This post may contain affiliate links, which means I’ll receive a small commission if you make a purchase. Originally posted on millennialtwist.com.
You want to be good with money. Right? I mean who doesn’t?
Maybe you don’t know where to start?
You’re a bit confused. Or super confused.
Maybe you’ve read Dave Ramsey stuff, random Pinterest articles, and maybe got some tips and tricks from family and friends? Sound about right?
You probably understand some of what you’ve read and been told, but you don’t know how it all fits together.
Payoff debt first right? Then invest.. or something? What accounts should you use? How much do you need for retirement?… Wait, what about the emergency fund? Can I buy a house? What about college funds for my kids? Or can I even afford kids at all?!
Super overwhelming, right?
I get it. I know. I was there (still there sometimes, finance stuff can be weird and confusing and everyone has a different opinion).
But that’s why I made this website – and this post!
I’m going to show you how you can get from financial chaos to financial security! (And a bit beyond that. How does financial independence sound?).
***Please note that this was not written by a financial expert or advisor, just an everyday human trying to manage her finances:)
How To Get From Financial Chaos To Financial Security (And Beyond! Like Financial Independence!)
- Why is this important?
This is important because you should know where your money is going, and how you can make it work for you. You should be scared to open up your banking app to check your balance (like I was), you shouldn’t cringe when opening bills (like I was), and you should feel confident when making decisions regarding your finances. You owe yourself this.
- What makes me qualified to tell you what to do with your money?
*** I’m not a CPA, financial advisor, or a money coach. ***
But I went from never paying bills on time, not checking my bank balance (because I was terrified) to having a budget (that works for me!), a debt payoff plan, and a plan to become financially independent.
What is Financial Security and Financial Independence?
- What is Financial Security?
To me, financial security is when you have enough money to cover emergencies and you have a plan for your money. This doesn’t necessarily mean you’ve paid off all of your debt, but to be financially secure, I think you should have your debt under control (have a debt payoff plan at least).
- What is Financial Independence?
Financial independence is when you have enough assets to cover your expenses. Basically, your money will enable you to do the things you want to do, if that’s traveling, not working your current job, or maybe starting a business? Freedom.
Ready to learn how you can get to financial security and financial independence?
Start Getting Ready Mentally
This journey is going to be difficult. It’s hard going from not knowing where your money is going and a possible negative networth, to actually thriving financially.
You’re going to have to make some drastic changes. Cutting your spending, tracking your spending, and other not-incredibly-fun things.
You can do it, you just have to be ready!
Find Your “Why”
Okay so you’ve decided you want to make some changes financially – so you’re ready for the next step. To keep yourself going, you need to find something that will keep you motivated (your “why”).
It can be a feeling (like the feeling of freedom because you’ve paid off your debt!), or something more specific (like being able to do what you want with your time because you aren’t tied to job you hate – because your set financially!)
I got more into detail about finding your why in the post – how to stay motivated when paying off debt (find your “why”)
Get Your Family / Partner Involved
You’ve decided to make some changes, you have your why handy. Now it’s time to have a conversation with your partner and family (kids, dogs, etc).
You’re probably wondering why I said you should have your why handy before talking to your family. Okay, here’s why. Your family might be reluctant to make changes and may not see the importance, but if you do the pre-work, it can show that this is meaningful to you, and that you’re willing to go all-in! This will make it a lot easier to talk to your family.
I’ll write a post about this eventually. Basically, you want to sit with your family and explain what you want to do and why. Just be open and honest and don’t get defensive or frustrated. Also be prepared to answer any questions they may have.
Know Where You Stand
To get where you want to go, you first have to know where you are now. Do you know were you stand financially? Know how much you owe? The interest rates? Everything?
If the answer is no, now is the time to fix that!
What Accounts Do You Have (and where!)
The first thing you should do is figure out what accounts you have, and all the information associated with it. You can create a spreadsheet for this information, or write it down.
I’ll write a more in-depth post on this soon, but this is the basic information you should have:
- Bank Accounts – You should know what bank accounts you have, what bank they’re with, and what the balance is.
- Credit Cards & Store Cards – What credit cards do you have? What is the current balance? And what is the interest rate? What are the due dates for the payments?
- Loans – Do you have a mortgage, car loan, or student loans (or all of the above)? Who services your loans? What is the interest rate for each loan? When is each payment due? Are there any penalties for paying off the loans early (this is a biggie!).
