If you’ve decided this will be the year you transform your finances, hats off to you. It can be a daunting task, but it’s not impossible. To help you get started (often the most difficult part) below is a list of steps I would follow if I was starting from scratch.
1. Write a Budget Around Your Expenses
The big turnaround for my finances was budgeting around my core expenses, not what I had coming in. It’s hard to wrap your head around at first but once you change this way of thinking, you’ll be better equipped to live frugally no matter what your income is. Want to know more about how I budget? Read the post here: The Opposite of Living Beyond Your Means
2. Build an Emergency Fund
If you don’t already have savings, then an emergency fund should be your first priority. Don’t even think about your debt until you have at least $1000 in the bank. Why, you ask? Well, the reason most people have debt is due to unexpected expenses. Even with the best of intentions, if you don’t have the means to cover an emergency you’ll head straight back into debt.
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For more ways to save money, I’ve written a post about how to save your first $1000.
3. Kill Your Debt
Once you’ve written a budget and saved (at least) $1000 it’s time to make a plan to clear your debt. The below list is tailored to credit card debt but you can tweak it for any type of debt. Here’s how I like to deal with debt:
- Find a balance transfer offer for as close to 0% and transfer your highest-interest bearing card there.
- Cut up the card so you can’t rack up any further debt on it.
- Set an automatic transfer for the amount you set aside in your budget.
- Find out how frequently the card issuer allows you to reduce the credit limit. If possible reduce your credit limit every time to pay back $100. For example, if you have a $3000 limit on your card and you pay back $100 you now owe $2900. Call your card issuer and ask them to reduce your credit limit to $2900. Note: this technique might affect your credit rating, but it’s exactly what I did and I have had no issue securing lending to buy an investment property or getting insurance, so it hasn’t hurt me. Read more about it here
- Rinse and repeat
Another tactic that really cured my debt addiction was to pay my debt in cash at the bank. It hurt so much handing over actual cash money. But it helped to confirm in my mind that credit card debt was real money and not some never-ending slush fund created solely for my consumerism. You can read more about how I changed my credit card maxing ways here: The Mind Trick I Used to Cure My Credit Card Debt
4. Get Educated
Want to learn more about money? Well, do I have a list for you. This list of the best personal finance books for beginners includes books that are easy to read and interesting, no boring analysis and jargon here, I promise. I’ve read them all and would recommend them to my loved ones.
5. Set an Audacious Goal
Write a big hairy goal. Something out of your wildest dreams. Travel around the world for six months. Become a stay at home parent. Take a year off to build a passion business. Semi-retire in your 30s. BIG DREAMS, PEOPLE. Stick your goal on the refrigerator door. Debt repayment and ultra-frugal living can really suck sometimes, so having a visual representation of your goal in a place you visit often can help to keep you motivated in the tough times.
With dedication and a few simple tweaks, this year can be the best year of your financial life. It all starts with budgeting to live within your means. Then by saving an emergency fund and making a get-out-of-debt plan you’ll be well prepared when the sh*t hits the fan. As you go through this process you’ll slowly see your mindset towards money change and perhaps you’ll feel as I did when I was going through this; when you know how to use it, money is a powerful tool, not something to be feared. I wish you all the best with it. Happy New Year!