll need to save $834 a month.
Pay off credit cards
Develop a plan to eliminate credit card debt and execute the plan.
Before I go any further, please know I understand how difficult this may be. It will not be easy to achieve the final steps in the process, but it will be worth it.
You’re someone who can be debt free. You’re someone who can be on the path to financial success.
Once you’ve got one month’s worth of expenses in your emergency fund, it’s time to eradicate your credit card debt and any other revolving debt (store accounts, personal loans, etc). I chose “eradicate” because I want you to treat this debt for what it is; one of the worst things in your life.
Start by getting an accurate accounting of how much debt you have and details such as annual percentage rates and minimum monthly repayment amounts. When you have that information, you’ll be able to put a plan together for paying it all off.
For additional help/guidance, you can access our Get Out of Debt course at no cost. It will help you get organized and develop your plan for becoming debt free.
One of our Partners, Dovly, can help clean up your credit.
Complete your emergency fund
Get six month’s worth of living expenses saved.
You should have more funds available to devote towards this goal since you’ve eradicated yoru credit card debt.
Start with two months, then three, then four, then five, and finally six. Before the pandemic, I would tell people they should have “three to six months” saved up. Now, because of the uncertainty we’ve all experienced, I recognize the importance of having six months.
There’s no guarantees in life. Bad things happen. Having six month’s worth of expenses puts you in a position to withstand bad things.
This can take you a long time. But it’s worth it.
Once you’re debt free and you’ve got six months of expenses saved up, you’ve achieved financial security.
Security, then prosperity.
It’s my desire for everyone to achieve financial prosperity. To have and enjoy the lives they want.
I know that before that’s possible, financial security must be found. When you’ve completed these 7 steps, you’ll have financial security. You’ll have developed new habits and routines, you’ll have grown your confidence, and you’ll have reached a new level.
The challenge and opportunity is locking that new level in and making it your new normal.
Making transformational change in your life requires an integrated approach. It requires you to look at your past history with money. It requires you look into the future for what you want your life to look like. And it will require you take a hard look at how you’re currently interacting with money.
This change will also require you to embrace discomfort over comfort. It’s natural to want to revert back to old habits.
But those habits didn’t serve you.
In order to achieve financial security and to get on the path to financial prosperity, you’ll need to embrace temporary discomfort. It’s temporary because it won’t last forever. Once you’ve completed these steps, you’ll be a new person with new habits, beliefs and a new outlook on your future.
It will get easier. Your life will be better.
In order to make important changes, you need the right resources.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
Connect with one of our Certified Partners to get any question answered.
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If you’d like help getting on the same page with your partner, check out our Same $ Page Course.
If you’d like to help your kids get good with money, check out our Teaching Kids about Money course.
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Good luck on your journey to financial security and then financial prosperity. We’re here to help.
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