Creating a financial game plan can be difficult and requires an honest evaluation of your starting point. Each of us has different experiences that affect our relationship with money during various stages of our lives.
Cres Hernandez, a comedian and producer in Chicago, wants to start over and build a solid financial base. Tonya Rapley, founder of My Fab Finance, gave Cres a crash course on budgeting 101.
When it comes to money, most of us just know that we want more of it. We often don’t consider what we should do with our money once we have it. Whether you’re getting a late start or searching for ways to build on your solid financial foundation, there are a few things you should be considering when it comes to your money.
Getting a late start
Try as we might, life might not always go as smoothly as planned. Some people start their careers in their late 20s or 30s, as opposed to right after school, and are just starting out compared to some of their peers.
Breaking down your financial start into achievable steps can help you visualize a game plan and then actualize it.
1. Establish consistent income. Depending on the nature of your work, amounts may vary, but your goal is to generate enough revenue to comfortably manage your financial responsibilities.
2. Control your spending. It’s common for people to spend freely when they first receive money after years of not having it. Set a budget; it doesn’t have to be a strict one, but focus on becoming mindful of your expenses and income.
3. Focus on establishing financial security, which is helped by creating a safety net with emergency savings. If you’ve never had a savings account, create attainable goals such as setting aside $250 or $500 in an account you don’t access regularly, and increase your goals as you reach them. Your goal should be to save a minimum of three months’ worth of your overhead costs and expenses. So if your monthly bills total $2,100, you’ll want to set aside at least $6,300 in a savings account.
From there, you can begin to assemble the remainder of your financial foundation. It’s important that you resist the urge to play catch-up with more successful financial peers during this stage. Keep in mind you are seeing the results of their efforts, not their actual efforts or the work that it took them to get there. Remember that comparison is the thief of joy.
After a financial setback
A financial setback is anything that doesn’t go as imagined and interrupts your financial plans. This could be an investment gone awry, job loss, a natural disaster, an unsuccessful business venture, identity theft or a medical emergency. Setbacks happen, but what you do following the setback will have lasting impact.
If you find yourself in this position, take stock of your current financial situation and determine the impact. You may find that the setback was less severe than you perceived it to be. During this time, you should also revisit your financial goals and determine if you are still on track. If you aren’t, then allow getting back on track to be your guiding focus.
If you do not have any financial goals, consider setting goals based on answers to the following questions:
1. Which area of your financial life was impacted by the setback? Do you need to repair any elements of your core financial foundation? Take an audit of how your setback affected your current financial situation and formulate a plan, accordingly.
2. Did the setback happen as a result of you striving to achieve another financial goal, such as launching a successful business? If so, recalibrate and set new goals aimed at getting back on track.
3. Did you incur any debt from the setback that needs to be repaid? If so, create a plan for repaying the debts and communicate with any creditors to mitigate any avoidable long term damage to your credit history.
Lastly, assess what you learned from the situation, and how you can avoid similar situations in the future.
Room for improvement
If you’re fortunate to be in a stable financial position, but you know there is room for improvement, the goal in this phase is to look for ways to build on the foundation you have already established. Picking and following a few of these achievable next steps and goals will put you on your way.
1. Continue to budget. This isn’t about depriving yourself of the things you want — it’s about making it a habit to spend less than you earn so that you can spend money on things that support your long-term goals. At this phase you should focus on creating assets and eliminating liabilities.
2. Eliminate unnecessary debt. Are you carrying around unnecessary consumer debt, like high interest credit card debt or debt that fuels consumption? If you are it’s time to get serious about eliminating that kind of debt. Money owed is money that isn’t yours.
3. Grow your money. The easiest way to begin is through a 401(k) or retirement plan offered through your employer or to increase your existing contributions, especially if you work for a company that matches. Once you have maxed out your workplace retirement plan look into other options to save, like opening a traditional IRA account, which has more tax benefits than a Roth IRA.
4. Invest in yourself. Are you positioned to take the next step in your career or business? Is it time to invest in a course, program or coach that can take you to the next level? Now is the time to increase your earning power and value.
5. Reduce future expenses. On a non-income related note, you can identify ways to reduce future expenses by prioritizing your health and adopting a healthier lifestyle. Each year millions of dollars are spent treating preventable illnesses such as diabetes, cardiovascular disease, obesity and dental disease. Carving time out of your schedule for exercise and incorporating healthier foods to your diet can have a tremendous impact on your well-being and can help reduce future health care costs.
No matter where you are in life, money plays an important role. While some events are out of our control, and unforeseen expenditures can come out of nowhere, the smart decisions you make at any phase of your life can bring you closer to your ideal financial situation.