Earlier this year, household debt balances in America rose to $12.73 trillion, the highest in our history. In fact, 73% of us die in debt. With this much debt, it’s hard for many people to reach long-term goals such as retirement savings, or shorter-term goals such as paying for a wedding. Many of us just wing it when it comes to our finances, thereby decreasing our opportunities and our joys in life. But with a bit of planning, we can take control of our finances, which gives us much more control over our lives and our futures.
You will find that the following guidelines make a big difference.
Set Your Goals
We all know it’s impossible to get anywhere without knowing where we want to go. Many of us have more than one financial goal, which means we need to set priorities. That doesn’t mean you can’t work toward more than one goal at once. Think about what is the most important thing to you now:
- Paying off debt;
- Contributing to an emergency fund;
- Saving for short- or medium-term goals, such as paying for a wedding or a vacation; or
- Saving for long-term goals, such as retiring comfortably.
In order to reduce both your risk and your anxiety, it’s best for most people to prioritize paying down their debt and building an emergency fund but without ignoring their retirement. Of course, your goal setting will depend to a large extent on your priorities in life. Recognize what those are and plan your spending accordingly. For some people, buying a large, comfortable house is paramount. For others, travel and new experiences are more important. Neither is right nor wrong. The point is to plan and act to make your personal goals become a reality.
Pay off Debt
Many people wonder how they got into so much debt and they don’t see a way out of it. But you can climb out of debt with good planning. If you are part of an average American household, you may have $15,654 in credit card debt, $27,669 in auto loans, and $46,597 in student loans. And almost half of credit card holders have revolving debt, meaning rather than paying off their debts every month, they carry it forward. If you have these kinds of debts, you are probably paying thousands of dollars per year just in interest.
Also, if you are in debt, you may occasionally overdraw your bank account trying to cover payments. That’s usually a minimum $34 bank fee and more if you don’t repay the money almost immediately. Banks are thrilled when you overdraw. They make more than $30 billion every year in overdraft fees.
Contribute to an Emergency Fund
If anything is constant it’s that nothing is constant. Life happens, and you need to be have a little cash put away for an emergency. Try to have at least enough money to get you by for three months. Six months is better. Shockingly, about 70% of Americans have less than $1,000 in the bank. If you have sudden medical bills, an accident, or lose your job, you need some cushion. If you don’t have an emergency fund, this should be a top priority.
Save for Short- and Medium-Term Goals
Once you have your debts under control and have a comfortable emergency fund, you may want to turn your attention to some short- or medium-term goals. This could be anything from buying a car, going on vacation, or buying a house. Life is to be enjoyed. Just don’t pursue these goals while going deep into debt or ignoring putting money aside for an emergency.
Save for Long-Term Goals
Of course, a long-term goal everyone should have is saving for retirement. Here are a few ways to do so:
- Start putting money aside as soon as you can, even if it’s only $50 per week.
- Don’t put your retirement behind everything else. It is far too easy to push it off. Don’t steal money from your retirement to renovate the kitchen or fly to the Bahamas for a few days.
- If your employer will match retirement funds, put in the maximum amount they will match.
- If you are over age 50, you can make a larger retirement contribution. Do this.
Know Where Your Money is Going
The first step to reaching your goals is understanding what you have to work with. You need to know where your money is going before you can redirect it to be more in line with your goals.
- Go through your bank statements and receipts and list what you are spending on.
- Separate your costs into two groups. The first group is fixed costs, such as rent or mortgage payment and insurance. The second group is flexible costs such as going to the movies and other entertainment, eating out, and gasoline.
- Make a note of your assets and net worth.
- Check your credit scores.
- Add up your debt.
You don’t need to go back years. Just take a look at your spending and financial information from the last few months.
Build a Budget
Just as you can’t get anywhere without deciding where you want to go (your goal), you also can’t get there without a plan. Once you have a firm grasp on the money you have coming in, your debts, your expenses, and how you spend your extra money, you need to make a budget.
“Budget” is a word that can strike terror into the hearts of many people to the point that they become paralyzed with fear. The word can conjure images of failure, similar to the word “diet.” There is no need to put yourself through this. Your budget doesn’t have to look like anyone else’s. Recognize your personal priorities and be realistic.
If you are saving for a short- or medium-term goal that is extremely important to you such as a big wedding or a vacation, you might be willing to tighten your belt in some areas for a bit. But if you live and die for weekend golf or morning lattes, those may not be the first place to look at cutting your spending.
Just realize you may not be able to have it all, at least not all the time.
See also: Payday Lending Pitfalls: What to Know
Get Help if You Need It
Some people become almost paralyzed with fear when it comes to dealing with their finances. If sifting through your financial records and creating a budget is too much for you, get help. There are various levels of help according to your needs. Help can come in the form of budgeting software, budgeting services, financial advisors, accountants, and bankruptcy attorneys.
The most important thing is that you get started immediately, because your future won’t wait.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.