Track Your Expenses
The first step to understanding your financial picture and putting together a financial plan is determining where your money is going, typically on a monthly basis. To start, set aside a Saturday morning to bust open the books and review your spending. As Millennials, this is a bit easier than our parents as the world has moved to a much more cashless society. Log into your online financial accounts and scroll through your credit card and debit card transactions from the last month or two. Record the amount and assign each transaction a description like "Grocery" "Mortgage" "Gas", etc. I'd suggest using a spreadsheet (Microsoft Excel, Google Sheets, Apple Numbers), if possible. Once you've outlined the last month or two, organize your spreadsheet in a way that you can easily manage and understand and begin tracking your expenses in more regular increments - for example, you might schedule 30 minutes every Saturday morning to review and track your expenses from the previous week, or you might be able to start each day reviewing your accounts while enjoying your morning coffee or tea. Whatever it is, just make sure you are regularly tracking your expenses so you can start to visually see your expense trends.
Review and Cut Unnecessary Expenses
Now that you are tracking your expenses regularly, you'll start to see spending habits and expense trends. You'll also start to see recurring subscriptions and other expenses that you might consider cutting. Think of it like spring cleaning. Can you imagine that feeling of when you clean out your closet each spring or let go of those unused items in the corner of the garage? Letting go of unused subscriptions and modifying certain habits to cut down superfluous spending will feel like a weight being lifted off your shoulder. It is important to note balance, though. Some people might view certain spending habits differently than others. While we all can agree that removing unused subscriptions makes sense, modifying other spending habits is subjective. To me, I'm not the type of person who purchases a speciality coffee on my way to the office and thus I might view that as an unnecessary expense. However, a colleague might find tremendous joy in that habitual spending and that is OKAY. I'm not here to tell you what to spend your money on, simply to practice awareness of your financial habits and empower you to review and make decisions based on your own experience. By auditing and cutting back on unnecessary spending, you'll be well on your way to improving your financial health.
Refocus Your Debt Strategy
A majority of Millennials have some type of debt on their personal balance sheet - student loans, credit card debt, car loans, mortgages, and more. No matter your current debt position or how much the balance, the key here is to refocus your strategy based on your current financial picture. To start, take a moment to list your current debt obligations, the remaining balance, what you're currently paying each period (week, month, year, etc.), time remaining on the debt term, and interest rate. Once complete, sort the list by interest rate, highest to lowest. Interest is the cost of your loan. The higher the interest rate, the higher the cost of the loan. With this in mind, look at your list of debts and see where you might refocus and reallocate your current spending. Are you paying the monthly minimum due on a student loan with a 9% interest rate but paying an extra $50 each month on your 4% mortgage payment. By moving the $50 to your student loan payment, you'll decrease your overall interest cost. As you pay off more and more of your debt, keep this principle in mind. And of course, ALWAYS pay the minimum due each period at the very least, otherwise you will most certainly get hit with fees and additional interest charges.
Pay Yourself First
Once you've refocused your debt strategy, understand your spending habits, and feel confident moving forward with your plan, the next most important piece of the puzzle is paying yourself first. What I mean by this is utilizing automatic deposits or transfers. If you utilize direct deposit, ask for a portion of each paycheck to be deposited into a savings account that you never touch and then the remainder be sent to your regular checking account. Or, set up a recurring transfer every day, week, month from your regular checking account to a savings account. If you want to take it a step further, consider setting up retirement or brokerage accounts that generate a higher return. Understand that certain investments are riskier than others and are subject to market fluctuations. And of course, if your employer offers a retirement savings account with a company match - make sure your contribution is AT LEAST equal to the match percentage or amount. It's free money, after all. No matter the way you do it, just make sure you determine how much you want to pay yourself and then do it first before your regular spending.
As you work towards your improving your finances in 2021, I want to remind you that you can and will be successful if you commit to it. Don't worry about how your situation compares to others because everyone is different. What you value most will differ from what others value you most. These strategies are guidelines and aren't meant to help you reach specific targets. But, if implemented, they can most certainly help you understand your personal finances more and start to understand how you can get back in the drivers seat to improving your financial health. And if you have questions or are interested in a more detailed approach, feel free to contact me.