You know it's important to get your money under control if you ever want to get out of debt, go on awesome vacations, or retire someday. The problem is, a lot of people don't know where to start or feel like they don't have time. If you have just a day, we have you covered.
Illustration by Angelica Alzona.
A huge part of personal finance is behavioural, so we won't pretend this guide will give you complete mastery over your finances in a day. Anyone who's worked hard to reach financial security will tell you: it takes time to learn better habits. However, you can make great strides in a day. If you're new to personal finance, here's what you can do to kick things off.
Build a Realistic Budget and Start Saving for an Emergency
Most of us suck at budgeting because we think about it the wrong way. We think of it as a strict set of rules meant to keep us from spending money on stuff we enjoy. Forget that. Let's kick things off with the crucial question that many financial planners ask their clients: Why?
Why do you want to get your finances in order? It could be travel, supporting a family, saving to switch careers — whatever. Your answer will serve as the backbone of your budget. Instead of a strict set of rules, your budget becomes a spending plan that supports what actually matters to you, even if it's just saving up for a new laptop. It's a lot easier to stick to that plan when it works for you, instead of the other way around.
From there, it's time to pick a budgeting method. Here are a few examples:
- The 50/20/30 Method: With this classic method, 50 per cent of your income goes toward fixed expenses, like your rent or your mobile phone bill. 30 per cent goes toward flexible spending, like groceries or restaurants, and 20 per cent goes toward financial goals, like paying off your student loan.
- The Subtraction Method: This is dead simple. Add up all of your monthly bills. From there, take your monthly income and subtract from the total of your bills and then subtract more for savings. Whatever is left is how much you can spend in a given month.
- Ramit Sethi's Spending Plan: Personal finance writer Ramit Sethi suggests a variation of the 50/20/30 method with a little more detail. 50-60 per cent of your take-home pay should go toward fixed costs, 10% should go toward retirement savings, 5-10 per cent should go toward saving for other goals, and 20-35 per cent should be guilt-free spending money.
Once you pick your method, budgeting comes down to a few basic steps:
- Make a list of all your expenses. (don't forget the irregular ones!)
- Determine your monthly take-home pay.
- Divvy up your expenses into categories using the method you picked.
- Come up with a system for tracking. We're fans of budgeting tools Mint and You Need a Budget. They make it easy to get started, but you'll need your bank account's login credentials. You can always use Excel, too.
Be realistic when you decide how much to spend in each category. If you spend $US600 ($781) a month on restaurants, for example, don't expect to go from $US600 ($781) to $US50 ($65) in a single month. Chances are, you'll go back to your old restaurant habits, blow your budget, and give up on it completely. Buffer some room for reality. If you need to cut back on your spending, by all means, cut back, but you'll probably have more success if you take it a little at a time. As money site Femme Frugality puts it, be liberal with your budgeting and conservative with your spending. In other words, it's better to err on the side of caution and overestimate your spending.
This is also important: you need an emergency fund. This is a savings account you can pull from when your car breaks down, your dog needs surgery, or whatever emergency comes up. Without one, too many people resort to desperate solutions when they hit a rough spot.
Most money experts say you should have between 3-6 months' worth of savings in an emergency fund, but that probably seems damn near impossible when you're just starting out. So start small: save $100, then a few hundred, then a thousand, and then worry about what your emergency fund should look like. For now, it should just be a small pot to tide you over in case of the worst. If you don't already have one, budget for this savings goal.
Save Money on Every Bill Possible
As a money nerd, a bill audit is one of my favourite things to do. I go through each bill and research ways to save. It's worth going through to look for savings on everything from your cell phone bill to your electricity to your streaming services. Here are some common bills people pay too much for and how you can save:
- Mobile phone plans: There are so many discount options these days, it's worth seeing what's out there if you haven't shopped for a new plan in a while. Best of all, many of the larger carriers are trying to keep up with the savings by offering their own cheap options. Use a tool like WhistleOut to help you search.
- Credit card interest: Surprisingly, 78% of customers who call to ask for a better credit card rate get what they want. Interest adds up, so it's worth the call. Here's a script to help you do it.
- Car insurance: Many of them offer discounts if you combine policies. If you have renters or homeowners insurance with a separate company, call your auto insurance carrier and see what your bundled rate would be.
Start with those three — you might be surprised at how much you'll save. Then audit all of your other monthly bills and see if there are additional ways to cut costs. The best part of this exercise is you do the work once but continue to save month after month.
Come Up With a Debt Plan
If you're in debt and you don't have a plan to get out of it, it's time to make one.
The first step: make a list of all of your debts. Track them in a spreadsheet, or just write them down. Make a column for the following: balances, interest rates, and minimum payments. From there, revisit your budget and figure out how much money you have available to go toward all of your debt. Set a general goal to pay off X amount of debt every month.
Second, pick a debt-busting method. Some people prefer the Stack method, where you pay off your highest interest rate balances first, then focus on your lower interest rates. If you have a handful of smaller debts, though, you might prefer the Snowball method, which focuses on paying off your debts with the smallest balances first. If you're on the fence, research shows the Snowball is the more effective method. People tend to stick to goals when they see progress. Since the Snowball method focuses on quicker wins, many people find that motivating.
Whichever method you choose, the next step is to prioritise your debts accordingly. Make a list of debts ordered by which one you'll focus on first. Of course, you'll still pay the minimums on your other debts (don't want to rack up late fees). When your priority debt is paid, add that amount to your next debt on top of the minimum. Then move on to the next debt, and the next one, until you've tackled them all. Yeah, it's easier said than done, but before you make progress, you need a plan.
This spreadsheet can help you calculate when you'll back off debt with the Snowball method in particular.
Learning to be good with money takes time, and a lot of it is just about adopting better habits and behaviours. That said, you might as well get started with the practical stuff. In addition to these steps, make a goal to learn a little bit about money every day. You're more likely to stick to a budget and debt goals if you have financial literacy on your mind every day, even if it's just fifteen minutes.