There are less than 60 days left in 2021. Now is the time to take action to improve your finances before the end of the year. Although winning the lottery would be the easiest way to change your money, that’s not happening any time soon.
Instead, you need to take control of your money. Taking these small actions TODAY can have a big impact on your financial future. All of this should take less than an hour, but you can definitely do it all in one single day.
For more guidance on how to improve your finances, what order to do things in, and detailed steps for everything: START HERE.
The Financial Security Steps are the guide you need to completely reform your money.
1. Pull your credit report
To change your financial future, you need to first clean up your financial past.
Your credit report lists all the debts associated with your Social Security Number, including:
- Open accounts
- Closed accounts
- Collections
- Bankruptcies
- Charge-offs
- Tax liens
- Judgments
A credit report doesn’t show your credit score, but it contains detailed information about your debts, like the loan holder, origination date, and highest balance. The report also notes late payments and account status, which impact your credit score.
How to get your credit report
Request your free credit report from AnnualCreditReport.com. You’ll be asked to enter your full name, address, date of birth, and address. Next, you’ll verify your identity by answering some questions about your past, like identifying previous addresses, employers, and vehicles.
Review the details
Read through your credit report carefully, looking for anything that looks wrong or inaccurate. Sometimes other people’s debt is reported under your SSN. Sometimes a discharged debt is still reported or a bankruptcy stays on your report longer than it should.
You might also find a debt you were unaware of or forgot about. Older accounts can be sent to collections, with the notification letters sent to an old address.
Clean up
Start a dispute with the credit reporting bureau to correct any inaccurate information. The process varies for each agency, so you may need to file 3 different disputes.
Contact the loan holder for any late or forgotten debts to arrange repayment terms. Paying the debt before it goes to collections, or settling it for less than owed, will go a long way toward preserving or improving your credit score.
Follow up
The first time, request a credit report from all three of the reporting bureaus (Experion, TransUnion & Equifax). With COVID-related financial uncertainty hanging in the air, you can get weekly free reports for a limited time.
After things go back to “normal,” you should rotate through the three bureaus. Request a report from a different source every 4 months, so you have newly updated information all the time. Keeping an eye on your credit report helps you resolve any problems quickly.
2. Calculate your net worth
Knowing and tracking your net worth, especially when you’re working on paying off debt, will be a big motivator to keep going. Net worth is the best measure of how you have improved your finances each month.
Net worth is a measure of what you own (assets) minus what you owe (liabilities). After pulling your credit report, it’ll be easy to list out your debts:
- Mortgage
- HELOC
- Vehicle loans
- Credit cards
- Student loans
- Outstanding tax bills
- Tax liens
- Medical debt
- Personal loans
- 401(k) loans
Finding all of your assets will take more work. List all your assets, even if they have a loan against them:
- Real estate
- Vehicles
- Bank accounts & cash
- Retirement accounts
- Other investment accounts
- Other possessions worth more than $5000 (for simplicity)
You’ll have to log into your bank accounts, your retirement accounts, your investment accounts. You can estimate the value of your home with Zillow and the value of your vehicles with Kelly Blue Book.
You can use this free worksheet to help with your calculations or transform it into a spreadsheet to speed up the math. I like to update our net worth every month, so I can see improvements over time.
3. Make a budget to improve your finances forever
Call it a “spending plan” if that makes it more palatable, but you need to tell your money where to go if you’re ever going to improve your finances.
A budget will help you keep your expenses in check and spend less than you earn so you can pay off debt, save, or invest. You’ll have to track expenses before and after making your budget, so you know what you’ve spent and what’s left throughout the month.
Make sure to budget for:
- Recurring bills, both monthly & annual. Read up on saving for recurring expenses to use my innovative Double Account Method to get a month ahead on your bills and have a cushion.
- Debt payments
- Food
- Household items
- Vehicle expenses
- Fun money
- Medical expenses
- Clothing
- Personal care
- Gym, workout apps, etc.
- Pets
- Entertainment
- Babysitting
- Miscellaneous
There are different ways to split up your income to make a budget, so it’s important to choose a method that works for you. Zero-based budgets are more intense to prepare, while the 50-20-30 budget is a good middle ground. The 80-20 method is super simple, but you lose detail.
It doesn’t really matter which method you choose, how many categories you use, or how you track your budget (pen & paper, spreadsheet, or website/app)… as long as you create a budget, follow it, and assess your spending frequently.
4. Evaluate your monthly expenses
When you’re tracking your expenses, creating a budget, and following up on it, it’s a great time to review (and evaluate) your monthly expenses.
If you find yourself needing to cut down on expenses, monthly bills are an easy area to start with. Those recurring charges really add up from month to month, so cutting them can have a big effect on improving your finances.
