Change is hard, especially when you are strapped for finances and seem to have nothing left for savings at the end of the month. Here are a couple of small first steps to get you headed in the right direction toward long-term financial security.
1. Outline your financial picture, but remember to keep it simple. Don’t try to tackle the Sistine Chapel of financial success. Outline where you are today and where your money is currently going. How much do you make? How much in bills? What larger expenses do you expect in the near future, what kind of debt are you carrying and what are the terms of repayment.
After you make the list, break it down into needs and wants. Rent is a need, the weekend dinner out with friends is a want. That’s not to say that you can’t have some of your wants, but those need to be downsized if you are implementing changes in your financial habits.
2. Take a look at your debt. Where did it come from? What are the terms of repayment? How long will it take you to pay off with minimum payments? What is the interest costing you? You’ll be surprised at how quickly debt ads up.
Now look for ways in your other spending to cut some corners so that you can get any high-interest debt paid off faster. If you can’t find anything, then it’s time to look at increasing your income, either through a new job or second job.
3. Reduce your debt. Start looking for ways to reduce your bills and other debt. Maybe you can refinance your vehicle loan or look for a cheaper insurance plan. Cut memberships or services that you rarely use like a club membership or online entertainment service. Turn the heat down in the winter and the air-conditioning in the summer. Every extra dollar you can find will help.
You can also use a service like the one offered at Family Financial Education Foundation. We make sure that bills are paid on time and that interest rates for collection services are lowered. As smaller debts are paid off we put the cost of that bill toward the next largest one, this is called roll-up and it’s an effective way to pay down debt.
4. Don’t skimp on insurance and be sure to have an emergency fund. Having a financial safety net under you if something bad does happen to you and your family can make a big difference in your financial health if there is a disaster in your life. Not having to borrow more money or go into expensive debt is worth the hassle of looking for an insurance plan that meets your needs.
5. Make your savings automatic and out of your way. Have your HR department at work or your bank to move a certain percentage of your paycheck into a hands-off savings account every month. The savings add up quickly.
If that is not possible in your situation, get creative! Drop pocket change or a few dollar bills into a hard to reach location, like behind your dresser, every night. You could also put a few $20s or better yet $50s into a sealed envelope and drop it into a fire-safe every paycheck. Once you have a sizeable amount saved consider investing it in a dividend account so that it can grow.
Remember small steps are going to add up over time. Looking back a year from now you’ll notice how far you’ve come.