Do you ever feel like your financial life can get overwhelming quick?
Bills can pile up. Then there is all the things you “should” be doing with your money.
It can be easy to take the “out of sight, out of mind” approach to money.
But I think we all know that eventually you have to start taking steps that will help improve your financial life. Whether that’s today or ten years down the road – and whether it’s your choice or a necessity – sooner or later you need to take action.
The good news is that the sooner you work towards taking control of your financial life, the sooner you can feel confident that you are making the most of your money.
This is the thought process behind my book Student Loan Solution: 5 Steps to Take Control of Your Student Loans and Financial Life. I’ve talked to so many people who have ignored their student loans due to how overwhelming they can be. It certainly can feel insurmountable, especially when you have little knowledge of your loans or your options. The sooner you can confront them, though, the sooner you can pick a strategy that fits with your loans and your life.
Today I wanted to take a simple approach to improving your financial life. We’ll go through a step-by-step plan for taking control of your financial life. An entire book can be written about all this (and I do go into a lot of detail on this very topic in Student Loan Solution), but I’ll keep it high level and actionable today.
Let’s get to it!
Step 1: Gather your Income and Expenses from the Past Three Months
So many finance writers and personalities recommend creating a budget as the first step towards taking control of your financial life. But I disagree. I think you first need to understand your income and expenses. After all, how can you possibly create a budget that’s realistic if you don’t have a few months of spending history to go off of?
That’s why I recommend you first look at your past three months of income and expenses. An easy way to do this is by signing up for a free trial of Tiller and connecting your accounts. Tiller will pull in all your bank and credit card data and put it in a nice uniform format. All you need to do from there is assign each transaction to a category. (I used to do this manually and it took FOREVER – so happy when Tiller came out a few years ago).
At this point all you are looking to do is gather data. We’ll put it to use in a later step.
Step 2: Gather information on your Debt
The biggest issue people run into with student loan debt is a lack of understanding of their loans. They don’t know what type of student loans they have (or why it matters), what the interest rate is on their loans, and (many times) how much they have in student loan debt.
You can use our free student loan spreadsheet to pull all your debt information into one spot. Don’t have student loan debt? Don’t worry, there is a tab in the file for non-student loan debt.
Understanding your debt is the first step in creating a strategy that gets rid of it for good.
Step 3: Emergency Fund
This is an easy one – do you have an emergency fund? If not, it needs to be a top priority.
Like paying down debt, building an emergency fund can also feel like an insurmountable task. There are so many demands on our money that the thought of finding extra money to set aside each month can sound impossible.
If you go through all these steps, though, which ultimately ends in putting together a budget and building a strategy going forward, you can find ways to build an emergency fund. One way is cutting expenses to free up cash flow. Another is to increase your income and divert the extra money towards your emergency fund (and later on, your debt).
None of this is easy, but having an emergency fund will be well worth the effort. Nothing I have done to improve my financial life has benefited me as much as building an emergency fund.
If you’re wondering how big your emergency fund should be, I first want to say is that simply starting is the most important thing to do. $500 is better than $0. $1,000 is better than $500, and so on. A good long-term goal is to have 3-6 months of expenses in your emergency fund, but slowly working your way to one month, then two months, and so on is the way to go.
Step 4: Review your Credit Report and Credit Score
If you’ve never pulled your credit reports from AnnualCreditReport.com, now is the time. You are entitled to a free credit report once a year from each of the three credit reporting bureaus. Spending time looking at this report and checking for errors (and getting those errors removed) is worthwhile.
Your credit report influences your credit score, but your credit score isn’t found on your credit report. There are websites like Credit Sesame and Credit Karma that offer credit scores (typically through a free trial of a paid membership – make sure you cancel before the free trial is up), but you can also view it through most credit cards today (Chase, etc.).
Here’s a general breakdown of what your credit score means:
Less than 500: Very Bad
500-549: Bad
550-599: Poor
600-649: Fair
650-699: Good
700-749: Very Good
750 and up: Excellent
If you’re credit score isn’t so hot, don’t panic. In a bit we’ll talk about what you can do to improve it.
Step 5: Take Action!
By reviewing your income, expenses, debt, emergency fund, and credit, you have set yourself up nicely for taking action to improve your financial life!
The actions you take will depend on your situation. For example, some will have credit card debt and others won’t. If you have credit card debt you will want to prioritize paying that down before you make any extra payments towards lower-interest debt. But if you don’t have credit card debt – and you already have an emergency fund – the next step may be to contribute more towards your tax-advantaged retirement accounts (401(k), IRA, etc.).
Here’s a few actions you should consider taking, but keep in mind that each individual will have different priorities of actions to take depending on their unique situation.
Set a Budget
As I mentioned earlier I’m a big fan of leveraging Tiller to create a budget spreadsheet (here’s an automated one you can download that leverages Tiller). Regardless of whether you create a budget in a spreadsheet or use some other tool or app, use the past few months of income and expenses to put together a realistic budget. You can also use the 50-30-20 budget as a guide if you want additional help in setting a budget.
Cut Out Unnecessary Spending
There are some in the personal finance world who think you should deprive yourself of everything for the sake of saving money. I disagree with this, and think it’s more important to focus on what your priorities are.
For example, is it important for you to have a short commute to work? Or are you willing to drive further if it means that you can save money on rent or a mortgage? This is just one example, but taking a hard look at your spending habits (again, using the past three months of spending as a guide) can reveal areas where you can potentially cut back.
Increase your Income
Easier said than done, right? But seriously, there are few things that can help your finances more than bumping up your income. For some this will mean reviewing salary data and having a tough conversation with their manager, or even going to a competitor who pays more. For others who are “tapped out” at their 9-5 it may mean starting a side hustle, or in other words creating a new income stream outside of their 9-5 jobs. I wrote an entire book about side hustles, but you can also start by looking at this monster post of 50+ at-home or online side hustle ideas.
Improve your Credit Score
To actually improve your credit score you need to understand what impacts it. Here’s a high-level run-down:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% New Credit Applications
10% Types of Credit
So how do you improve your credit score? Focus on the things that will help move it up. For example, consistently making on-time payments is extremely important. If you aren’t at least making the minimum payments on your debt you are hurting your score. Amount owed is important as well, though that may be a longer-term area of improvement. Generally keeping your credit utilization (i.e. amount owed / total credit available) under 30% is ideal. Again, this can take some time to get to that point, but it’s a worthwhile goal to pursue.
This just scratches the surface, but I dedicated a huge section of Student Loan Solution to improving your financial life in both the short-term and long-term. I expand on all of these things, and it’s especially helpful information if you have to factor in your student loans. If you want more of this, consider getting a copy of Student Loan Solution.
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This is a solid step by step plan. It’s good for anyone that is looking to take their finances by the horn and improve them.