Improving your finances can be tough, especially the start. To help you with this I’ve assembled an introduction to the fundamentals. I’ve put them in the order most people will approach them as a logical progression. There may be some variation or exceptions depending on your situation but if you are unsure, work your way down the list. The more you do the better you will be.
1. Spend less than you earn
The first and most important step in getting your finances in order is to spend less than you earn. Without a surplus of free cash, everything else you do will only help you so much. Although you can and will go periods of your life where you spend more than you make, in general, it’s worrying.
If you are already spending less than you earn, great start, you can continue as you are or try improve this situation by lowering your expenses, increasing the benefit you already have. Lowering your expenses is the most effective route for most people as with some effort you can start immediately. While improving your income can often be dependent on other parties, you can directly impact your personal spending today. The extra cash you get from lowering your expenses is now your money to put towards your goals. It’s like giving yourself a raise!
If you are not spending less than you earn, you need to change this soon. Look through your expenses, bank accounts, and debt. You need a full understanding of your situation to find the leaks in your ship. Once you have done a personal audit, start cutting unnecessary expenses and areas you don’t value but have been spending money on. If you’re unsure if you can go without something, lean on the side of cutting it out, and if life isn’t worth living anymore, reintroduce it.
If you are starting from a worse situation, you will have to be harder on yourself to start.
Here is a few ideas to start with:
Utilities - Compare and switch providers if you can get a better deal. Conserve energy by lowering consumption if possible. You don’t have to be able to walk around your home in a t-shirt in Winter, lower the heat and put on a jumper.
Cancel subscriptions - Cancel any unused or aspirational subscriptions. If you don’t use the gym, stop paying for it.
Debt - Restructure/consolidate debt if needed. Sell assets to pay off debt. If you can’t control yourself with a credit card, cancel it.
Social/Habitual spending - Drink less when going to bars and clubs, plan to go to free entry venues. If you get a coffee on the way to work, cut down or make it at home and take it with you.
Once you start cutting some expenses, you might even realise you don’t care about certain things that just became a habit, and others you want to continue regardless of the cost. That’s fine.
2. Build an Emergency Fund
An emergency fund is an easily accessible amount of cash ready to be used for unplanned expenses or minor emergencies. This can be intensely personal as you need to define what an emergency is to you. Is it broken dishwasher, a car repair, losing your job?
You need to define what you consider an emergency, so you don’t raid it for non-essentials.
Building an emergency fund gives you the peace of mind that the most likely issues you have will be easily dealt with because you have the cash ready.
According to the 2016 US Federal Reserve survey on Economic Well-being in US Households, the yearly report that shows the state of Americans personal finance, almost half of Americans can’t afford an unplanned $400 expenses with borrowing or selling something. That is pretty bleak, and we’re probably not far off in Ireland. Emergency funds stops that.
If you don’t currently have an emergency fund, start it now. Initially, try to build up €500, then €1,000 as that will cover most of the unplanned expenses that arise.
After you reach that level, you should do an assessment of what risks are likely for you, and the expenses you could face.
Basic risk assessment: how risky is my job, could I lose it tomorrow, can I get injured in work, do I have dependents, if broken what would need to be replaced immediately.
After this, some people will want 1 month of expenses and others will feel more comfortable with 6 months or a year of expenses.
3. Increase Your Income
After lowering your expenses, increasing your income will have the most impact on your wealth building. This can be harder to improve though as it can depend more on external factors like the state of your employer, salary levels in your industry, etc. so you need to plan for the mid and long term with this.
Can you work overtime? Not ideal as a long-term solution but good for a bump up if you’re trying to pay off debt or save for a goal.
What can you get a bonus for? Work towards sales or performance related bonuses. If your company has yearly or mid-year bonuses, how can you get this?
Improve your job. If you can improve your work, your team’s performance, your company’s results, you place yourself in a better place for pay increases, bonuses and promotions. Help your manager reach and beat their targets.
Make your intentions known. Although it sounds simple, many people never do this until they quit or move jobs. Make your intentions known to your managers. They’re not mind-readers. If you want a raise, promotion or bonus, make it clear to your manager and get specific targets needed to make it happen. Getting any of these is not an in the moment exercise. You need to have demonstrated your value and achieved success to be rewarded. Don’t just turn up and ask for more money because you are on time every day. Lead with your value, you get paid for last year’s performance.
Skill up. Get a respected qualification or accreditation that is desired in your industry.
Side Hustle or 2nd job. Unless this is just for a set period of time or while transitioning to a business, be careful. Like overtime, this should not be seen as a long-term solution.
Start a business. Don’t assume you can do better at this than working. Most businesses fail. If you make it work, you will receive a bigger proportion of the gains. If it fails, you are on the hook. Caveat emptor.
Don’t accept anyone else’s pace. Don’t set arbitrary timelines, go after what you want.
4. Set Goals
Having goals gives you a target. It gives you the ability to differentiate signal from noise and increase your work rate. When starting to improve your finances, you’ll probably have a lot of habits that are holding you back from reaching your goals. Set goals enable you to spot wasted energy, cutting unnecessary expenses and bad habits.
Write a list. Prioritise your goals. Set timelines, and consider trade-offs to reach this. After you write this down with timelines, you’ll get an idea of what is realistic and what is a stretch. Initially one or two stretch goals is fine, but you need the majority to be realistic. You may have to side-line some goals until you are in a better place. If it struggling to decide between some, ask yourself what is non-negotiable?
5. Increase Savings
Savings are like muscles. The bigger they are, the more you can lift. Even if you don’t have a set of goals right now, having savings gives you the ability to do what you want now, or sooner when you do have goals.
Savings gives you power and confidence. Many of the little financial worries that come up throughout different periods of life can be lessened by simply having money in the bank. If your job is less secure for a while, you can feel safer if you have a few months of expenses saved.
Savings also gives you power. Many people don’t have the confidence to turn down requests in work that go against their values. Asked to work the weekend at the last minute? Confidently say no, and go about your weekend plans, knowing your savings insulate you from the pressure to comply to unfair demands.
Build a few months of expenses in savings and increase your power.
6. Manage Risks
Insure against events you can’t pay for out of your regular cash flow. Don’t get insurance if you can cover the expense!
If you have kids or dependents you have a moral obligation to have life insurance.
There are also tons of non-insurance risk management moves. Have an Emergency Fund to cover likely, but unplanned expenses. Open two bank accounts so if there is an issue with one bank, you have access to cash in the other. Leave spare keys in your friend’s house.
List the risks you are most likely to experience or would have more adverse effects. Plan to mitigate these risks.
7. Set up a Pension
People are living older. The government pension will be paying less and later. Some question how long there will be a state pension. You need to set up a pension.
The tax benefits are sweet. Few things get near the level of tax benefits as pensions. If you are looking for low effort, high impact wealth building, set up a pension. If your employer contributes, take full advantage, this is free money!
8. Invest for Wealth
If you have gone through the above steps, you should have goals to meet and free cash to allocate. Start investing to meet your goals and separate your income from your time.
Investing allows you to diversify away from the risk of being solely reliant on your income to meet your goals.
9. Seek Counsel
Get external feedback. This can be friends, family, a co-worker or a professional. You need external feedback to give you an outside perspective on your issues. Unfortunately your point of view can blind you from obvious issues in your personal and professional life.
Seeking the counsel of a trusted advisor can help give you an unbiased view.
Get to work.
Financial literacy leads to reduced stress, better decision making and the ability to plan to meet your personal goals.
Money Boot Camp Ltd.
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