By this point, you’re convinced that you’re not good at managing your money and looking for guidance to manage your finances.
The good news is that you’re not alone. According to the Federal Reserve, 44% of Americans aren’t able to cover a $400 out-of-pocket expense.
Managing money is simple to understand but difficult to do. Why? Because breaking bad habits isn’t easy.
Through trial and error, I’ve paid off over 10K in debt and have saved more money than I’d ever imagined possible. And, If I was able to save, I’m betting you can too.
If you’re ready for change, here’s the ultimate guide to transforming your finances.
I hate to break it to you, but more often than not the problem isn’t the strategies you’re implementing, it’s you. You’re making irrational purchases and getting further into debt with a bad mindset.
Take T.Harv Eker’s quote for example, “Thoughts lead to feelings. Feelings lead to actions. Actions lead to results.” It all begins with the way you’re thinking.
Because thoughts play a crucial role in how you’ll act, you need to be careful with what you feed your mind. Instead of binge-watching Youtube videos, read books instead.
What should you read?
Read books on money, business, and successful people. It’s ok to read fiction books but create a healthy balance of reading non-fiction books. The goal is to continue learning and applying what you’ve learned.
Strapped for time?
Join a book club and get encouraged by others to start reading. Additionally, you can read while you’re driving or doing errands with Audible.
Surround yourself with successful people
“You’re the average of the five people you spend the most time with” – Jim Rohn
Hang around enough successful people and you’ll begin to think like them.
The same is true when you surround yourself with people who are in debt or have a scarcity mentality. Because these people have a huge influence on you, it’s best you cut them off. This won’t be easy, but you need to create an environment where people enable you to grow.
Sometimes you can’t cut certain people off like family or very close friends. In this case, spend less time with them. Do your best to create the environment that will help you reach that next level.
Take Benjamin Hardy’s story, for example, about his friend Mat who had a wonderful marriage. On top of this, he was also on track to landing his dream job.
Mat ruined his dreams when he underestimated the influence his friend Eric had on him. Over the course of 5 years, he’d become more pessimistic and careless. This prevented him from landing his dream job and led to his divorce.
There are many of Eric’s in your life. Your job is to find them and cut them off from your main circle of friends. Then, build a stronger social network.
Here are some suggestions:
1. Attend conferences
2. Attend meetups
3. Make new friends at the gym
4. Take classes at a local University
5. Join like-minded Facebook groups
Most people go to work and then go home to relax. Only individuals who are hungry for more do activities that’ll help them grow. Step out of your comfort zone by doing extra activities and see how your quality of life changes for the better.
Think in abundance
“It takes the same energy to think small as it does to think big. So dream big and think bigger.” – Daymond John
Some believe there’s a limited amount of money one can make, while others see no limit. The problem is that by thinking small you’re setting a cap on your earning potential.
But how can you start thinking big? With gratitude.
Each morning you wake up write down one thing you’re grateful for. For example, you can be grateful for having a bed to sleep in or for being alive. You won’t feel much at first, but soon, you’ll complain less and feel happier.
But, don’t only take my word for it. Research has revealed that practicing gratitude helps manage stress and build stronger relationships.
Building An Automatic Budget
So you’re on track to building the right mindset, what’s next?
Creating your budget.
A budget isn’t optional, it’s necessary.
The problem is, it’s easy to go over your budget or break your own rules. The trick is to use an automatic budget system.
How? By setting up automatic transfers from your checking to your savings accounts. This way each time you get paid you’ll only see the leftover money to spend in your checking account. This avoids all your money going into one account, where it can be quickly spent.
Follow these steps to set up the foundation of your budgeting system:
Step 1: Open a free checking account if you haven’t already done so.
Step 2: Open 1–2 extra FREE savings accounts from your primary bank. These accounts will be used to fund different short-term saving goals. (i.e., car expenses, new cell phone, etc.)
Step 3: Open new savings account at an external bank to fund long-term saving goals (i.e. new house, car, wedding). Then link your primary bank account to this savings account. But, don’t link your external savings account to your primary bank.
Because you’ll want to make it challenging for you to withdraw money out of this account.
Know your cash flow like the back of your hand
Think of your cash flow as money coming in and out of your account.
One of the best tools to help you achieve this is Personal Capital. Create an account and begin syncing all your bank accounts. Once you’ve added all your accounts, you’ll be able to see your net worth.
Don’t worry if it’s negative, we all start somewhere.
To view your cash flow, select the “Banking” option on the top menu and then select “Cash Flow” in the drop-down. Here you can view your cash flow, income, and expenses.
Take some time to understand your spending patterns. For example, you might discover that you spend over $200 on restaurants. In this case, you’d work on eating out less.
Setup automatic payments
How can you be sure to never miss a bill payment?
By setting up automatic payments. Go to the “expenses” tab and write down all the due dates for your bills and their amounts. For example, your cell phone bill of $90 is due on the 15th of each month.
