Taking control of your finances can have many benefits. You can achieve important goals, reduce the risk of getting into credit card debt or settle your current debt for good, and have the peace of mind of knowing you’re ready for whatever life throws at you.
But, while there are benefits to managing your money effectively, it can be difficult to know how to make your funds work best for you. The good news is that there are only four steps you need to take to finally take control of your finances for good. Here is what they are.
1. Take stock of your situation
If you want to take control of your finances once and for all, you need to know where your money is today. By carefully considering what you’re spending, how much debt you have, what financial goals you’re aiming for, and what you need to do to achieve them, you can move forward in developing a solid plan.
In order to take stock of your situation, you must:
- Make a list of all the debts you owe, along with the interest rate and the outstanding balance.
- Track your spending for at least 30 days to see where your money is going.
- Take a close look at how your expenses match your budget, if you have one.
- Review all the financial goals you have set and see if you are on track to achieve them.
- List your assets, including any savings.
This will give you an overview of your current financial life so you know what changes, if any, you need to make.
2. Make a budget
If you don’t have a budget yet, establishing one is key to taking control of your finances. By establishing a budget that you live by, you can ensure that you prioritize your goals and spend money on the things that add the most value to your life.
Your budget will serve as the foundation for the rest of your financial plan because you can make sure you’re spending enough money on important things like paying off debt and building for a secure future.
3. Create a debt repayment plan
If you’re in debt, chances are you want to pay off a lot of what you owe. Paying off certain low-interest debts with long payment terms, such as mortgages, is often not the best idea. But if you have high-interest debt, like credit cards or payday loans, you’ll want to pay them off as soon as possible.
To decide which debts to focus on paying off, consider what your return on investment will be. If your interest rate is 3% (as with a mortgage), your return on investment is limited to the interest saved. Since you can earn more than 3% with other investments, debt should not be included in your prepayment plan.
For the debts you want to pay off, focus on paying off those with higher interest rates first. Pay the minimum on all your outstanding obligations, then send as much as you can on your most expensive debts until they are fully paid.
4. Maximize the value of your savings
Finally, you’ll want to make sure you’re saving appropriately for the future. This means you should have specific savings goals, including investing for retirement as well as for big purchases like a house, home maintenance costs or vacations. You need to know how much to invest each month to reach each goal on your desired schedule and ideally automate contributions to your investment accounts so you can reach your goals on time.
You’ll also want to make sure you have the right accounts for each type of savings, including a high-yield savings account for your emergency fund that needs to be accessible, as well as tax-advantaged retirement accounts.
By following these four steps, you can take full control of your finances, ensure your money is being used wisely, and set you on the path to a more secure future.
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