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MoneyUnder30.com

Mini-lesson #1: So, honestly, how do your finances look?

Are you happy with your bank account balances? What about your 401(k)? Did you pay your credit cards in full last month? Are you working confidently towards a clearly-defined financial goal?

Relax, you don’t actually have to tell me your answers. But if that thought makes you uncomfortable, perhaps we have some work to do.

1. Take stock

Take a moment and think harder about your current financial situation. If you took a snapshot of your finances right now (today—not tomorrow, next pay day, or a month from now) how would they look? Ask yourself:

  • In an emergency, how much cash could I get out of the bank today?
  • If lost my job today, how long could I survive before needing to borrow money?
  • How much total debt do I have?
  • What percentage of my monthly income goes towards debt payments?
  • What percentage of my income have I saved over the last 12 months?
  • Am I currently putting away money for my retirement?

How’d you do? Chances are there’s room to improve, which is fine. That’s what we’ll do.

2. Visualize your future financial path

Now, think about which of the above answers you want to work on first. Think about your financial goals. Ask yourself:

  • What do I most want to change about my finances?
  • Where do I want to be financially in one year? Five years? Ten years?
  • What do I most look forward to about improving my finances? (Hint: This could be buying a home or car, the flexibility to change careers or work less, or simply the peace of mind that comes with sound finances).

If you have time, write this down. Make a formal five-year financial plan. (There is evidence that we are more likely to accomplish goals we write down; take it for what you will.) Either way, reflect on your financial snapshot and your goals for a while.

3. Acknowledge your present financial reality

If you’re in denial about your finances, you can’t make progress until you snap out of it. I’m not saying this is you—but I do know from personal experience that denial and fear can take a bad financial situation and make it much, much worse. For example, if somebody starts drowning in debt, the tendency is to repress just how much debt there is; it’s too scary to see the bottom line. Likewise, if you haven’t been saving for retirement, you might avoid the reality of how much catch-up saving you’ll have to do to make up for those lost years.

So think long and hard about your current finances, and be honest with yourself. Where are the holes? How can you improve?

4. Cultivate the desire to change

The path of least resistance is to just keep on doing what you’ve always done…until you hit a wall. In order to change your finances, you have to want to change them. It’s no different from quitting smoking or losing weight. If you don’t want it badly enough, it ain’t gonna happen.

The way to change, of course, is to set solid financial goals and really think about them. Picture yourself living your financial dreams. Then, work hard at those goals and you will gradually transform your current reality.

5. Finally, set one clearly-defined and attainable goal

Figuring out how to prioritize financial goals can get complicated, but here’s the really simple version:

  1. Save $500-$1,500 as a starter emergency fund and cash cushion so you’re not always waiting for your next paycheck or paying overdraft fees.
  2. Get rid of any credit card debt.
  3. Save six month’s living expenses in an emergency fund.
  4. Save $5,000 or 15% of your income (whichever is more) in a retirement account.
  5. Save for other big expenses like vacations, homes, and cars to minimize future use of credit.
  6. Pay off other debts like student loans, auto loans, or even your mortgage.
  7. Invest for your future and give to charity.

Wherever you are, pick a goal that’s small enough to work with and, for now, just pick one. If you need to pay off 10 credit cards, start with one, and focus on it until it’s gone.

Bonus: Need a visual reminder of your goal? Write your goal on sticky notes. Put one in your wallet, one on your bathroom mirror, and one near your computer.

I think that’s enough for today. Write down your goal, and chew on it for a little while. Next time we’re going to dive into some financial nuts and bolts and talk about the dreaded “B Word” (Budgeting). Until then…