In adulting 101, we are taught that success in life is as simple as following a few memes. As if the only thing standing between you and conquering the world is believing in yourself and the application of a Dale Carnegie quote.
With no disrespect to Buzzfeed and there 27 simple ways to get your sh*t together, cliché’ memes are not going to pay the bills. While I’m at it, the real world doesn’t care how special your mom thinks you are or that you have a fancy business school degree. If the economy heads into a recession or the market takes a nosedive, you may go from being a valued “family member” at work to an expendable line item.
Sometime after adulting 101, we learn that life’s a b*tch, so you better work on your options. Now, before you think this is some tough love approach, let me preface that I don’t care if you made mistakes in the past. We have all made mistakes, lots and lots of mistakes.
However, New Years’ resolution time is just around the corner, and every year millions of American pledges to save more or get out of debt. Unfortunately, most fall short of their resolutions, so here is the ultimate guide to financially getting your shit together. (Finally)
I understand that the need to budget isn’t a groundbreaking discovery. It’s been discussed to death in every personal finance article ever. However, a budget, even if it’s just a crude listing of all your expenses and income on a piece of scrap paper, is essential to get your finances in order.
You do not need to use a fancy software program or excel budget template, although they do help. Simply grab a notebook or some paper, gather up all your monthly bills, and write down how much you spend each month.
Don’t cheat yourself, guess, or play games with rounding and estimates. Most people find that when they write out a realistic budget, they find they are surprised where some of their money is going.
A colleague of mine in financial planning once did a budget with a married couple who couldn’t manage to save enough money despite having excellent salaries. Once they did a budget to see where all the money was really going, the wife found out the husband was keeping a woman on the side. So, you never know what a budget might uncover.
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- BillShark negotiates lower prices on your monthly bills to save you time, money, and hassle.
2. Trim the Budget
Once you have a sense of where your money is going, its time to look for ways to save money. Now, I’m not going to ask you to give up the fun stuff, at least not at first. Instead, I want you to focus on the items you might be overpaying for that don’t bring you any joy.
Most households waste money without even realizing it. According to Nerdwallet, “More than one in three Americans haven’t compared costs or checked the price of their [auto] policy in at least three years.”
The average family could save 400 dollars a year by comparison shopping, just their auto insurance policies.
However, it doesn’t stop there; the average family needlessly spends over 100 dollars on cable. If you have high-speed internet, you can save 50 dollars a month or more going with a live TV streaming service.
When I was working with individuals with modest incomes saving for retirement, we often found that they are overpaying for homeowners’ insurance, life insurance, auto insurance, taxes, utilities, and phone/cable/internet. By comparison shopping these services, the average family can save an extra one thousand dollars or more a year.
- Auto Insurance: Gabi is a full-service, online advisor who compares all your insurance options to find you the right policy, all in under two minutes.
- Home/Renters: Lemonade offers renters and home insurance powered by tech and driven by social good.
3. Refinance for Better Rates
Being in debt sucks, but it’s an often necessary and unfortunate reality for many. While the goal should be to debt-free and only use cash until you can eliminate debt, you need to be wise about debt.
One of the essential steps in financially getting your shit together is tackling both your credit scores and your debt. Poor credit scores and debt often can form a vicious cycle conspire to keep you in the continually borrowing hamster wheel.
Poor credit scores drive up the cost of borrowing, making it harder to pay off debt and save. Additionally, being in debt can through off your utilization ratios, lowering your score. If that’s not bad enough, the more credit you have, the higher the odds are of you being late with a payment, either as an honest oversight or because you don’t have enough emergency funds to cover your debt during an emergency.
To break the debt/credit cycle, we need to do two things simultaneously; improve your credit scores, and refinance at lower rates. Then rinse and repeat the process until you have the best possible interest rates and that your credit scores are in tip-top shape.
To improve your credit score, there are a few steps you may take.
- Request a copy of your credit score to determine what might be pulling down your score. You will need to pull your score and report from all three bureaus as they can be some differences between them.
- Challenge any blatant inaccuracies; if some of the data is incorrect on your report, make sure you contact the agencies to have it corrected. Be sure to follow up regularly, as the credit bureaus are very reluctant to remove the incorrect information unless you send them overwhelming proof.
- If you have missed payments on your credit reports, reach out to your lenders and ask them for a good faith removal. There are sample letters online; however, your best bet is to write them a personal story. Explain why the payment was late, what steps you are taking to ensure it won’t happen again, and explain to them why improving your credit is so important.
