I’ve recently been talking about personal finance with a variety of people and following are some broad points that are a good starting point for thinking about finances and developing a game plan. I hope these notes help you to get organized and put a strategy in place to chase down your goals.
Know Your Info
- To decide where to go, you have to know where you are now. Put together a list of all your accounts – assets and liabilities. Add the current balance for all the accounts. I highly recommend using Mint to track balances and where money is earned and spent. It’s free and a huge, huge help in managing your finances. This simple exercise is so important and shows you how things stack up. It might not be pretty. It might be gorgeous. Either way, you must know where you stand before you decide where to go.
- Take it a step further and look at your income and expenses. For the past month look at what you made and what you spent. If you’re using Mint this process is automated and you can use the built-in budget and tracking tools to see where you spend and start to identify where you want to make changes.
- Who wants to spend time paying bills? No one. (Except maybe Rick Moranis in Ghostbusters.) Automate your finances – savings, bills, etc. – and save yourself time spent on recurring non-value activities. Take that time and use it to pursue your goals. Look over last month’s spending and see where you want to trim your budget. Talk to your spouse about an investment you’re interested in. Read a post or two by Mr. Money Mustache and learn something new.
- Automating savings tools is especially valuable. Put your 401k on auto-pilot, with an automatic annual increase, or open a Betterment account and contribute $10 a week. You’ll remove the need to consciously choose to contribute and while you’re not paying attention those funds will grow. Weeks, months, years and the power of compounding really starts to add up and you don’t even have to think about it. Another benefit is once the money is invested you won’t be tempted to spend it.
Prioritize by Size
- Focus your efforts on the biggest items in your budget whether income or expense. We all have a limited amount of time and you’re better served prioritizing based on size. Does the $4 latte you buy daily matter? Yes. Does your $200,000 mortgage matter more? Yes. Daily habits are important and consciously working to have healthier, better habits is a lifelong process. Don’t beat yourself up about the small things – if you’re consistently working on the big things you’ll come out on top. Taking a look once a year and getting comparison quotes on your insurance or cutting a $100 a month expense is worth more of your time than clipping $2 worth of coupons every week. Again – good practices on small matters do matter but should be lower on the priority list than large matters.
Once you know where you stand and where you money is going to and coming from you can look at your goals and how you can take action to pursue them. Best of luck on your financial journey!