Where the f**k do I start? That’s the million-dollar question when you finally come to the realization that you need to get your financial shit together. And it’s hard to figure out because there is so much contradictory information out there about whether you should pay off debt or invest, what the best investments are, how to budget, and so much more. Trying to sift through everything and decide who’s right is overwhelming and exhausting.
Because of the information overload, many people grasp onto the low-hanging fruit, like budgeting. But saving $3 here and there isn’t going to have much of an impact on your financial future, and it definitely isn’t going to help you weather the next recession. So what should you do instead? Focus on making big financial wins and building your financial scaffolding.
By building a solid financial foundation and structure, you’ll be able to better navigate financial hardships in the future, and by reducing a few extremely costly fees you can save hundreds of thousands in the long run instead of $3 every grocery trip. Even better is that all of these things require much less time and effort than penny-pinching.
Here are the 6 things you should do when starting your finance journey to create big financial wins and build your financial foundation.
1. Take your financial inventory
Taking your financial inventory will give you a snapshot of your current financial situation. This is probably the scariest step to take because once you have a clear picture of your financial situation, it’s hard to ignore it. It’s also impossible to change your situation without understanding what you’re working with, so taking a financial inventory is step number one.
To do it, list out all of your savings, debts, and investments, and how much you have of each. Then calculate your net worth using this formula. Don’t feel bad if your net worth is negative! Many people, including me, had negative net worths when we started out. Now your job is to use the next 5 steps to turn that number positive.
2. Start saving
Once you have your financial snapshot, the next thing you need to do is start building your foundation. The best way to do that is to start an emergency savings.
Your emergency savings goal should be to have 3-6 months of expenses saved in a high-interest savings account. You can use my free savings amount calculator to get an idea of where you should fall within that range.
Once you know how many months of savings you’re shooting for, you need to calculate your monthly expenses. To do that, list out all of your bills, loan payments, subscriptions, insurance payments, grocery costs, etc. Then add all of your expenses up and add a 25% buffer to your total. Multiply that number by the number of months you’re planning to save and you have your savings goal.
Your next step is to open a high-interest savings account with an FDIC-insured bank and set up automatic contributions into it. Once you’ve done that, you’re well on your way to building your financial foundation.
3. Do an expense overhaul
Expense overhauls are the easiest way to save money without having to budget. The first thing you should do is go through all of your expenses and cancel any subscriptions you don’t use.
Step two is to call your providers and negotiate your bills. This works for things like your insurance, cell phone bills, and some streaming services. You can ask them if they have any promotional offers, and threaten to cancel if they don’t lower your bill. These companies also frequently change their policies, so sometimes you’ll find out that you’re paying a high price for one of their old plans and can easily pay less by switching to one of their newer offers.
While this process can be tedious and intimidating, you can get it all done in a couple of hours and could end up saving several hundred dollars each month. When my husband did this last year, we ended up saving over $200/month with just a few hours of work. Once you’ve negotiated your savings, you can reap the rewards for an entire year before having to do it all over again.
4. Pay off your credit card
If you haven’t been paying off your credit card in full every month, it’s time to start. Credit card debt is one of the worst types of debt you can have because it’s sooooo expensive. The average interest rate on a credit card is 18%. That means you pay 18% extra per year for everything you buy on your credit card but don’t pay off.
Since the average credit card interest rate is higher than the average return on the stock market, it’s unlikely that you’ll be able to invest your money and receive a higher return than 18% to offset your losses. So when deciding whether or not to invest or pay off credit card debt, the answer is to pay off your debt.
Since you’ve already taken your financial inventory, you know exactly how much credit card debt you need to pay off, and now you need to set up a plan to do it. Credit card interest is added daily, so make your payments as frequently as possible. The easiest way to do that is to set up automatic payments on days when you know you’ll have money to cover them, like payday. You can also call your credit card company and try to negotiate your interest rate down. This will reduce your interest expense while you’re paying off your balance.
5. Start investing
When it comes to investing, the earlier you start, the better. That’s because of compound interest. Compound interest grows your wealth exponentially over time, but to really reap the benefits, you have to wait decades.
If you invest $450 every month for 30 years and receive a 10% return, you’ll end up with over $1 million, but only $162,100 of it will have been contributed by you. You can thank compound interest for the other $865,882.
To make that much money from compound interest, though, you have to give it time to work. It took 30 years for that much money to accumulate in our example. If you shorten your investment period down to 15 years, you’ll only have $188,531 in total. That means over 80% of your $1 million earnings are made in the second half of your investment years. The more time you can leave your money invested, the more it will grow for you, which is why it’s so important to start investing today!
6. Check your fees and get them waived
Fees are your enemy when it comes to all things finance because they take away your hard-earned money. The good news is that you can get a lot of fees waived.
When it comes to account fees, there’s often an easy way to get your fee waived, like by signing up for paperless statements. If you can’t find information online on how to get your account fee waived, call your provider and ask if there’s a way you can do it. If you’re ever charged a fee for over-drafting your account or not maintaining the minimum required balance, you can also contact your provider and ask them to waive the fee.
Another type of fee you need to look out for when investing is called an expense ratio. These are the management fees funds charge so they can cover the expense of operating the fund. In general, actively managed funds have higher fees than passively managed funds, and they usually don’t perform well enough to compensate for the extra fee you pay. Choosing to invest in funds with higher fees can end up costing you hundreds of thousands of dollars more than you would have paid if you had invested in a fund with lower fees. When choosing funds to invest in, select the ones with expense ratios under .5%. If they’re under .2%, that’s even better.
By focusing on these 6 areas of your finances, you can make significant financial gains without constantly stressing about every dollar you spend. There’s no need to bargain shop and penny-pinch if you’re making larger financial wins and building a solid financial structure. That’s how you set yourself up to weather financial hardships and have a fantastic financial future.