In this lesson, we will talk about simplifying our finances in three stages (depending on where you are) … whether you’re in debt, looking to automate finances, or save & invest.
This is a very big topic that we will not be able to magically fix in one lesson. It depends on where you are financially. Many find themselves in huge debt with car loans, house loans, student loans and personal loans. This can be stressful.
We will address:
- simplifying finances in general
- automating savings, bill payment, and investing
You might be in the area where you are deeply in debt and having a hard time, or you may be financially secure and looking for a way to automate things and simplify your financial life. I’ve gone along the whole range and will talk a little bit about each area. You can choose one area to focus on and simplify today.
Simplifying your finances when in debt
- Face your finances head on. Just like going through possessions and any other issue in your life, face it head on.
- Make a list. List out every credit card and loan with how much you owe in general, how much you owe each month, and the interest rate. On your spreadsheet, you will see what is owed.
- Make a plan to pay off debt. Look to see how much you need meet to make to pay off your debt per month. Add in groceries, gas, and variable expenses. Hopefully, the total is less than your paycheck. If not, you may need to cut back on some things like eating out, going to the movies, or excess groceries etc.
- Cut out the monthly expenses which you don’t really need. Do less so you have wiggle room and have some spare cash that you can start to pay off debt. You may need to cut out cable t.v. or move to a place with cheaper rent. Each thing on your list, evaluate whether or not you really need that thing or the monthly subscription. Cut out a few things. Cut every unnecessary expense. You want to start to free up your debt. Dave Ramsey has a method called the Debt Snowball Method. Take the extra snowball, $100-200 you saved, and try to make it bigger each month.
- Make some extra income. Maybe you do some freelance work or take another job to earn some money so you can increase your debt snowball.
- Put money into an emergency fund. If you do not have a savings right now, put some money away for an emergency. It could be $100, $500, $1,000. Ideally, it would be 6 months worth of expenses. Having $100-$200 in savings is a huge relief in case the car needed worked on or I had a medical bill. Whatever you can put into an emergency fund, do it right now and start contributing to it.
- Start to pay off one bill early. Instead of paying the minimum each month, choose one bill that you will put that debt snowball towards and pay off extra. Once that bill is paid off, put what would’ve been your monthly payment towards your debt snowball. Now your debt snowball is that much larger and you can begin to pay off the next biggest bill! Ideally, you pay off the bill with the highest interest rate first because they are costing you the most over time. As you pay off bills, the debt snowball gets bigger and bigger. You continue to do this with all your bills until you are out of debt. You can also take some of that debt snowball and put towards your emergency fund to grow it slowly.
Simplifying your finances with no debt
- Continue paying into an emergency fund.
- Automate your finances. Each month, set an automated transfer to your savings account to grow your emergency fund. Put rent, utilities, internet on auto-pay. Be aware of how much os going to auto-pay and how much you need in your account to go towards auto-pay. Eventually you have all your bills, paycheck, and savings on auto-pay.
- Review. Once a week, I go into Mint.com to pull in all my data and information to check all of my amounts and transactions. Take a look and make sure everything is good, adjust a payment or look at trends if needed. I look to see how much I am spending on groceries or clothes to make sure everything is going smoothly.
- Invest. I highly recommend investing in low-fee index funds that are an index of a broad range of things. A Vanguard 500 is a classic example. I have several different index funds I use. One is the Vanguard total stock index or Vanguard bonds and Vanguard international stocks. That means that I am completely diversified, automated, and I do not have a high fee money manager taking away some of my earnings with their fees. All of a sudden, your investments start to grow and you feel more financially secure.
That is simplifying your debt. Depending upon which phase you are in, face your finances head-on. Get out of debt and stop paying all the interest. Put some money into savings and automate payments. Invest and grow your finances.
I am not a financial advisor. Do your research in all of this. This is just some of the things I have learned. Just focus on one at a time. It sounds complicated but it simplifies your finances.
Pick something to focus on the next few days, face it head on and take care of it.