A good approach for gauging where you are financially is calculating your net worth, which amounts to your assets less your liabilities. Write down or use a spreadsheet to record all your assets, including bank accounts, stocks, mutual funds, retirement account assets, and real estate, but not your home or car unless you plan to sell them. Likewise, list your liabilities, including credit card debt and other loans, but not your mortgage unless you included your home as an asset. Subtract your liabilities from your assets to figure your net worth. Hopefully, it’s positive. If you find that it’s not what you expected, don’t despair; let the information serve as a wake-up call that you need to make lasting changes to turn around your financial situation. If, like many Americans, you have zero or even a negative net worth, meaning your liabilities meet or exceed your assets, you might set a goal to get completely out of debt or spend less. If you determined that your net worth is positive but lower than expected to fulfill your life goals, think of ways to increase it—for example, save more, become an investor or homeowner, or start your own business. If you’ve started your career, you might even set a target to retire early. Whatever the goal, once you have it in mind, begin working backward to find out what you need to change or do in order to reach that goal. It’s useful to write the goal down or find a picture that represents it and hang it on a wall in your office or bedroom on put it somewhere else where you can see it on a regular basis and draw inspiration from it. Start by listing your income and expenses. Look at your spending over the last few months or even in the same month last year to get an indication of what you usually spend in each category. Then, subtract your expenses from your income. If the amount is zero or negative, aim to cut back on expenses or increase your rate of savings. Some common areas where many people can spend less are food and entertainment. If the amount is positive, put together a budget for spending each month. For example, with the zero-based budget, every dollar has a purpose, and there should be no more money left to budget by the month’s end. Or, use the envelope system, divvying up cash between different envelopes that you will use to pay for different expenses. Once you have a budgeting system, use financial software, a spreadsheet, or pen and paper to stick to it. In order for the rest of the steps to work, and improve your financial situation, you need to get your budget to work for you. It may take a few months of tweaking, but it is the key to financial success. First, you need to create a debt repayment plan. If you have a lot of high-interest debt, list your debts in order from highest interest rate to lowest, and then begin paying all of the extra money toward the first debt. Once you have paid off that debt, move onto the next debt on the list. If you have an unmanageable number of debts, however, you may want to pay down the one with the smallest balance first and then proceed to pay down those with increasingly larger balances. If any of your debts are in collections, you may choose to pay them off first and bring them current to stem the negative impact to your credit and reduce the number of calls you get from creditors. In order for any debt repayment plan to work, you need to make a commitment to stop using your credit cards and stop acquiring new credit. For example, you may find out that you eat out too often, which can add up quickly, especially if you have a family. Find ways to cook ahead so that dinner is ready with very little meal prep; this will help you plug the budget leak and save money. If you shop too much at certain stores, or use your credit card too much in general, leave your credit card at home and only take cash or a debit card with you when you go out to avoid overspending. Similarly, take a look at your bills to identify services you aren’t using and cut them from your budget, such as a gym membership or a seldom-used streaming subscription. As you focus on saving money, you may be surprised by just how much you can sock away for the future. Once you have your budget in front of you, identify whether you have an income issue. If it is temporary, you may able to solve the problem with the help of a second job or an income-producing investment that supplements your primary income. If you have persistent cash flow problems, however, you may need to take more drastic measures to turn your financial situation around, such as paying down your debt faster to reduce long-term costs, moving to an area with a lower cost of living, or going back to school to qualify for a higher-paying job. Additionally, build a financial cushion with an emergency fund, which is a pool of money you draw from to pay for unplanned expenses. Saving between three to six months of living expenses can help you in the event that you lose your job or have a major emergency. To save for a future expense, be it a down payment on a home, a car, or your child’s college education, consider establishing a sinking fund. This type of fund works like an emergency fund but is used for planned instead of unplanned expenses. Take the time to figure out what you need to save, and then establish a sustainable schedule for saving (biweekly or monthly, for example) and stick to it to stay on top of your goals. Experts generally recommend paying off credit card debt and other high-interest debt before you start investing. But once you are out of debt, you will likely be ready to invest. It helps to talk to a financial planner about your goals and situation and to receive advice about the best strategies for your long-term goals. The key to being successful is to stay motivated throughout the process. Share your goals with friends or family to keep yourself accountable, break down your goals into smaller steps, and reward yourself when you hit major milestones. With patience and commitment, you can improve your financial situation and rest easier about your future.
