So, in the last newsletter we talked about different ways to track your income vs. expenses and see where your money is going. I recommended Mint since it’s easy to set up and has a solid mobile app, but other options like Excel, YNAB or Quicken are solid as well. It’s all about what works best for you!
Now you’ve got your first week or two of income/spending data tracked – congrats! You’ll be using this information to inform your habits so that you can spend more on what’s important, and less on what isn’t.
So, what is important to you? From the answers I’ve gotten back, it’s things like:
- Getting rid of credit card debt
- Finally pulling the trigger and investing
- Building a rainy day fund
- Saving for college/retirement
Yet those answers were often followed by “but you know, I’m not sure how to take that first step”.
Don’t worry – there actually is an order in which to tackle these things. Here’s my recommendation:
- Build up a $1,000 “oh shit!” fund. This should only be tapped in real emergencies, like an unexpected medical visit or in the case your car breaks down. Knowing that if something bad happens you have the cash to cover it is a great financial stress relief.
- Pay down your debt. Credit cards have the highest interest rates so pay those off first, then move on to student loans and your mortgage. I recommend paying off the smallest outstanding balances first (referred to as the debt snowball) to help you build momentum when paying down debt. Some people suggest paying off the highest interest rate balances first – while you’ll pay less in interest over time with this approach, people actually stick with the debt snowball approach at a higher rate because they can more easily see their progress. Remember, it’s all about what you’ll actually commit to. But no matter which approach you take, always pay at least the monthly minimum on all debts so you don’t incur any penalties.
- Build a 3-6 month ‘Bad News Bears Buffer’. This serves as a cushion in case larger unexpected things happen in your life. Building up this BNBB is where the feeling of financial freedom really starts to take hold. You’ll never have to rely on credit cards to cover unexpected expenses and it gives you a decent runway in case you lose your job, get sick, etc.
- Invest! If your employer matches, make sure you’re contributing to your 401(k). It’s free money guys! If you’re already maxing out your 401(k) match (way to go champ) or don’t work for a company that matches (I’m looking at you freelancers) then invest in an IRA instead.
- Have Fun! With all of your bases covered you seriously deserve to treat yo self. Plan and budget for some awesomeness – vacation, kitchen remodel, go karting… whatever tickles your fancy.
For this week, on a scale of 1-5, let me know how far along you are on each step. I’d also love to hear how you feel about where you’re at and what you have in mind to improve and keep momentum moving forward.
Lastly, a giant ‘You’re Awesome!’ to everyone who has been in touch with me so far. Whether it’s been answering the questions posed in the newsletter, sharing your experiences or asking questions of your own, I’ve absolutely loved connecting with you guys and having great conversations about increasing your confidence in your finances.
Garah Jessica Parker
P.S. As you may have noticed we’re moving full steam ahead, so if you haven’t yet started tracking your expenses, do it now! Everything we’ll be covering from here on out will be building on this foundation, so don’t be left behind. As always, if you need a helping hand or kick in the butt-parts to get started, I’m just an email or Facebook poke away.