It’s easy to sign up for a subscription, forget about it, or quit using the service while still paying for it. Go through the expenses you’ve tracked and budgeted for, and make a list of monthly, recurring expenses.
Now, look at that list and really dig in.
- Are you actually using that service?
- Do you really need it?
- Are you getting your money’s worth?
Cancel right away
As soon as you identify a monthly expense that doesn’t fit in your life, cancel it today. Don’t delay or put it off until later; call or log in to cancel that subscription right away.
Be honest with yourself about whether you’re getting your money’s worth from the subscription, especially if it’s something related to a goal. Who hasn’t signed up for a fitness or food tracking subscription with the best of intentions, only to quit using it after a few weeks? Stop paying for things you’re not using!
Ask for a better rate
If you decide to keep that expense, make sure you’re getting the best value. Cell phones are a good example: you may not need unlimited data if you’re a stay-at-home mom who can use wi-fi when at home. Paying for 2 GB of data will save a lot compared to an unlimited plan.
Call the provider and ask if any discounts are available or if your bill can be reduced. Threaten to cancel only if you’re willing to follow through. A retention team member will usually be able to offer the best deal… if they’re desperate enough to keep your business.
5. Make a debt payoff plan
If you have any non-mortgage debt, make debt payoff your main goal for the new year. Make your goal for today the creation of a debt payoff plan.
Carrying debt robs you of the real spending power of your income, costs hundreds or thousands in interest and slows progress on your other financial goals, like retirement or college savings.
You’re (probably) not going to pay off all your debt in just a day, but you can make a debt payoff plan! Having a plan will guide you & keep you on track as you pay off debt.
A debt payoff plan works with your budget. Your budget shows how much you can put toward debt each month. The debt payoff plan directs that money strategically to each debt.
The Debt Payoff Planner is the perfect free resource to walk you through creating your own plan. It will help you list out all your debts (which you already have from your credit report and from calculating your net worth) and show you the 3 main debt payoff methods:
- Debt snowball: pay off debts in balance order, smallest to largest
- Debt avalanche: pay off debts in interest rate order, largest to smallest
- Hybrid method: make your own plan based on personal feelings, motivation, and changing interest rates
Automate payments to improve your finances
Your debt payoff budget category should be enough to at least cover minimum payments on all of your debts. Any extra money should also go toward debt. As you pay off one debt, put that minimum payment amount toward the next debt each month.
Scheduling automatic minimum payments for each debt ensures you don’t forget or fall behind on payments. When you pay off a debt, change the automatic payment amount for the next debt.
Making all of this automated keeps things simple and basically forces you to follow your debt payoff plan.
6. Start saving for retirement
I don’t care how old you are – if you don’t have a retirement account yet, start one. Today.
You don’t have to go all-in, especially if you’re young. Time is on your side when you start investing in your twenties, and less so if you wait until your forties.
When you still have non-mortgage debt, I recommend investing enough in retirement to get your employer’s match, if there is any offered. Often, this is only 3-5% of your pay, so you likely won’t even notice the missing money in your budget.
If you don’t have an employer match or an employer, start investing 3-5% yourself. Your employment type determines the type of tax-advantaged retirement accounts you can use. The type of account determines the amount you can contribute each year, but that’s not a big concern when you’re just starting.
Keep it simple to improve your finances
The easiest way to start a retirement account is through your employer. Human resources should be able to direct you, but you can open private retirement accounts as well.
To keep things simple, choose a target year index fund. An index fund is a group of stocks that are tracked; you buy a portion of that group, which means gains and losses are averaged out between all the stocks. They’re more stable, which is good for long-term planning.
Target year index funds are designed to gradually decrease risk as a specific retirement year approaches, making them a safer bet as you get closer to retirement. Choose a target year fund that is close to the time you’d like to retire… and be realistic about that timing. If you’re just starting to save for retirement in 2021 at age 30, a 2030 target fund probably isn’t the best choice.
There’s a lot of advice out there on how to improve your finances. Unless you receive a windfall AND magically change your spending habits overnight, there are no quick and easy solutions.
Instead, following the basics will improve your finances over time. Take these 6 actions today, then follow through. You have to put in the work to get the benefits… but those benefits are pretty great.
Imagine not worrying about paying the bills each month.
Envision your life without money stress.
What if you had enough saved to buy your next car, make a down payment on a home, and could put your kids through college debt-free?
Who doesn’t want to retire in comfort while you can still enjoy yourself?
THAT is what improving your finances can do for you.
This is really great! And you don’t mislead at all. You really could sit down and do all these things and make a big difference in just one day. Thank you.