Growing up and then throughout college, I never really handled my finances well. However, I never made a late payment on any bill, but I also racked up a lot of debt. Luckily after college, something clicked in me to pay attention to my finances. With my new post-college salary, I was keeping up with the bills, but I wasn’t making any headway with reducing my debt or increasing my savings and investments.
Now that I had more income than I’ve ever had in my life, I was bombarded with options to spend, save, invest and donate. I could consolidate loans, apply for new loans or credit cards, open an IRA, Roth IRA, contribute to my 401k, start a 529, start a masters degree, open a money market account, buy individual stocks, mutual funds, options and whatever else someone either recommended, advertised or just mentioned in passing. I was overwhelmed with the options and so I just didn’t do anything!
The Plan of Attack
What I needed was a plan of attack. It took me 6 years to formulate that plan, and I’m still constantly working on it. I didn’t start with the details and all the options though. I started from a high level and worked my way down. Here was my plan 6 years ago:
- Get out of debt
- Increase savings
- Increase investments
- Donate more
From that high-level plan, I dug down a little deeper into each one separately. The important thing here is that I didn’t try to tackle everything at once. If you try to take in all your options in a single breath, you’ll suffocate. Instead, I focused first at my immediate need: reducing my debt.
For some of you, you may not have debt, or you only have a mortgage. You may want to skip the debt plan and move onto another category first, such as increasing investments. For me, I had a growing debt problem that, combined with my spending habits, produced an urgent need for change.
In my plan of attack for the debt category, I laid out the following steps:
- Itemize my debts – first I had to figure out the terms of my debts such as minimum payments, balances, due dates and interest rates
- Prioritize my debts – Instead of throwing extra payments at my debts willy-nilly, I had to prioritize the debts and knock them off one at a time. This is called “snowballing debt“
- Review my budget – After I knew which debts I wanted to pay off first, I had fit the extra payments into my budget. That means I needed to create a budget first, but I won’t get into that here. Let’s just say I knew my incoming and outgoing funds and identified the amount of “discretionary income” (that money that wasn’t tagged to any bills yet).
- Pay off the debts – This is the fun, yet painful, part. Now that I set aside money each month for debts, I got to send it off to the bill collectors and watch my balances drop. It hurt to not buy those gadgets and toys I wanted, but I maintained my discipline and slowly, but surely, got my debt down to a third of its original amount in just a few short years.
All that was just tackling a single category. I then proceeded, and am still proceeding, through the other 3 plans to create a detailed outline for increasing my savings, investments and donations. For savings, I identified extra income, opened a money market account and contributed funds to it from the budget.
For investments, I’m still working on that plan, but my first step is education. I stepped into investing without knowing what I was doing and now I’ve had to pull back a bit to research my various options. But I’m setting aside time to only think about investing and nothing else when I do this research. Otherwise, I’ll get distracted and overwhelmed.
So the key to taking control of your finances is to create a plan by isolating your focus areas, and then drilling down into each one independently of the others. Don’t try to tackle it all at once or it won’t get done. You’ll probably find this tip useful in many other aspects of your life too!