- Other Debts – Do you have any other debts (like do you owe a friend or family member some money)? How much do you owe? When do they expect to be paid?
What’s Your Credit Score?
Knowing what accounts you have is only part of knowing where you stand. You should also know what your credit score is.
It’s important to have a good credit score. You can get better rates on your mortgage, and/or car loans, you can get better deals on cell service, cable, and internet, and usually it can help you get better insurance premiums. Important stuff.
You can check your credit score for free using Credit Sesame.
Here are the credit score ranges (according to Experian):
- 300-579 – Poor
- 580-669 – Fair
- 670-739 – Good
- 740-799 – Very Good
- 800-850 – Excellent
Don’t worry if you don’t have a good score (we’ll work on improving it later). It’s just important to know what your score is now.
If you want to learn more about credit scores (including how to build and repair credit), read The Beginner’s Guide To Credit Scores.
Track Your Spending
Before you start trying to make a budget, you need to know how much you’re spending, and what you’re spending your money on.
I suggest tracking your spending for a month.
And don’t just use an automated app like Mint. You should do this yourself with either pen and paper, or using a note app or something. You need to be very accurate (down to the penny). This will make creating a budget much easier down the road.
Get A Mini Emergency Fund
You need an emergency fund. Things will come up that are out of your control, like emergency dental issues, car repairs, etc. And in those times you will need money (because you can’t really plan for emergencies – well not beyond saving an emergency fund). It’s important, okay?
People usually say you need anywhere from 3-6 months of expenses for your emergency fund. But that can be a lot to save at once (especially if you have debt to pay off).
So to start, you’re going to save up a mini-emergency fund. $1000. This should be enough for any minor emergencies and will help create a tiny buffer in your bank account.
How to Raise Funds For the Emergency Fund
Getting to $1000 might sound a bit hard, but that’s okay, there are tons of ways you get money for your emergency fund.
- You can sell things you don’t use online (think clothes, video games, etc).
- You can pick up extra hours at your job
- You can side hustle for extra money – check out my list of 100+ Ways To Make Extra Money
Start Your Budget
I could write 10+ posts on this, but I’ll give you the short version.
First, you need to figure out your fixed expenses, this is stuff like your rent/mortgage, your car payment, your debt payments. The things that are the same amount each month that you have to pay for (just the necessities).
You want to subtract your fixed expenses from your monthly takehome pay.
This is what is leftover for all of your unfixed expenses. This is stuff like food, netflix, clothes etc.
Your expenses shouldn’t be more than your takehome pay – if it is, then you need to start cutting back or you need to increase your income (or both).
Also it’s important to save on the big expenses in your life (house, car, kids, and education)
How to Start a Budget
Pay Off High-Interest Debt
So you have your budget, your mini-emergency fund – now it’s time to start paying off that high-interest debt!
When I say high interest, I mean anything that’s over a 6-7% interest rate. So the things I’m talking about are:
- Credit Cards
- Loans (like some student loans or payday loans)
- That money you borrowed from your mom that shes’ charging 50% interest on for whatever reason
Now you may be wondering “when do I get to start investing, shouldn’t I be doing that first?” – and don’t worry, investing comes eventually. The reason you should knock out your high-interest debt first, is because the interest rate on these things are more than the gains you’d make if you invested the money. Make sense?
Now as far as the nuts of bolts of paying it off goes, you can do it in any way you like (as long as you’re paying at least the minimum payments). Usually people use one of two strategies to pay off debt – those are the debt snowball and the debt avalanche methods.
Now the simple explanation of the debt snowball is you take all of your debt, and you pay the minimums on all of them except the one with the LOWEST balance – that’s the one that you’re going to try to pay off first.
The quick explanation for the debt avalanche is you take all of your debt and you pay the minimums on everything except the one with the HIGHEST interest rate – this is the one you’re going to try to pay off first.
Which Should You Choose?
Well, it depends.
I know, not the easy answer you were expecting. See, mathematically speaking, it makes more sense to use the debt avalanche method to pay off your debt – you’ll save more money since you’re paying off the debts with the highest interest rate first.
But… Sometimes that’s not easy to do, see what if you have a GIANT credit card with a high-interest rate of 20% and a balance of $30,000, and a small credit card with an interest rate of 30% and a balance of $2,000?
You should be working on that 30k credit card first, but it can take forever to pay off, and it’s easy to get discouraged, isn’t it? So that might be a reason you might opt for the debt snowball method. You can knock out that 2k credit card and accept the quick win, and you’ll be motivated to keep going!
