Discover my top tips for how to get your finances in order, based on the true story of how I helped my friends Jen and Adam, do exactly that.
My friend Adam is a hard worker and a great Dad. He gets up every day, kisses his wife, Jen, and their kids goodbye, and begins his commute to the office where he’s worked for more than a decade. He’s good at his job, and gets a yearly raise.
As the sole earner in his family, he depends on his bi-weekly paycheck to cover all of the expenses for his family: Mortgage, utilities, summer camp, groceries, etc.
This is how things looked when we met: On payday, his paycheck was directly deposited into his bank account, and all of the necessary bills were paid automatically.
He never missed a payment.
So far, so good, right? Sure, until his oldest son needed braces and his wife wanted a new car.
He had long ago given up on his dream vacation of taking the entire family to Hawaii. There just was never enough left over. He couldn’t even think about what would happen if he got sick.
Like most Americans, Adam traded his hours for money, and it worked.
Until it didn’t.
Adam came to me for financial mentoring because he was starting to get depressed. He was doing everything right, but he wasn’t getting anywhere.
He could get another job, but he liked where he worked and he was good at it. Why fix something that isn’t broken? But something was breaking in Adam, and he knew he needed help to turn things around for himself and his family.
Whether they are paid minimum wage or a six-figure salary, many people find themselves in Adam’s position.
After assessing his situation, we decided that the first thing he needed to do was look at how he managed the money he was bringing home.
Then, he needed to develop new habits that would allow his hard-earned money to work for him, not the other way around. He needed a plan that would allow him to continue to support his family, and grow wealth at the same time.
Adam was doing everything he was taught to do. This is all most of us are taught to do!
There’s no shame in that.
Adam was punctual to work, never missed deadlines, participated in team events, gave his commitment to the company, worked efficiently even under pressure, and aligned his vision with the firm’s.
However, by taking a different approach, and avoiding common financial mistakes, he was soon on a road towards more financial freedom.
So how did he do it?
Table of Contents
How To Get Your Finances in Order: 4 Simple Steps
Step 1: Understand Where Your Money is Going
Like most Americans, Adam didn’t know exactly how much debt he owed. It was painful to look at, and so he avoided it.
He didn’t have a clear picture of his total monthly expenses, because the automation systems he had set up didn’t force him to. (Automating payments is a great strategy, by the way, as long as you keep an eye on things).
I told Adam to sit down with his wife and go over the following items, to assess how their money was being spent:
- Mortgage (this could also apply to rent)
- Household bills
- Credit cards/loan payments
- Insurance policies
- Subscriptions and services
While this was not the way they wanted to spend their precious few hours after their sons were in bed, it turned out to be an important exercise.
Because by looking at everything together, Adam and Jen immediately discovered about $200 a month in subscriptions and services they no longer used or really needed. Now they were having fun!
The next thing they decided to do was shop around for credit cards with lower rates. Between their three credit cards, they reduced the money they were wasting on high interest debt by $150 a month.
Then, they both signed up for their driving to be assessed by an app for the next 30 days. Because they were both good, responsible drivers, within a month they were saving $100 in car insurance!
Assessing their utilities, they began exploring ways to conserve water and energy that, it turns out, didn’t ding their comfort at home one bit. What it did do was lower their monthly utility bills by about $100/month.
Within one month Jen and Adam were saving $550 that had previously just disappeared.
Step 2: Understand Your Debt
There are so many ways to find yourself in debt these days. Some debts are inevitable – such as a mortgage – but others we willingly take on, like credit cards or loans.
While it can be handy to have a credit card, living at the top of your credit limit is a good way to waste all of the money you may have saved after assessing your finances.
Don’t do that! This is the WORST kind of debt you can have. It will absolutely cramp your style on the road to wealth. It may even stop your progress entirely.
Any debt with an interest rate will, naturally, cost more the deeper you are with it. Paying 16% of a $10 balance will only cost you 16 cents, but if your balance is $1,000, that amount becomes $16.
