I recently met a divorced professional who is raising three children as a single parent. We were meeting because she was feeling overwhelmed by her financial obligations.
Her parents did not discuss money or personal finances with her when she was growing up, and now she is faced with the challenge of managing her own money. He is also concerned about repeating the behaviors he learned and practiced with his pre-teen children.
As we talked, she admitted that she suffers from anxiety and doesn’t know where to begin taking control. We discussed that the change in her behavior won’t happen overnight, but if she stays focused and engaged, she can make positive changes that will empower her now and in the future.
By openly discussing her concerns and identifying solutions, she began the process of shifting her focus from anger and guilt to a positive personal wealth journey.
We devised a plan, which is highlighted below.
make a budget
Most people know the amount they’re paying for their mortgage and car payments, but few pay attention to the amount they spend on Instacart, online shopping, eating out, and credit card debt. Spending on these items is easily forgotten because the purchase is out of sight and out of mind. Keeping an eye on your spending will make it top of mind.
Apart from understanding the spending pattern, you need to understand all the sources of income. How much money are you getting monthly? Are you withholding enough for taxes, or are you owed money when your tax return is filed?
Creating a budget will help you understand how and where you are spending your money. Track all income and expenses for at least 30 days, or—better all—years. Write down your fixed monthly expenses first and then add the additional expenses. When tracking your expenses, think about the following:
— Are you spending more than your monthly income?
— Are you using a credit card because you are short of cash?
– How can you reduce your expenses and fixed expenses?
– Can you increase your income?
Are you saving enough to meet your short and long term goals?
How much would you need to save to maintain your standard of living in retirement?
– Are you maxing out your employer match and annual contribution limit in your retirement plan?
List all your loans on a spreadsheet or mobile app. Identify the lender, terms, dues, interest rates, promotional rates, expiration dates and minimum payments. Focus on the loan with the highest interest rate, except for your mortgage.
Sort the loans from highest interest rate to lowest, identifying the loan with the highest interest rate. Your focus will be on paying off that debt first; This is called the avalanche method.
For example, if you budget $700 per month to pay off your debt, you’ll make the minimum payment on everything except the credit card with the highest rate. Any additional funds will be applied to the loan with the highest interest rate. When that loan is paid off in full, the same strategy is applied to the loan with the next highest interest rate, until all debt is paid off in full.
As a reminder, keep your credit card in a safe place so you’re not tempted to keep spending. And delete any stored credit card numbers on your device to end online shopping quick and easy. Consider using your debit card for payments to avoid additional debt when you shop online.
Know your net worth
Make a list of your assets (that you own). Then, subtract liabilities from assets (what you owe) to determine your net worth. If you have never calculated your net worth, use this year’s statement of net worth as a benchmark.
Make a plan to review your net worth annually. Is it increasing or decreasing? Understand why it has changed. Are you saving more, have your debt gone down, or was the stock market up or down?
Whether your net worth is high or low, you should get an accurate picture of it. How do you plan for your future without understanding where you are financially now?
Plan for big ticket items
Are you planning to move, buy a car, replace your roof, or pay for college tuition in the future? Do you know how much it will cost, and have you thought about how you will pay for it?
If money isn’t readily available in your bank account, sketch your timeline, divide the expense into monthly costs, and include the expense in your budget.
prepare for the unexpected
As we have recently been reminded, life can change unexpectedly and rapidly. Are you prepared for job loss, illness, disability, natural disaster or lawsuit? Insurance and savings can help protect you from unforeseen events.
— Do you have an emergency fund with expenses ranging from six months to 12 months in a savings or money market account?
— Do you have a plan in case an unexpected natural disaster strikes and supplies are readily available?
If you’re tech-savvy, consider storing inventory and important documents on a portable hard drive. It’s also a good idea to keep copies of birth certificates, passports, trusts, wills, trust documents, home improvement records, and insurance policies in a small, secure evacuation box (the fireproof, waterproof type that you can lock is best). is) you can grab in a hurry if you need to evacuate immediately.
be diligent, stay focused
It couldn’t be easier to stay within your budget while you’re on this trip. Temptations will present themselves every day.
At the end of each day, spend some time reflecting on what worked during the day and what didn’t. Did you stop at Target, even though you don’t need anything, and still manage to spend $100? Next time, if you have a shopping list, commit to just stopping by Target, and don’t deviate from it.