Feeling overwhelmed by the mere thought of tackling your finances? Take a deep breath: we’re here to walk you through the process, letting you take control of your cash once and for all.
Step 1: Paint a picture.
You can’t solve a problem until you know exactly what you’re dealing with – especially when it comes to finances. It’s pretty normal to have multiple bank accounts, various different loans, and bills piling up left, right, and center. Without some kind of infrastructure to keep track, it’s a total mess. Take a not-so-lazy Sunday to create a spreadsheet tracking how much money you have, how much money you owe, and who you owe it to. For bonus points, include any payment deadlines and interest rates (the percentage fees you pay to borrow).
Step 2: Build a budget.
Figure out how much money you’ve got coming in each month, and how much you have to spend – on necessities like rent, electricity, and groceries. Hopefully, you’ll end up with some cash left over (if not, you might need to reduce your expenses – more on that here). Once you know how much moolah you’ve got to spare, you can figure out what to do with it: you might want to spend some on luxuries, put some toward debt, and save some.
Step 3: Pay off debt.
If you’ve got “bad debt” – loans that’ll just grow and grow, courtesy of high interest rates – your first priority should be paying that off. Budget carefully by allocating as much as you can afford to paying off your debt. Begin with the highest interest (and most expensive) loans: not only will you be using your cash efficiently, but it can be mentally rewarding to get rid of one loan at a time rather than slowly reducing the balances of many.
Step 4: Build an emergency fund.
Once you’ve dealt with debt, you should start funnelling money into your very own emergency fund. This will help you to be financially stable in case of a catastrophe – like losing your job, getting sick, or receiving an unexpected expensive bill. A good rule of thumb is to have three months’ worth of salary (after tax) set aside: more on how to do that here.
Step 5: Invest!
Once you’ve got a financial life raft sorted, the rest of your money can be put to work. You could keep some in cash, but the low interest rates available on most savings accounts mean that inflation – the constant rise in prices of goods and services – will likely erode its value. Instead, if you can afford to wait a few years to access your money, the smartest move is probably to invest it. That way, it can generate returns – ensuring that as time goes on, you’re getting better off. More on how to do that in a forthcoming article.