Ready to get your finances in order? Here’s how in 4 simple steps

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When you’re start up finally makes money and you have a steady stream of income coming in –how do you take the next step and get your own personal finances in order? Once your business is running well getting your overall personal finances in order is a vitally important step to take. This will help you reach your financial goals, finance your near-term life plans and prepare your retirement earlier and faster. 

Unfortunately, many people are not motivated enough to take control of their finances, and then they are forced to face an important event that can (or will) change their lives – things like a having a baby, having to paying for an unexpected home or car repair or not being able to work for a while. 

The most important thing is to start planning

There are numerous free financial tools available to help you look after yourself or your business through better financial planning. It’s never been easier to check your credit score for free thanks to the rise of providers that offer a free credit check. Then, get a budgeting app to help you visualize where your money goes. Mint or YNAB are good choices to help with budgeting.

Finally, plan ahead to create a saving plan that will help you invest money and make your capital grow. The type of account you save in can make a huge difference as illustrated by the endless amount of free account calculators like this 401K calculator in the US or this TFSA calculator in Canada. You normally need to be a citizen or resident of the country offering the tax-advantaged account in order to contribute money to it. 

So, dig into more detail on what you can do to take control of your finances. Get on track with these 4 steps…

1# Create a budget

You should track your own spending in the same way you track your startups expenses. Using a budget to better manage your money is the first step to getting control of your finances. Once you create a budget and track your incomings and outgoings, you’ll know exactly where you stand financially, and what it will take to reach your financial goals. It’s easier to create a budget with the variety of free tools that we’ve mentioned. Before you get started, the first step is to establish what your financial goals are, so then you’re more motivated to stick to your budget.

Then, you need to compute your total revenues and expenses to know exactly how you’re currently spending your money.

To start saving and pay off your debts, it might be easier to categorize your expenses (fixed, flexible and discretionary) in order to know what you can change in the way you spend money. 

2# Pay-off your debts 

Once you’ve found a way to spend less money (and/or to earn more money), you need to identify which kind of debts to pay off first. 

For instance, some debts might be considered ‘good debts’, like a student loan, as they can contribute to improve your future financial situation. However, personal loans to buy a big TV or a family vacation should be considered ‘bad debts’ and are likely the best ones to focus on first.

Overall, it is better to pay off debts with higher interest first. Also take into consideration the influence of each of your debts on your credit score and try to eliminate the ones with the biggest impact first.

3# Set-up an emergency fund

As you cannot predict the future, it is good to have an emergency fund you can dip into in the face of unexpected events. This money will act like a financial buffer between you and the unexpected events that can happen in life.

While it might seem obvious, an emergency fund is put aside for true emergencies (job loss, a hospital visit, etc.), reducing what could have been a major life crisis into a minor inconvenience. Don’t be tempted to use it for non-emergencies!

To be prepared for big emergencies, the minimum amount of money your emergency fund should have is about 6-month worth of living expenses. So start setting aside what you can every month from your salary or other sources of income. When you have built the emergency fund you targeted, you can invest the extra savings. 

4# Start investing

When you’re young or you’re just getting started with your business, the last thing you’re thinking of is saving money and investing it to make it grow. 

But the earlier you start, the better it is – getting started as early as possible really makes sense mathematically (compounding) and helps you adopt more disciplined financial habits and behavior. 

Do not forget to adapt your investment strategy and the assets you invest in, depending on your age. One of the allocation rules mentioned by Investopedia is to ‘gradually reduce your risk as you get older since retirees don’t have the luxury of waiting for the market to bounce back after a dip’. 

The account you put your money in can have a big difference in how much money you might have in time. Most countries have specific retirement accounts that are tax advantaged to encourage their citizens to save. 

A final note – even when you’re on track with your budget, your emergency fund, your savings and your investing, these steps are just the beginning. Start with and master these steps and keep going!

 

 

Disclaimer: This content does not necessarily represent the views of IWB.

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