At the start of a new year, many people set money-related goals and resolutions. Whether you are new to the world of personal finance (welcome!) or are just trying to get back on the horse, the amount of information out there can be intimidating. If you are feeling overwhelmed by what to do with your finances, start with these three things.
Before you can start working towards any financial goal (such as saving for a house or paying off a student loan), you really need to understand your cash flow. How much money are you making each month and how much of that are you spending?
There are many ways to track expenses, so you will have to find the method that works best for you. Some people use a notebook, and write down every purchase they make. Some people use an app like Mint or Personal Capital to track expenses. Other people use credit cards for everything, and track their spending by looking at their credit card statements.
Once you determine how much you are spending, separate those expenses into fixed expenses (rent/mortgage payment, utilities, loan payments, etc.) and discretionary spending (eating out, entertainment, clothing, etc.). If you are spending a lot on nonessentials each month, you probably have some room to tweak your budget to save more.
Figure Out Your Net Worth
Your net worth is a snapshot of your financial health. It is all of your assets (cash, investment balances, the value of your house, etc.) minus all of your liabilities (loan balances, mortgage balance, etc.).
There are four ways to track your net worth (paper and pencil, online calculator, app, spreadsheet), so choose the method that works best for you.
Personally, I use an Excel spreadsheet and figure out our net worth (since my husband and I combine finances) once a month. It is very motivating to see how much our net worth grew in the last year.
If you come up with a negative number, that means that you have more debt than assets. Don’t be discouraged. If you stay disciplined with saving and paying off your debts, you will see that number rise over time.
Start Saving For Retirement
There is no doubt about it, the earlier you start saving for retirement, the better off you’ll be when you retire. Compound interest is a powerful thing.
If you are not saving for retirement, you should start ASAP. It doesn’t matter if you are 21 years old and just starting your first job out of college, or 45, you need to start today.
Not sure where to begin? Check with your benefits department at your job. If your job offers any sort of match with a 401k or 403b, you should be at least contributing enough to get that match (that’s free money, yo!).
If you are a government employee who can join a retirement system (pension fund), join today. The earlier you join a retirement system matters. I was able to join our retirement system in an earlier tier than my husband, and don’t have to contribute as much as him over the course of my career AND will get better benefits in retirement.
If you do not have access to an employer-sponsored retirement plan, do not get an employer match, or are already getting the match, but just don’t have great investment choices, you could open a Roth IRA.
Choose one thing and just get started saving for retirement. Once you start, you could add a different account or two and really ramp up your savings.
By doing these three things this week, you will put yourself in a better financial position than you were in last week.
Once you get started tracking your spending and net worth, the next steps you need to take should be clear to you. Maybe you are spending too much on clothes each month, and need to cut back in order to pay down your student loan faster. Maybe you already have a bare-bones budget and need to take on side hustle to earn more money to save for a down payment on a house.
There are many articles and blog posts about how much you should be saving for retirement, but they all agree that no matter how much you can invest, you should start now. Even if you only can manage to save $100 (or $50 or $20) a month for retirement, that’s better than doing nothing.
If you were feeling overwhelmed with your finances, where would you start?
Illusion of Scarcity Worksheet (PDF)
Download this free worksheet and start paying yourself first.
- Budget for financial obligations and recurring expenses
- Prioritize your financial goals
- Make all your transfers on payday