Get Your Money Life Organized!

I’m outlining here a step by step process to start feeling more in control of your finances. I’m always here to help you with the details, but sometimes it’s nice to have a road map to see the big picture.

Take control of your expenses.

One of the things holding people back from even starting to pay off debt is not having a good handle on monthly/yearly expenses.  Most people live in perpetual fear of that next automatic payment being deducted and throwing you into an overdraft nightmare.  

To start taking control, go through all your bank/credit card statements for the past several months and make a list of all your monthly and yearly regular expenses.  Did you know that for most expenses you can actually choose your own due date?  I find it helpful to consolidate all the due dates to one or two dates per month, usually around pay periods, when everything is deducted at the same time.  When you have an idea of how much will be taken out, you will know how much you need in your account to fund all the deductions.  Surprises will happen but we can greatly reduce them by knowing what we need to account for each month.  Build a cushion for yourself that would cover unexpected expenses.

Review your expenses and decide if there is anything you are no longer receiving value from and cut those out if possible.  Find out if there is any way to save money on the things you still need.  For example, sometimes paying 6 months or a year at a time rather than monthly on your car insurance will save you a significant amount in the long run.

Get a better bank.  

Most of the big commercial banks out there have all kinds of systems in place to penalize people who have the least amount of money.  For this reason, people become scared and distrustful of using banks in the first place, which is totally understandable!  Good thing there are banks and credit unions out there who will work with you, not against you.  My checking account has no fees at all and actually pays me interest on any cash that’s in there.  So start reading the fine print and make the switch as soon as possible.  I know it can be intimidating to switch from a bank you’ve always had and then go through the process of changing all your accounts over, but again-the fear and reluctance is costing you money!  

Get out of debt.

I know, it’s no fun and it’s easier to pretend it doesn’t exist.  The idea of looking at your debt seems scary and maybe unnecessary.  But let’s figure out how much that fear is costing you.  

Someone I work with recently told me she has several credit cards that are holding balances and charging 25% interest!  For most of the cards, she was paying hundreds of dollars each month in order to ignore the debt.  When I asked the simple question “could you pay those off now?” her answer was “yes, I think I could.”  Just by facing her fear, she was able to quickly and easily pay off several credit cards with small balances and high interest rates and saved herself thousands of dollars over the course of the year!  

Here’s how to face your debt in the way that will make the most impact.  Make a list of all your debts including the balances and the interest rates.  Many people will encourage you to start with the smallest balance first, but even though this might be more psychologically satisfying, it is not the most logical method.  I encourage you to start with the debts that carry the highest interest rates.  Assuming you are already making the minimum payments on all your debts, start throwing any excess cash at the debt with the highest interest rate.  Once that debt is paid off in full, move on to the next one.  Repeat this process until all your debt is paid off.  And now you can celebrate!  You have achieved something spectacular and can now start really building wealth without those ridiculous interest rates dragging you down.  

Build your cushion fund.

Most people in the finance world recommend creating an emergency fund.  This can give up peace of mind and prevent us from dipping into our retirement/investment accounts when things come up.  Saving 3-6 months of expenses will bring enormous relief because you know you will be covered if things go sideways.  As you start trusting yourself more with money, the need for this fund may fluctuate but it is always recommended to have something saved for a rainy day.  COVID taught us that the unexpected can truly happen, so think about how much you would need to have accessible in order to help you sleep better at night.

Set up and start funding your retirement accounts.

This is where the real fun starts.  This is where you will start watching your money really grow and start working for you.  If your company offers a 401k match, get signed up for that YESTERDAY!  They will match a percentage of what you put in, so put in as much as you need to in order to get the match.  Make sure that money is invested, typically companies will allow you tol choose from a target date retirement account with a year associated with it.  Those who want to be more aggressive with their investments can choose a target date further than when you actually plan to retire which will change the allocation to be more stock heavy rather than bond heavy.  

If your company doesn’t offer a match (or if you want to supercharge your goals!), the next step is to set up an Individual Retirement Account (IRA.)  There are several different types that you may or may not qualify for but the two main types of IRAs are Roth and Traditional.  Again, the differences can get complicated but the big difference is whether you pay taxes now or later.  Roth IRAs are funded with money that has already been taxed, usually through your paycheck.  Traditional IRAs are tax deferred and can be used to lower taxable income currently, taxes are paid when you withdraw that money in retirement.  If you are self employed, there are other options such as a SEP IRA or an Individual/Solo 401k, both of which will allow you to invest a little more each year than the regular versions.  You may even be able to do both!

Taxable Brokerage Accounts.

Ok, this is for those of you who are ready to play in the big leagues!  Once your tax advantaged accounts are set up and fully funded, you are probably enjoying watching that money grow and getting excited about the magic of compound interest.  The only problem is you have to wait until you’re age 59.5 to start taking that money out of the market and using it.  That’s where taxable brokerage accounts come in.

For those of you who are interested in retiring early, this is a good way to start growing your money in a place where there is no penalty for withdrawing before retirement age.  It’s possible to invest in very simple total stock market index funds and not think about it until you’re ready to retire and start drawing down those funds.  One useful strategy is funding your tax advantaged accounts until you are at “Coast FI,” (where you will hit your FI number by the time you retire even if you don’t continue to contribute to your retirement accounts just by allowing the interest to compound and grow) and then put the rest into your taxable accounts.  These brokerage accounts are taxed on both ends (income and withdrawal) but don’t have any limitations for when you can take the money out.  As long as you won’t need the money in the next 2 years or so, this is a great place to park your money and watch it grow!

Enjoy The Ride.

Being in this position feels really nice.  Your money is all set up and working for you, especially if you have automated everything, which I recommend.  If you are in this for the long haul, take some time to smell the roses!  Treating yourself to things that truly bring you joy and fulfillment will make this journey feel sustainable and remove any deprivation reasoning.  You’ll get a better idea of who you are, the things you value, and how much it will take to sustain the life you want to live.  We only get one shot at this life, so never miss an opportunity to live it!