When thinking about getting your financial life together, it’s hard to figure out where to start. You know you’re broke, unorganized and need more money, but it’s hard to figure out just what actions you need to take to get yourself together. It’s natural to believe that finding ways to make more money is where to begin. Though this may be part of the solution you need, that’s not the first place you should start.
The first step to getting your financial life is creating a plan. Personal finance is 80% behavior and 20% knowledge. Whether it’s getting in shape, learning a new skill, performing well in school or at work, behaviors drive success, and failure, in all facets of life. The same way good habits will lead you to getting that six pack like Beyonce (I been crunchin’, I been crunchin’), developing good financial habits are the basis for taking control of your personal finances.
We live in an economy that teaches us that we must acquire the means to achieve our goals. But achieving financial freedom does not begin with having more. It begins with stopping, thinking about what you’re doing and cultivate the behaviors that allow you to achieve your goals. So before you create your financial plan, start by understanding your behavior.
1. Know where you stand today by calculating your net worth
Knowing your net worth tells you exactly where you stand financially and it’s something you should track annually. Your net worth in a nutshell is how much you own vs. how much you owe. The money you have in your bank account, investment account, retirement account, savings account and properties you own outright are examples of things you own. Things you owe would include any outstanding debts you have including student loans, home loans, credit card debt, car loan debt and payday loans. Add up everything you own and subtract everything you owe, and bam–there’s your net worth! This number could be positive or negative.
2. Figure out how you ended up with that net worth
It’s important to know and understand your personal history, because if you don’t come to terms with it, you will repeat the mistakes you’ve made. Conversely, if you have been good with money so far, you want to take note of those behaviors and repeat them. Our world moves so fast and there are so many distractions that keep us from being introspective. You have to take the time to actually think about your life and what’s actually happening in it. Acknowledging where you are and how you got there is the first step to freedom.
Take some time to make a self assessment. What specific actions that you’ve taken in your adult life have led you to the place you are right now? Where did you go wrong and where did you go right? Don’t focus on outside influences like your family, friends or community. Just think about you. If you’ve acquired debt, ask yourself, “Why did I need that money? What did I do with it? Looking back on that decision today, did it help or hurt me? Also, think about the things you’ve learned about money so far. What it means to you, how hard you’ve worked to get it and how easy/or hard it is to spend it. What are some of the decisions you’ve made simply based on the fact that you were misinformed.
3. Figure out what you’ve been doing with your money
Have you ever thought to yourself, “Where the hell did all my money go?” You need to know the answer, friend. Our spending behavior is so habitual that many times we aren’t even aware of all the ways we waste money. We have access to pretty much anything we want, in any color, size or variety, so we often confuse needs and wants. Even though technology makes it easy to track our spending, we usually don’t. To make sure you get where you want to go you have to know where you are. Literally! When you use Google Maps for directions, the very first thing the GPS has to pick up is your current location so they can give you the proper directions to get where you’re going. Think about you financial plan in the same way.
Log into your bank account(s) and take a look at how you’ve spent your money over the last month by downloaded your monthly account statements from the last three months. If you’re really feeling froggy, look at your last annual summary. That will probably give you the clearest assessment of just how you’ve been spending your money–and may be a little terrifying.
Ok, so how much of the money you’ve made did you spend? What was your biggest spending category (food, entertainment, bills, debt repayments)? Did you save anything? If you assess and entire year in this exercise and this is your first time tracking your spending, you’re probably going to be in shock! In shock of just how much you made in a year and how much you spenUntitled designt.
4. Determine what you want your life to look like
Now that you know how you spent your money, think about how you want to spend your money. Get real about what your financial life actually looks like today then think about what you want it to look like. How do you want to be using your money one, five or ten years from now? You want to travel, own property, be debt free, pay cash for a Chanel bag (or is that just me?). Whatever you want to do, write it down in the form of goals–long and short term. For example, if you have a long term goal of saving a $15,000 emergency fund in the next three years, your short term goal should be to save about $416 per month. If you want to pay off $10,000 in debt in the next 2 years, your short term goal needs to be to pay at least $500 a month (to cover interest). The key is determining the end result in your long term goal, then backing into it with your short term goal.
Now, stop right there. What you’ve done here is determined where you stand, become conscious of your behavior and acknowledged your goals. Now that you are conscious of your behavior you can control it. From here you’re well on your way to be being better with money. You got this!
