Want to reach financial independence or financial freedom? No idea where to start? Yeah, that's where most people struggle the most. In this post I'm going to show you the first 5 steps to master your money and get on the track to financial independence and freedom!
This Is How to Start Your Journey to Financial Freedom
Reaching financial freedom is a massive topic!
You could read about all kinds of personal finance topics all day and still not be sure where to start. Even worse, we graduate from our high schools and colleges and they don’t even have good personal finance courses to prepare us for handling our money in adult life.
When I first got into really getting my money under control, I didn’t even know where to start. I knew I wanted to invest, I knew I needed to start understanding where my money was going. The problem was, I had no idea where to start.
I started a blog about automating personal finances and was dishing out all these different strategies, but I kept getting asked: “Where do I start?”
So… I decided I needed to create a simple list of action steps that all millennials could follow that would get them on a successful path to gaining control of their money, building great financial habits, and beginning to build some wealth.
From there they could launch into more advanced strategies like stock investing or automating their money.
I created a 5 step plan that anyone could follow. I’m going to break down the steps in this post. You may be already doing some of them or even all of them. If so, high five, you’re awesome!
If you’re not, then this is an awesome opportunity for you to take control of your money and begin building some wealth today.
Let’s do this!
STEP 1 - UNDERSTAND AND ORGANIZE YOUR MONEY
Let’s face it, most of us are not logging into all of our accounts every day and checking on them. I don’t blame you. That would be tedious and boring... If you’ve had more than one job and/or more than one bank you probably have more accounts than you think and it’s difficult to keep tabs on all of them.
There is a better way. Before you can really do anything else with your money, you need to really understand where all of your money is. To start off, get out a pen and your notebook, or open up a spreadsheet, or a document on your computer.
Start by listing out all your ASSETS:
Houses you own
Next list out all your DEBTS:
Lines of Credit
It’s hard to track all of these accounts manually. (I’ve tried)
If you don’t already use it, check out Mint at www.mint.com. This is an awesome free tool that automatically checks all of those accounts for you, giving you a real-time view of your finances in one place. You can see balances, transactions, fees, and interest rates. It’s an amazing tool!
Connect all of your accounts and with one site or phone app and you’ll be able to see all of your accounts so you can truly understand your total money situation.
STEP 2 - AUTOMATE YOUR BILLS
Bills suck. I use to struggle with them every month. It doesn’t have to be a stress filled event with constant tracking of all your bills and due dates. Automate them!
To get started, list out all of your bills. Every one of them. Make sure you note the due date and the average bill amount. For bills like your electricity bill that can change monthly, I estimate a little higher to leave some wiggle room.
Now, how many paychecks do you get a month? 1, 2, 3, 4? List those out as well with the amount of each paycheck.
Assign each bill to a paycheck. Remember, the paycheck must come prior to the bill due date so you have time to get the money to them.
Here is a quick and simple example:
Paycheck #1 - $800
Mortgage - $600
Paycheck #2 - $800
Electricity - $150
Cell Phone - $80
Paycheck #3 - $800
Car Payment - $250
Car Insurance - $80
Paycheck #4 - $800
Water - $25
Trash - $25
Netflix - $10
Now we need to automate those payments. I use my very own bank's online bill payment service to do this. I don’t like allowing the companies to pull money out of my account on their terms, so I always setup my own payments.
To do this, sign up for your bank's online bill payment service. Log in and create a payment for each bill and make it a recurring payment the day after your assigned paycheck deposits. It’s that simple.
Once it is set up, your bills will be paid automatically without any stress on your part! This was a life changer for me. I highly suggest giving it a try.
STEP 3 - AUTOMATE AND ELIMINATE YOUR DEBT
Just like bills, debt sucks. Big time.
Getting rid of your debt isn’t as hard as most people make it out to be, but it does take:
The first thing you need to do is get rid of your access to debt. Cut up your credit cards, shred those check advance forms, cut off your access to any credit lines. You have to stop the bleeding first.
Tell yourself: NO MORE DEBT! This is crucial!
Once you’ve decided to stop using debt, it’s time to begin getting rid of the debt you’ve already accumulated.
List out all of your debt except for mortgages. (You should have this already listed out from step 1)
Sort them from lowest to highest balance. This is what you need to pay off in order of priority. The lowest balance debt is your FOCUS DEBT. That’s the debt you want to focus on paying off first.
Now, how much many can you set aside for paying off that debt?
Decide how much money you can afford to pay towards that debt after paying all of your monthly bills. Don’t stretch yourself too thin or it will just tempt you to go back into debt.
