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Hey, I’m happy to feature a guest post from Greg Johnson! Greg and his wife Holly run Club Thrifty, where they feature tons of great info on managing your money and traveling cheaply.
Do you spend every cent you earn? Do you buy whatever you want and hope for the best? Be honest: Do you have any idea how much you spent on food last month?
If you answered yes, yes, and no, then you, my friend, might suck with money.
Now, don’t get offended. Here’s the dirty little secret about getting ahead that few ever tell you: Everybody starts somewhere. Every personal financial rock star you know had to learn the basics at some point.
I remember a time when I sucked with money. And, not to toot my own horn, but things turned out pretty good for me.
If I could turn things around, then so can you. Here are four key steps anyone can take to start getting their finances in order.
Start a Budget
I know you don’t want to hear this, but the first thing you absolutely need to learn if you want to get ahead is how to budget.
People don’t like it when I start throwing around the “B” word because they instantly associate it with restrictions and tedious spreadsheets. I’m here to tell you budgeting doesn’t have to be like that. You just need to find a method that works for you.
Personally, my wife and I dig the zero-sum budget. What that means is that your income and expenses balance out to zero. Essentially, you assign every bit of your income to an expense category so there’s nothing left over. This means you have to treat your savings categories like expenses, which works really well for us.
Here’s the quick and dirty on how to get started with a budget:
- Determine your monthly household income
- Make a list of all your monthly expenses
- Make a plan for how you will distribute that income to cover those expenses
- Keep track of your spending and check in throughout the month to make sure you’re on track
You can use a simple pen and paper, a spreadsheet program, or a budgeting app – whatever you’re comfortable with. Just get started.
Track Your Spending
Tracking your spending is actually an integral part of budgeting, but I like to talk about it separately because not everyone gets that right away.
The first part of budgeting is making a plan for your money. Doing that is a huge step, and – if you’ve made it that far – give yourself a pat on the back.
But, your job isn’t done. It’s not enough to have a plan. You need to make sure the plan is working. That’s why you need to keep track of every dollar you spend. If you don’t know where your money is going, you can’t take control of it. There’s no getting around that.
I know, I know, it sounds tedious…but, it doesn’t have to be. If you’re using a pen and paper budget, you might prefer to save your receipts and update your budget with how much you’ve spent in each category once a week. Or, you might prefer to take 30 seconds and do it every evening – you do you.
If you’re using a budgeting app like Personal Capital, Mint, or YNAB, you can sync them with your bank account so that all of your transactions are automatically imported.
Either way, tracking your spending is a must. If you track your spending and find you’re not sticking to your budget, then you know you need to make adjustments to either your spending or your plan. In either case, you’re in control.
Create an Emergency Fund
When you’re making your budget, one expense category you’ll want to create is an emergency fund.
It’s mind-blowing how many people don’t have any savings stashed away to cover an emergency.
You might be telling yourself you can’t afford to save right now, and I get that. I’m not judging you. With that said, I’d argue that you can’t afford not to.
Think about it: What would you do if you lost your job tomorrow and it took eight weeks to find a new one?
Or, how would you pay if your pet needed an emergency vet visit to the tune of $600?
What would you do if the transmission went out in your car?
If you don’t have an emergency fund, then I’m betting you don’t have answers to those questions.
A reasonable goal is to save 3-6 months of living expenses – but, you know what? – don’t even think about that yet. That type of commitment makes it sound bigger and harder than it is. Instead, look at your budget and decide what you can afford to put away on a regular basis right now. Maybe it’s only $25 out of every paycheck. Well ok, that’s a start.
Set a goal to get $100 in your account, then $500. Keep moving the bar up until you’ve reached $1,000 or more. Even if you’re not quite to that 3 to 6 months of expenses yet, you’ll be far better off than before you started.
I recommend setting up a separate online savings account – CIT Bank and other online savings or money market accounts offer great options – and automating those savings. Basically, every payday, that $25 will automatically transfer from your checking account into your new savings account – you won’t even miss it. That’s called paying yourself first, and it’s a strategy every financial rock star uses.
Contribute to Your 401(k) or Work-Sponsored Retirement Plan
Speaking of paying yourself first, let’s talk a little bit about retirement. If your employer offers a 401(k) or a similar employer-sponsored retirement plan, count yourself fortunate. Most importantly, you’d better be taking advantage of it!
Employer-sponsored retirement plans generally work like this: You contribute a certain percentage of your annual salary to the plan (prorated over each pay period), and your employer matches it (to a certain limit).
For example, your employer might match up to 3% of your salary. So, if you earn a gross income of $50,000, 3% is $1,500. That means you’d put $1,500 (or $58 out of each bi-weekly paycheck) into your 401(k) every year, and your employer would also put in an additional $1,500.
That’s $1500 in free money.
Ideally, you should shoot to save at least 10-20% of your income for retirement. With that said, you should at least save enough to meet the match. I mean, that’s FREE money, right?
I don’t know about you, but I love free money. Never leave free money on the table! Only someone who sucks with money would do something like that, and that’s not gonna be you. Not anymore, right?
If you can take an honest look at your financial habits and admit that right now, you kind of suck with money, then good job. Admitting there’s an issue is the first step to making a change. The second step is tackling this list to start getting your financial house in order.
Remember – nothing is permanent. Mistakes you made in the past do not dictate the changes you can make today and tomorrow. What will your tomorrow look like?
Thanks for reading and good luck. You can do this!
Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.