Embarking on a journey towards financial well-being can seem daunting, but taking the first step is crucial. In this guide, we’ll explore the foundational steps to kickstart your personal finance journey and set yourself up for success.
Assessing Your Current Financial Situation
Before diving into financial planning, it’s essential to understand where you stand financially. Take inventory of your income, expenses, assets, and liabilities to gain clarity on your financial landscape. It’s important to consider your net worth, which is a holistic view of your current financial state. This is fairly easy to calculate by taking your assets minus your liabilities.
Many people use apps such as Credit Karma or Empower to link all of their checking, savings, credit, and loan accounts to see everything all in one place.
Setting Financial Goals
Establishing clear and achievable financial goals provides direction and motivation. Whether it’s saving for an emergency fund, paying off debt, or investing for the future, setting SMART goals ensures you stay on track. SMART goals are Specific, Measurable, Achievable, Relevant, and Time-Bound.
An example of a SMART goal would be something like: ‘Pay off $5,000 in credit card debt within the next 12 months.” And don’t forget the power of writing things down. That’s something I’ve been working on recently as it’s easy to get caught up in the digital nature of today’s world, but there’s something about writing down a goal or an idea on a piece of paper that makes it more satisfying to go after.
Creating a Budget
A budget is your financial roadmap, guiding your spending and saving decisions. You can start by tracking your income and expenses, then allocate funds to various categories based on your priorities and goals.
The easiest way to do this for most people is to create a spreadsheet either through Excel or Google Sheets. Having insight into your own financial information is half the battle.
Once you track your earnings, spending, and savings, then you can begin to build out a budget for how much you expect to spend in a month. Ideally you’d have some money left over, so whatever you don’t spend should be invested for the long-term or put into a High-Yield Savings Account (HYSA) for the short-term.
Establishing an Emergency Fund
Life is unpredictable, and having an emergency fund can provide peace of mind. Aim to save at least three to six months’ worth of living expenses in a separate account to cover unexpected costs.
Notice it’s not three to six months of income. If you ever find yourself in the situation of needing an emergency fund, you must seriously cut back and only spend what you have to in order to get by. Framing the emergency fund in this way will allow you to set a more achievable amount for your “break glass” scenario. So figure out the amount, and keep it nice and safe in a HYSA.
Establishing Good Financial Habits
Consistency is key to financial success. Establish healthy habits by taking some of the actions mentioned above like saving a portion of your income, tracking expenses, and avoiding unnecessary debt. Small, consistent actions over time lead to significant results.
After a few months of saving, you’ll get used to only using the portion of the money you allocate to spending. You’ll start to not even miss the money that goes straight to your savings. This is why starting out with good habits as you start to enter the workforce is easier.
Seeking Additional Resources and Education
Continue to educate yourself about personal finance through books, podcasts, and online resources. Take advantage of financial literacy courses and workshops to expand your knowledge and skills.
Your life is constantly changing, so your personal finance needs to grow and adapt with your life. My personal favorite is podcasts, but a book I read recently called The Simple Path to Wealth by J.L. Collins. As a Gen Z’er myself, I thought it was a great introduction to personal finance and the concept of financial independence.
