Personal finance covers a range of topics including budgeting, expenses, debt, banking, mortgages, saving, insurance, investments, retirement taxes and estate planning. Essentially it encompasses all things money management.
Personal finance is a loaded topic. There is so much to talk about when discussing personal finance. The core of my content really comes from my personal finance journey. This week I wanted to go back to the basics of personal finances. Where do you start when you want to learn about personal finances? What are the first steps someone should take if they want to get their finances in order?
These are great questions. You have to start somewhere. Competency in personal finance is a learned skill. I made a lot of money mistakes in my life. In my twenties I was not great with money. I can probably write an entire post just listing my money mistakes but I will spare you. Since starting my blog, Youtube channel and Instagram I have seen so many people say that they don’t know where to start when it comes to personal finance.
It occurred to me that I’ve never taken the time to inform my audience of where to start when you want to get your personal finances in order. It’s important to learn about personal finance and be motivated to makes changes. However, if you don’t know how to start getting your finances in order then the knowledge your gaining is going to go to waste. So, here are the steps I think you should take if you are motivated to get your personal finances in order.
Let’s get started
1. Calculate your income and expenses
This is the best place to start when going over your personal finances. First you need to determine your Net income. Net income is the amount you bring home after taxes and deductions. The amount that actually goes into your bank account. It’s very important that you only count what you’re receiving. Just because you make $65,000 per year does not mean you should budget for that amount. Budget for the income that you are actually able to spend.
To calculate your expenses I recommend going through your last 3 months of banks statements and credit cards statements. That way you can get a true average for what you spend on a monthly basis. If you use cash or Venmo be sure to calculate those expenses as well.
2. Calculate your debt
When discussing personal finance we have to talk about debt. Since you’re early on in the process let’s not worry about any outstanding mortgage. At this stage we’re going to look at all other outstanding debt. Student loans, personal loans, car loans, credit cards, etc. Write down all of your debt amounts and also write down the total amount of all of your outstanding debt. It’s very important to know these numbers. If you do not have any debt that’s great. You can skip right over this step.
3. Identify your needs vs your wants
Before you create a budget you need to have a clear understanding of needs vs wants. Needs refer to items in your budget that you cannot be without. Food, transportation, housing & clothing are all examples of needs. Wants refer to items that are convenient or desired but not necessary. This step is important when trying to get your personal finances in order because it sets the tone for your budget. Needs have to be included in your budget but wants will only be included if the budget allows it.
4. Create a realistic budget
Emphasis on the word realistic. A budget should be restrictive in a sense. It should allow you to pay for your needs but also keep you from over spending. If you are just starting to get your personal finances in order I highly recommend having a budget. Start with your needs. You have to include your needs in the budget. Then, if there is room in the budget, you can add in your wants.
5. Create an emergency fund
Now that you’ve written down your income, expenses debt, needs, wants and created a budget it’s time to create an emergency fund. This is a savings fund that is created specifically for unplanned emergency expenses. Life happens so you should be financially prepared in case of an emergency. I recommend at this stage having an emergency fund of $1000. Keep this in a savings account that is easily accessible but be sure to reserve it for true emergencies. This is a very important step. I do plan on doing an entire post about emergency funds because It’s so important and it will keep you from incurring more debt in the event of an emergency.
If you do not have debt, or once your debt is paid off, I recommend upping your emergency fund. It’s a widely accepted rule that you should have 3-6 months worth of expenses in your emergency fund. This will come in handy in the event of job loss or an unexpected medical emergency.
6. Start to pay off debt
Once you have an emergency fund of $1000 it’s time to start paying down your debt. Again, if you’re debt free you can skip this step. We are also not counting a mortgage as debt for this step. I recommend using a zero-based budget. Essentially that means that every dollar you bring in is allocated to something. There is no “extra money” left over. After you’ve budgeted for your needs any left over money should go to making extra debt payments. Getting your personal finances in order means getting rid of your debt as fast as possible. Debt is costing you so much money in interest and it holds you back in your financial journey. I highly recommend paying down debt before adding any “wants” into your budget. Try to stay motivated and send every “extra” dollar toward your debt.
There are several different ways you can go about paying off debt. Two well-known ways are the debt snowball and the debt avalanche. These are both great options. You should research both and choose the one that will work best for your personal finance journey.
7. Don’t get discouraged
If you’re not used to living on a budget give yourself some grace. Learning to live on a budget can be difficult. It takes a few months to get used to. You’re probably going to overspend or forget to add items to your budget at first. Go over your budget at the end of every week or month and determine what you need to work on. I promise, budgeting gets easier after time. I also recommend trying new budgeting tools until you find what works for you. You can use pen & paper, budgeting app, spreadsheet, etc. Take a few months, try not to get frustrated and find what works for you.
8. Educate yourself
If you are on a journey to improve your personal finances you should be proud of yourself. One of the best things you can do on this journey is continue to educate yourself. There are so many great resources out there. Numerous books, podcasts, YouTube channels, blogs, etc are available to access for free. I highly recommend looking through some of these resources and finding people that you trust to give you advice. I also recommend getting personal finance advice from multiple sources and ultimately finding what will work best for you and your financial situation.
9. Don’t compare yourself to others
Personal finance is personal. Everyone has to start somewhere. Some people are taught good money habits from their parents. Others have to make a lot of mistakes in order to learn good money habits. Some people come from privilege and have assistance with paying for college or a down payment on a home. Others may not have had any help and may have acquired a lot of debt in order to get where they are. My point is that you cannot compare your financial situation to anyone else because you simply don’t have all of the facts. Focus on your journey and the progress that you are making. You should be proud of yourself simply for trying to get your personal finances in order.
10. Continue to re-evaluate your situation
Getting your personal finances in order is a journey. It’s something that needs to continue for your entire life. It may get easier as time goes on. Especially if you’re paying off debt and continuing to learn how to better your financial situation. Even as you learn and become comfortable with budgeting, saving or investing you still need to “check in” periodically. You need to go over your budget and update or adjust it as your financial situation changes.
You will also need to review your emergency fund and possible re-fund it if you have had to use it. Once your debt is paid off you will need to determine where you “extra” income will be sent to. I highly recommend investing but I will save that for another post. Essentially you want to make sure that your budget and your actions are continually in-line with where you are on your financial journey.
These steps that I’ve outlined will help you to start taking control of your personal finances.
As I mentioned before, personal finance is a loaded topic. This post is really just a basic outline for how to get started. Each of these steps can easily be expanded into an entire post. If you are just starting a personal finance journey I hope I can be a great resource for you. Feel free to check out my other posts and leave any questions or comments you may have and I will be sure to respond. Thanks for stopping by!