I hate wasting money. If you start to look at it like this, you probably will, too.
If you have high interest debt (like credit cards), always pay off more than the minimum you owe.
Adam and Jen decided to put 60% of the money they had saved by assessing their finances towards paying off their newly consolidated credit card debt as quickly as possible.
Within six months, that debt was erased, and their credit score improved as well. Now they could use that money for other things, and stop wasting their money on credit interest.
Already, they were making huge progress, with the same income.
Step 3: Build Your Savings
When they were just getting by, Adam and Jen considered saving a low priority.
Once they committed to building wealth, however, socking money away in their savings account became a real possibility.
Rather than spend the other 40% of their newfound dollars on a weekend away, or a couple of fancy dinners, they delayed gratification and started building their savings once more.
When Adam’s annual review came around, he was offered a raise. Rather than spending the 3% increase on things like a new grill (their current one was working fine), he automated siphoning that income into savings as well.
Now they were really getting somewhere. They were no longer wasting money on high interest debt; their savings account was growing exponentially and they were both sleeping better at night.
In fact, their relationship improved. Not having to worry about where every dollar was going reduced their stress and the small fights they had become accustomed to about how to spend the few extra dollars they had suddenly evaporated.
Now they could spend those precious evening hours after their boys went to bed enjoying each other, rather than privately stressing about money.
This is where a lot of folks make big mistakes that can erase all of their hard work.
Step 4: Use Momentum to Plan Ahead
Newly confident in their money management skills, Adam and Jen began to plan for the future, which suddenly seemed full of possibilities.
Adam started dreaming of a new set of golf clubs and shopping for plane tickets to Hawaii. Jen had her eye on a shinier new model of their SUV. Why not? They could afford it, right?
I’m always so grateful when clients stick with me through the first few steps on their journey to Indestructible Wealth, because this is the stage where many people feel like they have arrived.
They don’t need any more mentoring, right? This is also the stage where almost everyone, being human, makes choices that unravel all of the progress they have made.
I’ll tell you what I told them: Hold on.
If the car is still safe and functional and the old golf clubs are still swinging just fine, wait.
Press pause until you do your due diligence to assess how these purchases will impact your overall budget.
If the trip to Hawaii is going to put them back to where they started, with Adam depressed and both of them always on edge about money… Is it worth it? Or would it be better to take a fun vacation nearby and continue to enjoy their newfound peace?
The answer is usually obvious to me, but it can be harder to “see” that when dreams that once seemed out of reach become a real possibility.
Should Adam stop dreaming of breaking out his new clubs while Jen and the kids take surfing lessons in Maui?
No! Keep the dream alive, and plan for it.
They decided to reassess their finances, which, at this stage, had become a familiar habit that was no longer scary or intimidating.
When they could see their financial picture clearly, they decided to wait a little longer, continue to save and invest (more about investing in another blog), and put aside the additional income from his raise towards the trip.
Together, they created a vacation budget. They decided that once that number was achieved and that their savings and emergency funds were set aside, they could book the trip.
They could also plan for the new SUV before it was time to make the purchase. By strategically delaying impulsive gratification they could, in fact, have their cake and eat it, too.
This is how the game of Building Indestructible Wealth is played, my friends.
You Can Live the Life of Your Dreams Too
I’m sharing Adam and Jen’s story because it’s the story of so many of my clients.
Their story is impressive, but it’s not unusual. By taking the time to apply the steps above in a way that works for your particular financial situation, you too can learn how to get your finances in order.
You can get to where you want to go, sooner, rather than later (or never). Adam and Jen’s starting point is probably not yours, exactly.
Remember, you don’t have to wait until you’re old and retired to enjoy your life. Savvy money management habits now can allow you to enjoy wealth and financial freedom earlier, increase your overall sense of peace and well-being, and even improve your relationships.