By Leo Babauta
So far, we’ve been taking small steps to get started with our Awesome Finances module, without a good idea of where we’re going. That’s been on purpose: it’s easy to get overwhelmed with everything that needs to be done, but if you focus on taking one small step at a time, it’s not so difficult.
That said, let’s take a little time today to understand what the overall plan is, so you know why each of these steps matter.
Just know that this is a general plan, and it should be adapted to your situation and preferences. You’ll also hear from several guest experts, each of whom has different ideas about how these things should be done — I’ll leave it up to you to decide if you want to modify your plan based on what they say.
OK, let’s dive in! I’m going to give two separate plans, one for each track.
The Debt Reduction Plan
You won’t eliminate all your debt in one month … the key is to get the ball rolling, to get started and to see that there is a path. For me, it took two years of hard work to get out of debt, but it got easier and easier. The most important thing was starting.
Here’s what we’ll be doing this month (and beyond):
- A quick assessment: Ideally, you’ve already done this — a quick look at your debts, what you owe overall, what you have to pay each month.
- Find a Power Amount. The idea is to look at your non-essential monthly payments and daily expenses, and see if there’s anything that you can cut. If that means eating out less, going to the movies less, cutting out a few online services that you don’t really need, cutting out a subscription or two, ending a gym membership you don’t use … so be it. In an ideal world, maybe you wouldn’t have to cut anything, but if you’re in debt then it’s a critical situation and we have to take action. This extra amount that we find … we’ll call it our “Power Amount,” because it will help us make powerful savings and debt payments we couldn’t make otherwise. This is the next step we’ll take.
- Make a savings & repayment plan. This will be simple — we’ll take the Power Amount that we find, and put it first toward a small emergency savings fund. We’ll talk more about why that’s important soon. Then we apply the Power Amount to our smallest debt, and pay that off … then the next debt, and so on. We can make a schedule for paying all of this off. This is what we’ll be working on in Week 2.
- Put the plan into action. Once we have a plan, we have to start taking action steps to make it happen. Each one will be small and easy. We’ll do this in Week 3, as well as examine some of the things that make debt reduction difficult (and how to overcome those).
- Learn to automate. Debt reduction isn’t that hard once you have a plan and set things up so that they’re automated. We’ll look at some of the ways to do that in Week 4.
Along the way, we’ll have some great articles from guest experts, and I’ll share the things that have worked best for me. It’ll be a blast!
The Savings/Investing Plan
If you read the Debt Reduction plan above, you’ll see that the plan below is pretty much the same, but just applied to different goals. I should note that depending on where you are right now, it can take awhile to get to an awesome state of savings and investment, but it feels incredibly good to make progress. This month, we’ll focus on making some progress and going in the right direction.
- A quick assessment: Ideally, you’ve already done this — a quick look at your assets and debts, what your net worth is at this point.
- Find a Power Amount. The idea is to look at your non-essential monthly payments and daily expenses, and see if there’s anything that you can cut. If that means eating out less, going to the movies less, cutting out a few online services that you don’t really need, cutting out a subscription or two, ending a gym membership you don’t use … so be it. I’m not saying you have to cut out all non-essentials, but cutting out some will help you increase your savings and investments greatly over time. This extra amount that we find … we’ll call it our “Power Amount,” because it will help us make powerful savings and investments we couldn’t make otherwise. This is the next step we’ll take.
- Make a savings & investment plan. This will be simple — we’ll take the Power Amount that we find, and put it first toward a savings fund so that we have some financial security. We’ll talk more about why that’s important soon. Then we apply the Power Amount to investments, and even make a schedule so we can calculate how this will grow over time. This is what we’ll be working on in Week 2.
- Put the plan into action. Once we have a plan, we have to start taking action steps to make it happen. Each one will be small and easy. We’ll do this in Week 3, as well as examine some of the principles of simple investing.
- Learn to automate. Saving and investing isn’t that hard once you have a plan and set things up so that they’re automated. We’ll look at some of the ways to do that in Week 4.
Along the way, we’ll have some great articles from guest experts, and I’ll share the things that have worked best for me. It’ll be a blast!