Letâ€™s move into Week 2 of our Awesome Finances Challenge â€” this week weâ€™re going to use our daily session to start setting up our finances in an awesome way.
What would awesome finances look like? Some ideas:
- Youâ€™re debt-free or moving in the direction of debt-free. That means creating an amount each month that you can use to pay off debts, if you are in debt.
- Your finances are tracked and budgeted, and youâ€™re on top of it.
- You have a regular system for paying off bills, tracking and budgeting, and examining your goals.
- You are clear on your goals and youâ€™re moving towards them.
How does that sound? Awesome? Overwhelming? Both? Donâ€™t worry, weâ€™re going to move towards that this week, one step at a time. It wonâ€™t be accomplished in a week, of course, but weâ€™ll be moving in the right direction.
This week, Iâ€™d like you to take a number of small steps with your daily sessions. Skip the steps that donâ€™t apply to you:
- Set up a budgeting tool. I recommend You Need a Budget (YNAB), though if youâ€™re already using one you like, just stick with that. Each software is different and you should use what works for you. (More on this step below.)
- Start tracking your spending. Once you have a budgeting tool set up, start inputing your spending. Most of this software can do this automatically if you hook it up to your bank accounts, but itâ€™s often better to do it manually â€” it only takes a few minutes a day, and youâ€™ll gain much more awareness about how youâ€™re spending your money. Itâ€™s good to get clear on this, so get into this habit!
- Start planning your spending. Allocate the money you have in your accounts to the spending areas that are priorities first. Then to next priorities, and so on. Your spending becomes deliberate. More on this below.
- Set up an amount to pay off debts (or invest). After youâ€™ve done the steps above, starting to pay off your debts (if you have any) is a powerful step. Alternatively, set up an amount to invest. Weâ€™re not going to do that in one month, but we can get started by setting aside some money to pay off your debts (or invest). Again, more on this below.
In Weeks 2 & 3, weâ€™ll work on goals and structure, but for now, these are the things to at least get started on. You donâ€™t need to complete all of this stuff this week! Just get moving on it.
Itâ€™s important to take things one small step at a time, if youâ€™re feeling overwhelmed. This can be stressful stuff, but remember, you just need to do 10 minutes a day. If you do this each day, youâ€™ll make progress. Youâ€™ll be moving in the right direction. Thatâ€™s whatâ€™s going to get you there, not turning away when youâ€™re feeling overwhelmed.
So take a breath, and move into this loving direction, one small step at a time.
The sections below are to be read when you get to that step this week (or beyond), so donâ€™t worry about reading it all right now.
You can do this, my friends! Check in on the #finances channel on Slack if you are having difficulty.
Set Up a Budgeting Tool
If you already have budgeting software you use and like, then stick to that. If you donâ€™t, I recommend You Need a Budget (YNAB). Iâ€™ve been using it this year and it changed my financial life.
However â€¦ it took me 3 tries for the software to finally click for me. I was confused the first two times. Then I watched this tutorial, and it clicked. I recommend you do this:
- Sign up for the free trial. If you donâ€™t like it, you can cancel before a month is up. But I think the cost is more than worth it. Link to YNAB.
- Watch the basic YNAB tutorial on getting set up. Itâ€™s pretty clear. However, you might not fully get it after this so â€¦
- Watch this tutorial and then really give it a shot. This is the tutorial that helped me. I watched a few other tutorials as well, just to understand the ins and outs. I spent a day setting up my YNAB budgets (one personal, one for my business) and it has been a godsend.
If you decide to use another software, thatâ€™s totally cool. Find a tutorial to get set up, and then set it up! Youâ€™re now poised for greatness.
Start Tracking & Planning Your Spending
In the YNAB software, I entered in each of my balances (bank accounts, credit cards, cash in my wallet) and then each day, I enter in transactions. It takes 2 minutes. This has allowed me to be much more aware of how Iâ€™m spending my money.
I highly recommend you do this. Take a few minutes a day to enter in your transactions, so you know how youâ€™re spending your hard-earned money. You become very clear on where your cash is flowing.
Then from this place, you can become very conscious about how youâ€™re going to spend your money in the near future. I do my planning the YNAB way: I look at how much is in each account, and give that money a job.
First I allocate money (thatâ€™s already in my accounts) to my highest priorities â€” rent, power, water, groceries, etc. The things needed to keep a roof over my family, lights on, food on the table. Then I put money towards savings and debt, then other bills and longer-term expenses like car registration and home maintenance. Finally, if I have the money, I put it towards other goals like a trip or the like.
You donâ€™t have to master this all this week. Just get started! Youâ€™ll get clearer on it over the course of this month and next.
Set Up an Amount to Pay Off Debts (or to Invest)
You might not be able to do this step this week â€¦ thatâ€™s OK. But if you can, at least give this some consideration.
Debt is the thing that eats up most peopleâ€™s finances. Not only are you paying off your past overspending, youâ€™re usually paying high interest. And the debt payments keep you from getting free. So I highly recommend that you make getting out of debt a big priority.
If youâ€™re not in debt, find an amount you can put towards investments. I personally follow the advice of many wise writers on this topic and simply invest in index funds like Vanguard 500. Youâ€™ll want to do your own research, but Iâ€™ve found this to be a simple but effective strategy. (My personal strategy is to follow the 3-fund portfolio discussed here and also here.)
The key to either of these goals (pay off debt or invest) is to have an amount allocated to the goal. For example, you might find $300 a month to pay off your debts â€” you keep applying that each month to one debt until itâ€™s paid off, then apply that amount to the next debt and then the next debt until all are paid off (using either the debt snowball or avalanche method).
For investing, you would take that $300 and set up an automatic investment each month to be distributed into your portfolio by a percentage (letâ€™s say you have 3 funds, and itâ€™s 60%, 20% and 20%).
So to find that amount, youâ€™ll need to cut back on other expenses â€” can you spend less on eating out, spend less on online shopping or subscriptions, get a cheaper car, move to a smaller home, sell stuff so you donâ€™t have to pay for storage? Weâ€™ll talk more about this in an upcoming article.
The key thing is to get started figuring this out. You got this.