So, which option should you choose?
Choose the option that you can stick with. Also, don’t forget you can change your mind at any time – nothing bad will happen, I promise. Just keep chipping away at your debt!
If you want to learn more about picking a method, you can check out this article from Forbes
Big Emergency Fund!
You got yourself a budget, you’ve paid off you’re high-interest debt, now it’s time to finish up that emergency fund.
Now, most people go for 3-6 months, which is great!
I think we should go bigger
WAIT DONT LEAVE!
Gimme a chance to explain – first, if you’re good with 3-6 months of expenses then go for it.
But, if you have kids, are a freelancer, or you’re just a chronic worrier like I am, then shoot a bit higher – 6-12 months
You can stash this in a savings account just so it’s liquid enough for you to get to it if an emergency actually happens, or you can get a bit fancy and use CDs (certificates of deposits) or Bonds for part of your emergency fund. Whatever works for you! Just start saving up!
Holy crap you’re doing amazing – I’m so proud of you!
Now that you have your financial life together, it’s time to take care of your financial future.
Let’s talk about retirement, we’ll get to the big goal of financial independence later on – but for now, let’s make sure you’re on track for retiring at the “normal” age of 65.
It can be really difficult to know the exact amount of money you’ll need in retirement – but you can definitely figure out a sort of benchmark for yourself. You can use an online calculator – and adjust things as necessary, you can (and should) speak to a professional who can help you determine a number, and/or you can use a benchmark created by a company like Fidelity.
To get you started, and to make things a bit easier, we’re going to use the Fidelity benchmark. Based on a retirement age of 67, they say you should aim to have 10x your salary saved up by then. That means if you make $50,000 a year, you should save up $500,000 by the time you retire. Now, Fidelity assumes two things:
- That you’ll maintain your same standard of living.
- And you’ll be using social security in retirement.
Now, Fidelity breaks it down more in this article, but they say you should have:
- Age 30: 1x Your Salary Saved
- Age 35: 2x Your Salary Saved
- Age 40: 3x Your Salary Saved
- Age 45: 4x Your Salary Saved
- Age 50: 6x Your Salary Saved
- Age 55: 7x Your Salary Saved
- Age 60: 8x Your Salary Saved
- Age 67: 10x Your Salary Saved
So this is (in my opinion) the minimum you should be shooting for. Got it so far?
Where To Save For Retirement?
If you have a 401(k) plan or something similar through your workplace that offers a company match you should be contributing to that account so you get the match (at the very least). Then you can expand to using a Roth IRA or a Traditional IRA (a roth ira is a type of account that lets you save after-tax money so you can withdraw it tax-free in retirement, and the traditional ira is a retirement account that lets you save pre-tax money that is taxed when you withdraw it).
There are pros and cons to all three of these types of retirement accounts, but if you want to start saving something this is a great place to start.
Just start stashing your money somewhere (so you can start reaching your goal of saving at least 10x your salary by age 67.
Pay Off Remaining Debt
Now that you’re on track with your retirement savings, you want to finish off your low-interest debt, these are things like:
- Federal Student Loans
- That 0% Interest Best Buy Credit Card that you used to buy that washer and dryer for your condo
Once again, you can either choose the debt avalanche or debt snowball methods, just use the one that will keep you going as you pay off your debt.
Road To Financial Independence
Now that you’re debt free, you have your emergency fund, and you’ve started saving for retirement, it’s time to ramp things up!
Does the thought of working until you’re 67 make your stomach churn? Yeah, me too.
This is where FI (financial independence) can save you – once you have enough saved up so your investments can cover your expenses indefinitely – this is FI.
So how do you get there? Investing. Lowering your expenses. Making more money so you can invest. Investing. (yes I’m serious).
How Much Is Needed For Financial Independence?
Now I won’t get too technical with you in this article, but you want to have 25x your annual spending invested.
Now here’s why: this will let your withdraw 4% of your portfolio the first year of retirement (and withdrawing that same amount each year [adjusted for inflation]). So if you spend $40k yearly, you’ll want to save up $1,000,000 (40k x 25). And 4% of $1,000,000 is $40k.
If you want to know more about the math behind financial independence, this article from Mr. Money Mustache does an amazing job of explaining it.
If you have your budget, and you’ve lowered your expenses, and you’re winning to make some changes (like earning extra money through a side-hustle!) – you can definitely reach FI.
This is just the beginner’s guide, if you want to learn more about FI, please take a look at: