Taking control of your finances always seems like a difficult task. But, I’m going to show you how easy it really is in three simple steps!
Step 1: Understand Your Finances
The first step to taking control of your finances is to face them. Stop running and hiding from the numbers. First, make a list of all your long term debts (i.e. house, student loans, car, etc). Next, make a list of all your recurring expenses, whether they be annual, monthly or bi-weekly, just note them as such (i.e. mortgage, utilities, car registration, etc). For flexible expenses such as groceries and toiletries, be sure not to leave them out, enter a monthly estimate. For annual/major expenses like car maintenance/business licenses/etc, estimate an annual amount and divide it by 12 to have a number for your monthly budget. You should have two lists in front of you now. Congrats, you have now successfully prepared yourself to create a debt payoff plan, as well as a monthly budget. Wasn’t that easy?
Step 2: Plan Your Finances
The next step is to organize and plan your payments accordingly. With larger bills like rent and childcare, total them for the month, then divide them based on how often you are paid (i.e. biweekly employee: divide the rent by 2, put that amount away each check). This helps soften the blow major bills can cause on your budget.
In order to understand your current status you have to look at your monthly debt to income ratio. Total all of your monthly income and then calculate all of our monthly expenses (use the list you created in the above section). What percentage of your income is needed to pay your bills? If you come up with a number of 70% or more, you’re in the orange-red area and it’s time to make some changes if you want to see some real growth.
Tip: Divide your monthly bills by your total income to figure out this percentage
Bills $2100, Income $3500: 2100/3500= 60%
In this example the individual needs to use 60% of her income to pay her bills.
Now that we have obtained that information, we can create your customized 50/30/20 plan. I’ve seen the minimalist budget plan of 50/30/20 everywhere. Though, it reads well, I don’t think it’s realistic for everybody’s situation. The three groups are essentials/personal/savings, respectively. I typically like to increase the amount going to my savings and then I split that amount in half. I then create sub categories of savings and future payoff. The future payoff category is what I use to pay off my debts early and essentially buy my financial freedom.
Once you know the remaining percentage of income you have left after bills, you can determine how these categories can work for you and your budget. The first two categories speak for themselves. Essentials are all the things you must pay for to survive (i.e. housing, utilities, transportation, food). Personal are all the things you like to add (i.e. cable, internet (unless you need internet to earn money), eating out). Category three, Savings requires the most planning and is also the most important category.
Go back to the list you created in step 1 with your long term debts, order them from smallest to largest. Use this as your game plan for knocking out your debt, with your future payoff funds. I have a spreadsheet that you can enter this information into for visualization and planning.
Now it’s time to make some decisions. In the above example the budgeter has $1400 left after bills, 40% of her income. She decides to split her remaining income into 10/30, giving herself 10% for personal spending $350, and 30% for savings $1,050. She’s a disciplined spender, be realistic with yourself, but still set goals to do better. In this plan we have a 60/10/30 split.
Here’s a couple other realistic splits, keep in mind in the real world these numbers are NOT perfect. And can be found in any variety, my personal budget is currently 68/12/20. Which is not good, but I’ve cut all my BS expenses. I have a ton of overhead and not enough income right now. Yours may look like 45/20/30: 65/5/30: 80/7/13: 50/35/15: 45/10/45: 60/15/25: or anything in between.
Step 3: Command Your Finances
Here’s the part where you have to put your foot down. You know what you want to do, so do it! Once you can see the clear path to financial success, don’t stray from it. In the above example the budgeter will save $500 a month and pay off an additional $550 of debt a month. She will save $6,000 in one year and will pay $6,600 more than the minimum payment on her debts annually.
Most of us deal with a financial vice. Regardless of what it is, now is the time to get it under control. If it cannot comfortably fit in your personal spending category, cut it completely. I know it’s hard, but if I can do it you can too. Stop making excuses for your spending habit. I used to love blaming mines on moments of sadness. I can tell you the credit card bills after $1800 of “sadness” finally made me get my act together. If you need to get a finance buddy to keep you focused, do it. If you need to stick a picture of Terry Crews in your wallet, do it. If you need to leave your bank cards at home and give yourself cash, do it. Do whatever it takes to resolve your debt, set up your future and set yourself free!