Step 1: An inconvenient soul search
Before you can create an action plan, you should assess your current financial situation. On a clean piece of paper, on the left side, write down all of your monthly bills. On the right side, list your monthly income or revenue sources. Now, on the left side, scratch off things like water bill, rent and electric bill, as these are recurring items and there’s not much you can do about them. Also if you have multiple credit cards, list the outstanding balances next to each one. Now, the trick is to pay off the one with the smallest balance as fast as you can. You’ll need to figure out how you’re going to do it. Should you pay off the card with your savings? Perhaps fewer trips to the coffee house? Whatever you need to do to pay off your smallest credit card balance, do it; then cut up the card. Psychologically, this will be a big boost. Then, take the next smallest card balance and repeat the process until all of your credit cards are paid off. It’s always good to keep one card handy, but use it with extreme caution. (By the way, you’ll need to stop charging on all of your cards while you’re performing this “financial cleansing” in order to get the full benefit.)
Step 2: To thy own self be true
Whenever you have the urge to buy something, ask yourself, “Do I really need it?” For example, “Do I really need to pay four dollars for a double caramel latte when the coffee at work is actually pretty good? Or “Do I really need to go clothes shopping even though my closet is bursting now?” Chances are, you’ll say “no.” And you’ll see the extra savings in your bank accounts. Imagine how great you’ll feel, each and every month, knowing that you’re on the road to financial security.
Step 3: Open a savings account
This sounds like an obvious one, but you’d be amazed at how many consumers are living “paycheck to paycheck.” Financial experts suggest having six month’s worth of living expenses available in case of an emergency. Well, that may be a stretch for a society with a negative savings rate, but it’s something to shoot for. More realistically, choose to make savings a priority and start now. Savings rates have crept up over the last few years and most money market accounts are paying around four or five percent. Even if you deposit $50 or $100, it’s a positive step. And the higher your account gets, the happier you’ll be.
Step 4: Start a 401K account at work
You’ve probably heard your co-workers gleefully proclaim: “The difference in my take-home pay after my pre-tax deduction wasn’t bad!” Well, it’s true. Investing in a retirement plan with pre-tax dollars is one of the best kept financial secrets around. If you’re worried about not being able to make ends meet, start off with a small amount each pay period. You can always increase the amount later. Over time, you probably won’t even “miss” the money that’s taken out of your check, and your retirement funds will grow.
Step 5: Park your ATM card
With an ATM perched on almost every corner, the ease at which we can get cash 24 hours a day is almost scary. However, if you really want to see the ugly truth, check out your next checking account statement. Look through the section that lists your monthly ATM activity. Be brave. Grab a calculator and add up your ATM withdrawals. Now, sit back a minute and try to remember what you purchased. Chances are it’s a hefty amount of cash every month, and for what? Consider putting your ATM card aside, and when you need cash, go inside the bank, stand in line, and cash one of your personal checks made out to you. This minor inconvenience forces you to stop and think before you snag more money out of your account. Try this for three months. You may be amazed at the amount of extra money in your account.
By following these steps and rethinking your spending habits, you may feel better about yourself – especially when you see your credit card debt shrink and your savings account balances grow.