Managing one’s finances is not always a smooth ride. There are many ways someone can lose financial control. Over-extending on credit, having little to no savings, and not understanding the math on paying minimum payments with compounding interest, are all signs that you need to take control of your financial situation. The first step is to shift your priority to paying down your debt as quickly as possible.
Don’t wait until the New Year to start your financial makeover. Getting your finances back in order requires an honest evaluation of your debt and cash flow, prioritizing your financial goals (e.g., paying off debt, saving for retirement) and determining if your money management aligns with your financial goals. Here are 5 steps to gain better control of your finances:
STEP 1: REVIEW YOUR CASH FLOW
If you aren’t aware of your current cash flow situation, it’s time to review your budget or home accounting software. If you don’t have a budget or software that monitors your current income and expenses, try using apps and online tools, like Mint, which will lay out all of your expenses, help you monitor them and allow for easy adjustments to be made. You can also talk to your financial advisor to assist with making a budget.
Once you have all of your expenses laid out against your income, it’s important to compare numbers. What you want to achieve when it comes to your cash flow, is that your expenses do not exceed your income. If this is not the case and you’re living paycheque to paycheque, it may be time to make some lifestyle adjustments regarding your finances.
Try making two to three simple adjustments towards your monthly expenses. Start by changing habits where you can immediately see results such as quitting smoking or stop buying lunches or designer coffees.
If you don’t want to change any habits, try increasing your income. Start by working additional hours at your current job. If that’s not an option, look for a part-time job or side gig that can realistically fit into your schedule and bring more income into the household.
STEP 2: REVIEW YOUR DEBT
Next, it’s important to be aware of your current debt load. Take some pointers from our recent blog “One Debt at a Time: 5 Steps to Paying Back Your Debt”, and review how much debt you have and how long it will take you to pay down based on your current payments. A good rule of thumb is that you want to eliminate your high-interest rate debt (e.g. credit cards and payday loans) within 12 months. How much you are able to put down towards these debts will depend on your available cash and your discipline to put a freeze on further spending on credit.
You will want to decide if you’re going to tackle your smallest debt first or your highest interest rate debt. If you gain momentum from small, quick successes, you should start paying down your smallest debt first.
You can also consider consolidating your debt at a lower rate of interest or making use of credit card balance transfers at an introductory 0% interest over 6-12 months. Remember, the key with this plan is to pay off the entire balance before interest applies.
STEP 3: SET FINANCIAL GOALS
Once you’ve reviewed your spending and determined a plan to tackle your debt, set financial goals that you can measure monthly or every quarter. You want to ensure you’re making progress on paying down debt and adding other goals such as setting aside 5-10% of your monthly income towards an emergency or contingency fund or starting a retirement plan with monthly contributions.
STEP 4: REINVENT YOUR RELATIONSHIP WITH MONEY
Your behaviour with money stems from years of observations and personal experiences stemming all the way from childhood. If talking about money and finances with your partner, spouse or a trusted friend has been off limits, take the bold step of making it a priority to talk about it. For example, just like having a date night, have money night where you can each share financial goals and encourage each other to achieve them.
STEP 5: CELEBRATE YOUR FINANCIAL VICTORIES
Taking control of your finances is not a walk in the park. It’s important to be proud of your accomplishments and celebrate the financial victories that you achieve. Everyone’s definition of a financial victory will differ. Victories can be as big as paying off your credit card debt to as simple as sticking to your new budget for a whole month.
It’s also important to remember you’re not alone when it comes to better managing your finances. Financial advisors, government organizations, financial non-profits organizations and financial counsellors, like Licensed Insolvency Trustees, are equipped with advice and tools that can help you achieve your financial goals and help you gain control of your finances.