I mentioned in my previous post that I thought the first step to doing such was keeping track of spending first. I thought I would elaborate on what I think those steps are, as I feel that getting started now would be a great benefit especially in the current economic climate.
Find your starting point. You can’t really plan things out unless you know where you’re starting from. This could be as simple as learning to balance your checkbook or signing up at Mint as I mentioned previously. Figure out what comes in and goes out on at least a monthly basis.
Cut expenses. Once you’ve figured out where your money is going, you can start looking at what cuts you can make. Gradual changes are better than no changes at all (e.g. cutting back on lattes and eating out), but wholesale changes work better for some people (making lunch and drinking free coffee at work). Much like diet and exercise, just use the strategy that you’ll stick with. As for what to cut out, you’ll probably find entertainment and food expenses to be the easiest things to cut but look everywhere you can. Maybe hold off on that new videogame system, or find out how you can avoid some of your bank’s fees. Set a goal of reducing one or two of these things a week and see how it goes.
Set up an emergency fund. This is to help you get off of the paycheck-to-paycheck habit. Living that way puts you one step away from financial disaster, so let’s make it two steps away. I’d recommend at least one month’s worth of expenses or $1000, whichever is greater. Either way, reducing expenses as I mentioned in step 2 will make the target easier to hit. Put the money in a savings account that you have easy access to, but remember that this is an emergency fund. You shouldn’t be dipping into it for any reason other than, well, emergencies. Car broke down and you can’t get to work otherwise? Emergency. Need money for Christmas presents or that vacation coming up? Probably not.
These are steps that I’ve gleaned and come up with through various sources and (somewhat) common sense. I may revise my thoughts as I start reading other blogs, books, and the like. Nonetheless, I think these are good first steps for the financial newbie to make.
Tags: financial independence