Another problem you might face is paying your bills on different due dates. This makes it inconvenient for you to have a steady income each pay cycle. The trick is to split your total expenses in half, then set up your due dates to average this amount each pay cycle.
Here’s what I mean, first tally up the total amount of bills and expenses you have each month, then divide your total in half. Sort your bills so that they are about half your monthly expenses each cycle. View the example below:
- 1st of the month: Rent – $600
- 13th of the month: Cell phone – $90
- Weekly: Groceries- $250
- 30th of the month: Student loan: $100
- Weekly: Gas: $100
Total = $1,140 Half: $570 Cycle 1: 600 (rent) Cycle 2: 540 (cell phone, groceries, student loan, gas)
Finally, call your bill providers to change due dates if necessary. For example, let’s say you get paid on the 1st and 15th of the month. In the scenario above you’d move your cell phone bill past the 15th of the month after you’re paid.
Now that you’ve configured your bill due dates, set up recurring transfers from your bill provider. Nowadays, most companies offer the option to take your money automatically from your account. Set up as many bills as you can to be charged to your credit card.
This is important because sometimes companies overcharge you and waiting to receive a refund can take days. By paying most of your bills from your credit card you eliminate the chances of it affecting your cash flow.
Allocate leftover money
By now, you’ve done most of the work.
Now it’s time to put your leftover money to work. Open Personal Captial and go to the “income” tab and write down your average income each pay cycle. Subtract this amount from your monthly expenses.
Income – Expenses = Leftover money
Now, use this money to fund different saving goals.
Log in to your primary bank and set up automatic transfers from your checking to your savings. For example, if you get paid on the 1st of the month, set up recurring transfers to occur on the 1st of each month.
Saving money isn’t easy.
Otherwise, most people wouldn’t be in debt. Instead of saving all your leftover money, start by saving half of it. If you find that you’re taking money from your savings account, lower your savings amount. Gradually increase your savings as you feel more comfortable.
Reward yourself as you continue saving money each month. Treat yourself to a nice dinner or buy yourself a nice shirt. This will vary on the amount you have leftover, but you get the point.
This reward system will help you stay motivated as you’re saving money and avoiding burning out. It will take time, but you’ll build strong saving habits.
According to Comet, on average 80% of Americans carry some type of debt.
The good news is that if you’ve followed the steps above, you’ve created systems to help you get out of debt.
That’s because most of your money is being used to pay bills and save for different goals. But, that’s not enough. You need constant motivation to help you break bad money habits.
Setting clear goals
So, how can you stay motivated?
By having a clear purpose. A Harvard study indicated that people who set goals are 10 times more likely to achieve them.
Think back on why you’d wanted to improve your finances. Then write down your S.M.A.R.T goals in a journal.
For example, one goal you may have is wanting to reach financial independence. Whatever your goal is, write it down somewhere you’ll see it daily.
Here’s how to break down your goal:
- Write down your goal and by when you’d want to complete it. For example, save $500 in 3 months
- Break this goal down into actionable weekly micro-goals. 1. i.e. Save $42 each week ($500/3 months = $166 per month / $166/ 4 = $42 per week)
- Break this goal down into actionable daily micro-goals. 1. i.e. Save $6 each day.
- Write down your micro-goals in your journal.
- Review your progress daily to make sure you’re on track
Eliminate Credit Card Debt
According to NerdWallet research, credit card debt climbs to $911 billion.
Credit card debt is no joke, but the best way to avoid it is by having no credit cards. Unfortunately, this is easier said than done. Instead, aim to only have 1–3 active credit cards.
Get organized and jot down all your credit cards in a separate list with their balances. Use the majority of your leftover money to pay extra principal on your lowest credit card first. Follow this process until you’ve eliminated all your credit card balances.
As you pay off your entire balance close the ones with the lowest credit history. For example, if you have 3 credit cards and only one is 6 years old, keep this one and close the rest. Yes, your credit score will drop a couple of points but it will go back up.
It can take weeks, months, or even years for you to become credit card debt free. But, once you pay off your credit card debt you’ll stay out of debt, knowing how hard you’ve worked to get out.
Stay on top of your credit
Good credit is essential.
That’s because you’ll be better prepared to make big purchases, such as a home, and a car with the lowest interest rates.
Your credit score can also be a great tool to help you stay motivated. Use FREE apps like Credit Karma to check your credit daily. Since checking your score is a “soft” inquiry, your credit score won’t get affected.
You’ve now set up your budgeting system to save most of your leftover money.
There’s no best answer, but I’d recommend you start with the following:
Build an emergency fund
“By failing to prepare, you are preparing to fail.” – Benjamin Franklin
How long could your finances sustain you if were to be laid off tomorrow?
Most wouldn’t survive for more than a few months. The scary part is that in some households there’s only one breadwinner. Unemployment is a scary thing, but the good news is that you can prepare for it.
