Many people have been there: financial disarray. This day in age it’s not hard to get there. We’re encouraged to spend, spend, spend at every corner. Given the consumer culture and the unstable job market, it’s easy for anyone to fall into peril. Thankfully, there are ways to turn things around.
The following five-step program is by no means easy — it’s never easy to get out of debt and regain prosperity. But it does make the process as smooth as possible. Less resistance means a greater chance of success. If you’re in a poor situation, follow these five steps and pull yourself up by your bootstraps.
1. Take Inventory
Before you can change your behavior you have to take two important steps. The first is to take inventory. In financial terms, that means gathering together all of your debts and your assets. With these in hand you can give yourself a clear view of your net worth. If you’re deep in debt, this might paint a sobering picture of your finances.
Taking inventory has never been easier. With apps such as Mint.com’s personal finance software, you can just enter information for all of your electronic accounts. Since almost all financial institutions have electronic accounts these days, you’ll get a clear picture of your financial state. Even better, it will automatically keep up with you, so you’ll always have an idea of where you stand. That is, you won’t have to take inventory again.
2. Evaluate Trends
The second step in changing any behavior is to identify any trends that might lead you down the wrong path. If you’re in financial trouble, chances are you have a few behaviors that have led you there. By examining trends in your behavior you will be in a better position to make a change. Since you’ve already inventoried, you have the means to identify these trends.
Look back through your transaction history. Which withdrawals stand out? When were they made? What was going on around that time? Were you feeling a certain way, or was there some event going on? The more ways you can qualify each transaction, the clearer your picture becomes. Once you identify a few qualities that define your most egregious transactions, you’re in a position to stop them before they occur.
3. Portion Your Income
Creating a budget is perhaps the most effective way to turn around a bad financial situation. After you’ve taken inventory you can then determine how to budget your income. The problem with most budgets, though, is that they don’t provide the most accurate picture. Paychecks and pay periods can vary, and that can throw off any monthly budget. It’s best to create a portioning system. For instance:
- 40% for paying off debt
- 30% for housing and utilities
- 15% for food
- 8% for transportation
- 7% for entertainment
Clearly everyone will have an individual breakdown, but the idea is to figure out the minimum levels needed for necessities (housing, food, transportation) and then portion out the rest as needed. Creating this kind of framework helps you automate your finances, so you don’t have to think about it. Every time you get paid, you just add the appropriate percentage to each “account”. When you get out of debt, you can swing around and create savings.
4. Track Your Spending
If you’re going to stick to a budget, you need to keep accurate records of what you spend. That means being diligent at all times. Thankfully, there are ways to make this process easier. You can use a small notebook and pen you carry around, or you can download an expense tracking app such as ExpenseTracker. Every time you spend, make a record. That way you’ll know when you’re sticking to your budget (especially if you follow No. 5). Save your receipts as a backup reminder.
Yes, the Mint.com app does keep track of your spending and even categorizes it. But the point of this is to create a connection between you and your money. There’s no feeling of parting when we swipe a credit card. It’s just electronic digits. By writing down your spending you’re re-creating the connection we had with money in the old days, when cash was among the only means of payment. Taking this small step will make you more aware, and hopefully more responsible.
5. Review nightly
The final step is to remain diligent. When it comes to your finances, that means making records every night. Hopefully you don’t spend money every day. Even if you don’t, it pays to look over your records. It’s a good habit to get into even if you’re in good financial standing.
Everyone falls into bad habits from time to time. Sometimes those bad habits pile up, leaving us in a sorry financial state. But with a quick five-step program anyone can turn around a poor financial situation. Look at those five steps and ask yourself: is this little effort really too much if it will turn around my finances?