Personal Finance. Where to start?
This is always a difficult question. I have had many friends and family ask this before. I feel bad to always retort their question with a question. Where are you at? By determining where you are at, you then can formulate a plan for the future. Your priorities will be different from mine, or someone that is entering retirement. If you are starting you need to develop all aspects of your finances. Whereas if you are going into retirement, you need to change your investment strategy to accommodate withdrawing if it isn’t set to do so.
Simple things like these is where I see most people mess up. Surprisingly, people who usually need the most help don’t know it because they are already doing well. People who aren’t doing well know they need help, because well, they aren’t doing well. So, wherever you are at let’s get started.
I want to lay out an approach and I will cover it in more depth in upcoming posts. This is just to provide a quick overview:
RECOGNIZE AND DECIDE
Don’t beat yourself up too bad. You need to decide that you are going to do it and do it. You can beat yourself up along the way, but, the first step is recognition and decision.
INCOME
Find out what you actually earn. Determine your income annually and monthly. Whether you are self-employed, an employee for someone else or retired, it doesn’t matter, you need to know what is coming into the checking account every month (or year if they are annual installments).
EXPENSES
Track your expenses. Go through the last couple of months and look at your checking, savings, and credit card (if you have them) statements. Determine the monthly amount of expenses and start to categorize those expenses.
BUDGET
Start with 100/0 spending/savings, then progress to 80/20, and then kill it and try and do 60/40. Why start with spending 100 percent and saving 0? As I said, depends on where you are. If you are at 120/-20, getting to 100/0 just stops the growth of debt. For many, that is a great place to start. Develop a “Macrobudget,” this is a budget with the major categories and is what I currently use. If you nitpick every single aspect of your budget you are less likely to follow it and give your self no wiggle room. See more on how to “Macrobudget” here.
INSURANCE
The next important aspect is insurance. This includes health, home or renters, car, and life. These are important to shift the risk and make someone else responsible for huge catastrophes you would be unable to afford. If you don’t have one already, a Certified Financial Planner (CFP) or Finance Professional licensed in these services can provide you with the assistance or products you need. MAKE SURE THE TYPES OF PRODUCTS YOU GET ARE SUITED TO YOU, NOT ONE SIZE FITS ALL.
SAVINGS
Starting out, I would recommend before anything else that you build up a one month of income as an emergency fund and work on slashing the expenses or upping the income to achieve 100/0 budget. After we get past the 100/0, now we can start thinking of building up the emergency savings and investing to build wealth.
BUILD WEALTH AND OTHER THINGS
After getting the foundation laid, this is where it gets fun. Setting goals and reaching new heights, dreaming and achieving those dreams. Everyone’s dreams and desires are different. So, set your dreams and goals and succeed.