When you are just starting out, taking care of your personal finances can seem like a daunting task. Whether you are earning your first real paychecks, purchasing your first house or preparing to start a family, certain milestones can mean huge changes in how you handle your money. Use the following helpful suggestions to get — or keep — your financial life on track.
1. Create a Net Worth Statement
This is a snapshot of your current financial situation. You can find helpful worksheets online, or create your own. Do it on a spreadsheet so you can easily amend it as your situation changes over time. In one column, list your assets — what you own — and the value of each item. Include account balances and possessions such as vehicles. In another column, list your liabilities — what you owe. Subtract the liabilities from the assets; the difference is your current net worth.
2. Set Financial Goals
If your net worth is a negative number, one obvious goal is to change it to a positive number. However, that can take years, especially if you own a home or bought a car recently. Set several goals with varying time frames. Think of one goal you can accomplish in a year, one in five years and one in ten years.
3. Review Loans
Loans that you secured a year ago or more may be ripe for refinancing. The higher the balance on the loan, the more important it is to get the best deal possible. Interest rates may have gone down, your income may have increased or your credit may have improved. Any combination of those factors may result in better auto financing rates. One caveat: be wary of high loan origination fees, which sometimes undermine mortgage refinancing efforts.
4. Examine Your Credit Report
Lenders, rental property managers and prospective employers check your credit history. Shouldn’t you know what is in it? Being aware of your credit score is a good start, but you should check the detailed report at least once a year. Correct inaccuracies, investigate any accounts you do not recognize and close accounts if necessary.
5. Keep a Spending Log
For at least a month, keep track of what you spend. This goes for all adults in the household, so if you have a partner, make this a team effort. You may be surprised to discover where your money goes. Use an app or just a small notebook. The only requirement at this point is honesty; no judgment allowed.
The next step is to separate expenses into categories. Common fixed expenses include rent or mortgage, car payments, and student loans. Categories that vary from month to month include groceries, fuel, personal care, clothes, dining out and recreation. Add up your figures so you can see how much you spent on what. When you have done the math, it is time to evaluate. Does your spending reflect your values? Take a moment to assess the results and decide if any changes are in order.
6. Create a Spending Plan
This is the step where you put the results of your spending log into action. Create a spending plan, also called a budget, using the categories you developed when evaluating the log. Decide how much you will spend in each group during the next month. Automate bill paying for the fixed expenses so you will never be late with payments and get hit with fees and penalties.
Now comes the fun part. Revisit your financial goals and look at your progress toward them. If you are not already setting aside the funds to meet your financial goals, redirect money from the variable spending. To increase the odds that you will stick to the plan, do not shave more than 10% from any one category.
Set up a savings account. Add up those small amounts from the various categories and automate regular deposits into the savings account. Schedule it for the day after payday so you are less likely to use that money on things that are not important to you. Follow these six steps and your effort will pay off. Handling your money wisely puts you in charge of your life.