Next, let’s assign that money to your debt. Apply the minimum payment to all debts but the one with the lowest balance. Whatever is left, apply all of that to your Focus Debt.
Here is a simplified example:
$1,000 per month available to pay off debt.
Debt #1 - Balance $1,000 - Pay $700 per month until paid off (FOCUS DEBT)
Debt #2 - Balance $1,200 - Pay $100 per month (minimum payment)
Debt #3 - Balance $2,200 - Pay $200 per month (minimum payment)
Finally, assign those payments to your paycheck just as you did in step 2 and automate those payments! This is so important because it takes the stress off of you while paying down your debt for you.
STEP 4 - CREATE A BUDGET THAT WORKS FOR YOU
Now we’re going to talk about a budget. If you don’t have one yet, it’s time. It really is. Budgets are not that difficult and not as tedious as everyone likes to make them out to be.
Let’s create a very simple zero based budget. This won’t take much time and will begin to help you understand where your money is going and allow you to correct it as needed.
Open a spreadsheet or a pull out a piece of paper and list out all of your monthly income. Everything you have coming into your bank income after taxes and all the deductions have been taken out. Here are some possibilities:
Rental Property Income
Assign each income source a monthly amount. If it varies you’ll have to take an educated guess, but for safety I would guess on the low end.
Next, list out all your monthly expenses. Think of everything you spend money on monthly. Here is a list to get you started:
Home / Renters Insurance
Assign each expense a monthly amount. If it varies you’ll have to take an educated guess again, but for expenses I would guess on the high end.
Now, let’s move to the fun stuff. List out all of your goals. Anything you need to save for. It could be something you want this year or even years down the road. This is totally up to you, but here is a list of possibilities to get you thinking about what you may want to save for:
Got any ideas yet? Let your mind run wild. If you’ve got a bucket list think about making those a reality by starting to save now.
How much do you need to make those happen? Large ticket items or experiences may be expensive so you’ll have to set aside an amount each month to get there. Think about how much you can afford to set aside and list out a monthly amount you’ll save next to each goal.
Now we’re at the end of this budget. It’s time to make sure every bit of your money has been assigned to an expense or a goal. You can use a spreadsheet or a calculator to figure this out.
Add up all your monthly income. Add up all your monthly expenses. Add up all your monthly goals.
Now use this formula:
TOTAL MONTHLY INCOME - TOTAL MONTHLY EXPENSES - TOTAL MONTHLY GOALS = 0
In other words, all your income should be assigned to monthly expenses or monthly goals.
It’s really that simple. With a good budget you know exactly where all your money is going. How much is going to expenses and how much is going to goals!
STEP 5 - INVEST IN YOUR 401K
Too many millennial’s are not investing and it’s a shame. Even just a small bit of investing can lead to a huge amount of wealth over time. The easiest place for most people to start investing is simply by enrolling in your company's 401k plan.
Most companies offer them and if you’re not enrolled. Please, please, please get enrolled ASAP. If not, you are giving up so much money.
I highly recommend contributing at least 10% of your income to your 401k.
Here is a cool feature of company 401k’s. If you contribute say 6% of your income, your company will often match a portion of that. For example, many will contribute 3% if you contribute 6% resulting in a contribution of 9%, making it super easy to get to that 10% investment without affecting your paycheck too much.
If you're not sure how to enroll or make these changes, just contact your friendly HR rep at your company and they can help you get started easy peezy.
Now, once you’re enrolled, you need to invest that money you're contributing. You’re probably thinking, I have no idea what to invest in!
I’ve got the answer.
Not too long ago, a brand new type of investment became popular. It is the S&P 500 Market Index ETF (Exchange Traded Fund). It’s an awesome way to invest in the entire stock market and historically the stock market has provided great returns over time.
Not only does it provide a great diversified portfolio but they also have extremely low fees! How can you go wrong?!
Ok guys and gals, let’s recap this. Here are the 5 action steps you need to take to get yourself in an awesome position financially:
Understand and Organize Your Money
Automate Your Bills
Automate and Eliminate Your Debt
Create a Budget That Works for You
Invest in Your 401k
Don’t procrastinate, don’t put it off… Get started NOW! You’ll thank yourself so much in the future when you know where all your money is. You’re not worrying about bills. You’re on the the path to being debt free, and you're beginning to build some real wealth for the future!
You can do it! No one is stopping you but you so get started!
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CREATOR OF LET'S AUTOMATE YOUR MONEY WITH MY LOVELY WIFE KRISTA