By this point, you should know your monthly recurring expenses. Decide how many months’ worth of expenses you’d want to save. Then configure your budget to help you save for this goal.
Set short-term goals
Prepare for future expenses so you don’t use your savings accounts to make these purchases. For example, set a budget to save up for a new laptop, regular car expenses, or Christmas presents. Put every dollar to work.
Most banks allow you to give your checking account nicknames. Use this feature to reflect your saving goals. Let’s say you’re saving for a house, you can then name your savings account “Dream Home.” Play around with this feature and use it to your advantage.
It’s ok to splurge your money on nice items.
Managing your money effectively doesn’t mean you have to be frugal and miserable. After all, what’s the point of saving money if you’re not happy? But, be sure you’re saving and paying down your debt each month.
Now you won’t have to guilty for owning an iPhone, or the hottest sneakers. As long as you’re saving more than you’re spending.
Nowadays, it’s no longer smart to depend on a company pension to support you after retirement.
That’s why investing in your 401k or IRA is important. At least contribute to what your company is willing to match. For example, if you’re company matches up to a 5% contribution, then contribute at least this amount.
This is FREE money on the table, so why not take advantage of it? Currently, the annual contribution limit towards your 401k is $20,500 as of 2022. It’s a good idea to set your contribution to increase annually or every 6 months by 1%.
Chances are that you won’t miss this money and you’ll grow your retirement nest egg faster. Money contributed to your 401K account is pre-taxed.
For example, let’s say you get paid $1,000. You’ll contribute 5% of this amount before you incur taxes. This is huge because you get to contribute more money.
Learn the basics
You don’t have to be the next Warren Buffet when it comes to investing, but you do need to understand the basics.
After all, you’re investing your hard-earned money. A great way to start is by reading the following books:
More often than not the contributions you’re making with your 401k aren’t optimized. Use resources like the Boggleheads forum to get help in choosing your best options. Picking stock options can be tricky, so learn the basics then seek advice from experts.
You have the option to use robo-advisors like Wealthfront, who build your portfolio. But, you may miss out on your company’s matching contribution if you invest your money elsewhere.
Review Your Progress
Kudos to you, if you’ve made it this far.
At this point, you should be in good shape, except you need to set a time to review your progress. Use Google Calendar to schedule a recurring time each month to review your finances and stick to it. You’ll need to dedicate about an hour to review where you stand.
Here are some things to look out for:
- Are you hitting your saving goals?
- Are you on track to becoming debt-free?
- Can you cut more unnecessary expenses?
- How can you improve your budget?
A great tool to help you keep track of your goals is Google Sheets. The best part is you can view or edit on the go.
Unleash Your Earning Potential
You’re capped on much you can save but not on how much you can earn.
As you build your strong budgeting system it’s important that you build a side hustle, even if you love your job. Why? Because the future is unpredictable.
The truth is you can lose your job tomorrow if your company decides to downsize. Did you know freelance workers will become the majority of the workforce within a decade?
Let that sink in. The majority of the US workforce will be working online soon. This means that you no longer have to take the traditional route to earn extra money.
Think of your side hustle as working a part-time job in a field you love. Unlike your current job, you’d have the flexibility of working around your busy schedule. The best part is, you’d be able to use this extra income to pay off debt and save money much faster than before.
Choosing your side hustle
With so many online job opportunities may be wondering where to start.
Start by identifying a skill you already have and determine your available options. For example, if you love creating logs you can offer this service to local small businesses.
If you’re running low on ideas, here are some of the best side hustles you can start today:
If you’re looking for an in-depth guide, you can check it out here.
“If you are willing to do only what’s easy, life will be hard. But if you are willing to do what’s hard, life will be easy.” -T. Harv Eker
Be prepared to work hard for several months or even years before you earn a large income from your side hustle.
Because building your side hustle will be one of the most challenging things you’ll do. Think about it, you’ll offer a product or service. You’ll also do marketing, accounting, and everything else successful businesses do.
In other words, you’re learning to become an online entrepreneur.
In the early stages, it will be easy to stay committed but you’ll experience tough times. When these tough times arise remember why you decided to improve your finances in the first place. Surround yourself with people who’ll support you during those tough times.
“Work at micro speed, with macro patience.” -Gary Vaynerchuk
Reach Financial Happiness
Imagine having zero debt and increasing your income higher than ever before.
Not only are your finances in great shape, but you’re now waking up with a higher purpose in life. You have enough money to retire but choose to work on projects you are passionate about instead. You’ve finally reached financial independence.
How awesome is that?
Money shouldn’t make you anxious, cause you stress, or run your life. Instead, money should be a tool to buy you time and freedom. The problem is it’s easy to lose track of your goals because of short-term gains.
You now have the knowledge and tools to start improving your finances. It won’t be easy but well worth the sacrifice.
Happiness is waiting for you on the other side, but you have to be willing to grab it. Are going to you continue feeling stressed about money or will you finally do something about it?