You know you want to live debt-free. You understand the core principles that make up a good get-out-of-debt game plan. So, now the hard part: Getting started.
STEP 1: TRACK
To begin your journey to financial freedom, you need to develop your baseline first. This means that you need to have a very clear picture of where your finances are today and where they need to go. To develop your baseline, spend time tracking all your banking activities. This task might be hard at first, but don’t throw in the towel! Remember that it’s a necessary first step in your journey to a healthier relationship with money. To get started, if you share a bank account with a partner or spouse, consider using a Google document or shared iPhone note so that you’re both working off the same document. List every transaction or get some help from free programs like Mint.com or Money Management™. When this exercise is finished, you’ll have your baseline.
STEP 2: ANALYZE
Before you set up your budget, take time to analyze your spending activity. Categorize your transactions into 4 buckets:
How much of your money is going into each bucket? Is most of your spending going toward needs and wants? Are you saving for the long term and for unexpected costs? How many financial situations arose during your tracking that you weren’t prepared for? Begin to understand your spending habits in preparation for your budget creation.
STEP 3: CREATE
When you have a good understanding of your spending habits, and when you know what you want to change or adjust, it’s time to create your budget. Sit down with your list of financial goals and items from your “needs,” ”savings” and “giving” buckets. Save the “wants” bucket for any cash left over after your budget exercise. Begin to divide your monthly income into the buckets. Many find success by placing all income into the savings bucket first, and then dividing cash across the other areas. The goal is to balance your income so that you can make room for saving and giving – two financial components that usually get neglected.
STEP 4: IMPLEMENT
Your budget looks good on paper. But how does it work in the real world? Set yourself up for success by making these kinds of behavioral changes:
- Save more. Ask your employer to adjust your direct deposit so that you can make savings contributions automatically.
- Use a “round-up” strategy. This means that if you spend $1.50 on a soda, pretend it was $2 and put $0.50 in savings (apps like Acorns can do this for you).
- Stop before you spend. Always take time to ask yourself how a purchase will align with your financial goals.
- Know yourself. If having a credit card in your wallet makes you more inclined to use it, pay for items with cash only.