I was laying on the padded table at the rehab yesterday, doing back and leg stretches to fix my herniated disk when I realized something important: the steps to rehabilitate your body are similar to fixing your finances.
Don’t believe me? Well, let me outline a few steps that I progressed through in my own rehab and compare it to fixing our finances over the last 1-2 years. If you recall, we paid off about $41,000 of pure debt principal just last year alone. That’s an amazing amount that I know not everyone can achieve, but we still have over $44k left to pay by our debt pay-off goal date. To get to that point, we need to continue fixing our finances, but adapt to changing lives, emergencies and commitments.
Step One: Financial Diagnosis
Before I could start rehab, I had to find out what was specifically wrong with my back. However, I didn’t need to wait for all studies to come back before starting something. While waiting for the MRI results, I began a regime of stretches, but held off on exercising until I knew the extent of the damage.
Do you know where your finances are right now? Do you know how much you’re pulling in each month? You should because you probably get a paycheck from work, the state or maybe your parents. But the bigger half is do you know how much you’re spending? And do you know how much debt you’re in? And the structure of that debt?
In other words, Do you know the damage to your finances?
Here are a few sub-steps for this stage:
- Analyze your spending – Back in the day, I started to track how much I spent via a notepad and Microsoft Excel, but now that I pay more with credit cards (that I pay off monthly) and debit cards, I use Quicken to sync with my online accounts and enter transactions manually. There are no expenditures that I don’t eventually find out about this way (except cash, which is still a problem). TRACK EVERY OUTFLOW, whether it’s cash, credit, debit, online billpay or check, and then CATEGORIZE IT. I’ll warn you now that your initial categories will probably change and adapt as you learn more.
- Add up your debt – Some of you might laugh at this step and ask “Who in the world doesn’t even know how much the OWE?!?”. You’d be very surprised at the percentage. When we started on our debt-free life a few years ago, we honestly didn’t have a grand total of money owed. Truly, we didn’t really do the math until we applied for our first mortgage 3.5 years ago. And that’s when we found out we were in WAYYY over our heads. And then we got a house anyway 🙂
- Create a detailed “expense sheet” – Whether in electronic or paper form, you need to keep track of due dates, payoff dates, interest rates, applicable fees (like annual fees) and any other important financial- or date-related nugget about each of your recurring expenses and debts. For instance, if you have a special interest rate on a credit card, track when that ends. Keep track of due dates for your utilities and mortgage. Keep it updated.
Now that you know what you owe, what you’re spending and how you’re spending it, you can move on to the next step…
Step Two: Set Goals and Limits
Just like in physical rehabilitation, I don’t want to start running on a treadmill when all I can handle is a slow bike ride. I’d give up too fast and probably cause more problems than I fix.That’s why I need to know my limits (and limit myself) and set goals for upgrading my regimen.
What do you call a sheet that defines your spending limits? A Budget!
A while back, I wrote a resource on how we created a budget, including a template of our own Excel spreadsheet with generic categories that you can use/add to/remove as-needed. Basically, a budget should guide you in your monthly spending. You don’t want to be too restrictive at first. If, in Step One, you learn you spend $500 per month dining out, then dropping down to $50 per month is probably a bit too drastic. Quitting cold turkey is often very hard when trying to cut expenses, unless drastic measures must be taken for other reasons such as job loss or illness.
Budgets aren’t meant to be painful. They’re meant to help guide your spending into more manageable goals. That $200 per month for dining out in our own budget is a goal that we both try to work towards. Some months we blow the budget, and other months we find that we just haven’t wanted to go out very much and came in under budget. Originally, our budget was $125, then we increased it to $150, then to $200 and that’s where it’s stuck because we’re comfortable and happy with that amount. However, we know it’s there in case we want to cut it if we’re in financial trouble.
Regarding other goals (just discussed spending goals), you should also have saving, debt payoff and investment goals. For example, if all you can manage in your budget is $20 towards savings, $50 extra towards debt and maybe 1% towards your 401k or $25 towards a Roth IRA or 529, then mark it down each month and stick to it. Keep at it for a few months and continue to update your budget to know where you stand! You’ll need to know for the next step.
Step Three: Revise Your Goals and Limits Through Education
Yesterday was the first time the therapist had me do actual exercises to begin strengthening my back after stretching it out. I’m making excellent progress, but it’s still painful during and after each session. I learned what my body could tolerate, but only by going through the basic diagnosis and testing it out. As you progress through rehabilitating your finances, it will be painful, but you’ll eventually be able to move on to new goals and exercises.
It took at least 6-10 months for our budget to get pretty stable. Within that time, we continued to revise our spending goals for dining, groceries, and even utilities as we didn’t have a good history on expenditures. After the expenses settled, I began to revise the other goals such as savings, debt overpayments and investments. Last year, we were able to contribute the full $4000 to our Roth IRA, and of course pay off tens of thousands in debt over our standard payments. Also, we were able to grow our savings account by 250% last year over the last.
We couldn’t have done this without having a solid foundation, educating ourselves about our patterns and adapting to changing needs. And that’s the same thing you’ll eventually go through in your journey.
I wish I could say there’s a Step Four: Done, but there isn’t. You’ll always be spending, saving, investing, earning, even if you don’t have debt, so you’ll just stick in a holding pattern in step three. Eventually, your finances will shift to autopilot, with only incremental tweaks as you get a raise, grow your family, or something seriously good or bad happens. But with proper planning, you should be able to tackle all but the worst problems.
So, if you don’t have a plan, start one. If you’re not maintaining the one you have, then fix it! If you’re in Step Three, then congratulations and keep it up! Oh, and make sure you allow room for some nice surprises like little (or big) vacations, gifts or little romantic escapes.
Image Courtesy of MannyWallace