- Deal with collections and charge offs, if you have a collection or charge off on your report call and negotiate a settlement in agreement to remove the offending remark. Many times, companies sell off the uncollected accounts to debt collectors for pennies on the dollar. These debt agencies will often take a reduce payment and remove the remark if you negotiate with them.
- The length of your credit history plays a role in your credit history, so use caution when closing out old credit cards. If you have an old credit card from college, if its one of your oldest cards, leave it open as opposed to closing it out.
- Watch your utilization ratio; ideally, you want to keep your credit card balances below 30% of the credit limit. However, if you’re just getting started on paying off debt, that might not be a luxury yet. At a minimum, try to keep your balance below 80% of your limits and pay extra attention that you don’t go over your limit with interest and fees.
Tip: If you are pulling your credit reports daily or weekly, keep an eye on what dates your lender reports to the bureaus. Many lenders report on certain days each month and knowing when your lender reports can help you time payments and purchases to improve your rations.
- If you have a small business or side business work on separating your personal credit and business credit, separating your business financing from your personal credit, not only will it potentially help improve your scores, it will help shield your finances if something goes won’t with your business.
Once or simultaneously, as you are working on improving your credit scores, work with lenders on refinancing your debt with more favorable terms. Keep an eye on improving your cash flow and lowering your interest rate. Avoid adding to the length of your loans if possible, also don’t let banks or lenders talk you into shorter loans if you can’t really swing the monthly payments.
In the following steps, we are going to discuss creating a plan to pay down debt, but please try to avoid the urge to pay your debt down too aggressively. Right now, just focus on free up money each month in your budget.
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4. Become Bazooka Proof
I had a Sgt. In the Army, who used to say, “a plan that’s bulletproof isn’t good enough, a plan needs to be bazooka proof.” When it comes to getting your personal finances in order, I think there is a lot of truth to that saying. We all know we need an emergency fund; the problem is most people’s emergency funds are woefully inadequate, barely bb gun proof.
Money guru and Grumpy Cat stand-in, Dave Ramsey, recommends that you only need an emergency fund of 1000 dollars. Just 1000???
Most people’s insurance policies have a thousand-dollar deductible.
The sad reality is $1000 doesn’t buy much today, a car repair can easily cost 1500 or more. If your kids get sick or need dental work, the furnace calls it quits, or the family pet needs to go to the vet, $1000 likely won’t cover it. So, what do most Americans do, they whip out the plastic or sign up for financing and get back on the debt hamster wheel
If you want to get out of debt and stay out of debt, you need a real financial disaster survival plan that ensures that the first bump in the road doesn’t send to back into debt.
So how do we stop the vicious cycle of yo-yo debt repayment?
The first we need to come to terms with the debt, it sucks, it happened, now “let the past die.” Don’t let shame and embarrassed put you on a shaky foundation. If you try to pay off debt too quickly without adequate precautions, you likely going to end up back in debt.
So instead of worrying about how some financial blogger was able to pay off massive amounts of debt in .32 seconds, I want you to allow yourself to pay down your debt in a slower, more sustainable fashion.
If you created a budget, trimmed some expenses, and refinanced your debt, hopefully, you found some extra money. Initially, you should take all the money that you have discovered and stick it in your emergency fund, even if it means just paying the minimum on your debt for a few months.
Ideally, you should funnel all your extra cash into your emergency fund until you have a minimum of one month of expenses plus two thousand dollars in your emergency fund. So, if your monthly payments are 3k a month, then your minimum emergency fund should be 5k. (3k plus 2k)
Once you hit your minimum emergency fund goal, you can then start paying extra money towards your debt. However, as you are paying down debt, you should continue to add money each month to your emergency fund. Remember, the goals to eventually get out of the debt trap, and it will never happen if you don’t have adequate cash reserves.
If you can get out of debt forever, will it really matter if it takes six months to a year longer to ensure the plan works?
Note: If you have so much debt that it is causing problems in your relationships, is holding back your career, or realistically you can’t support the payments even with trimming expresses, please talk with an attorney or financial counselor about your options.
Building a financial disaster financial plan is not just about saving a few bucks for a rainy day. Real preparedness isn’t just about hoarding some supplies. It’s about building your options and becoming self-sufficient. While you are working on amassing an emergency fund, you should be focusing on building up your resume, career growth, networking, and even building up some passive income or side hustles.
5. Don’t Skip Saving for Retirement to Pay Debt
This advice is going to seem a bit counter-cultural but stay with me on this. Skipping saving for retirement to pay down debt is potentially a huge misstate.
Why?… I’m glad you asked!
One word; taxes. Believe it or not, Uncle Sam wants you to be able to retire someday. That way, young people can have your job. Additionally, Uncle Sam would prefer during that retirement, they didn’t have to support you.
So, to keep you out of the treasury’s coffers at old age, political elite, have come up with some pretty attractive incentives that pay you cash money for saving for retirement. Follow Uncle Sam’s rules, and they will pay you a decent chunk to squirrel away a few bucks each year for your future self.
The Gov. is so worried about you getting your financial shit together; they will match your retirement savings up to 50% or more. That means if you squirrel away just one thousand dollars, the government could give you a free 500 dollars. The program is called the Retirement Savers Credit, and it is one of several tax credits from the government that could pay you thousands of extra dollars a year.
Unless you took out your student loans from Vinny, the loan shark, I find it hard to imagine a situation where your best served by leaving free money from the government on the table. If you qualify for the retirement savers credit, toss 1k into your retirement account and use the 500 dollars to pay down debt.
What would you rather have; 1k less debt, or 1k in savings and $500 in less debt? The choice is clear. Before you go crazy paying down debt, spend a bit of time with a tax pro and optimize your tax return.
6. Get Help
Sometimes when you are in the middle of a situation, it is hard to see the bigger picture. Additionally, sometimes, it helps to have a partner that can offer some objectivity and accountability in helping you reach your goals.
The financial services industry has evolved past the says of selling stocks and mutual funds for a commission or managing assets. Todays, fee-based financial advisors are taking a more holistic look at finances and can help you budget and reduce expenses.
Today’s advisors can help you reduce insurance costs, save money in taxes, and assist with some of the more complicated financial decisions such as should you pay off debt or invest, or should you fund a Roth or Traditional retirement account.
Since most advisors offer an initial consultation for free, there is no risk of hearing a few advisors out and finding out what might be possible. Chances are they may have a unique perspective of new ideas to help you reach your goals.
We highly recommend, Facet wealth, because their CFP’s are all salary based, meaning they don’t earn a commission of fee for selling products. They offer a free initial phone call, and the costs, if you choose to hire them, are incredibly reasonable.
7. Get Financially Lit
I’m not talking about that Lit; I am talking about getting excited about financial Literacy. If you want to get your financial shit together, you have to increase your financial IQ. Once you have your budget under control and you tamed the debt demons, its time to start investing like a boss.
Reading this blog, it is a great start to increase your financial IQ and pick up some budget hacks; however, the best way to fire up your financial IQ is to immerse yourself in as much great financial content as possible. At Your Money Geek, we are huge fans of the Morning Brew newsletter; it’s free and only takes a few minutes each morning to read.
Plus, it’s pretty cool stumping your co-workers with financial trivial around the water cooler.
8. Work on Your FU Money
It is critical now more than ever that you work on becoming financially free. The days of working for a company until you 65 and retiring with a Rolex and a pension are long gone. Additionally, the chances of younger members of Gen X and millennials see any of that Social Security money is quite slim.
The reality is previous generations mortgaged our future with reckless monetary policy and deficit spending. The cost of which will be footed by Gen X and millennials. We can sit around and point fingers and wage partisan politics, but the reality is if you’re in your twenties and thirties, you on your own and you better get your shit together. Uncle Sam and his quasi-government half brother, The Fed, are about tapped out in the bailout department.
If you want to enjoy more life with less stress and anxiety, you should start working on that FU money ASAP. What is FU money? Everyone defines it a bit differently, but I like to think of it as having enough money saved that if things go south at work, you could walk away without a second thought and be ok financially.
You don’t necessarily need to have enough money to retire, although that should be the long term goal. FU money might mean that you have enough saved up that you can semi-retire or afford to take a lower-paying, less stressful job. It’s an essential step on the way of becoming financially independent.
Getting Your $hit Together
Don’t become another failed New Years’ resolution statistic. There is no better time than the present to get your finances together. Getting organized and becoming financially free isn’t about giving up what you enjoy or delayed satisfaction. It’s about being as efficient as possible with your money and avoiding wasting money, things that don’t bring joy into your life.
Previously published here and reprinted with the author’s permission.