The new year is upon us! I’ve talked to a lot of folks lately who have resolved to make this the year they get out of debt. Or start an emergency fund. Or earn more money.
These resolutions don’t mean a whit, though, if you don’t have a plan. For the past five years, I’ve shared the following road map, adding one new tip every January. Many readers have used this info to plot a course to financial freedom. Maybe this year it’s your turn.
Here then are eleven simple but effective steps to build a better financial future.
Step 1: Set Financial Goals
The road to wealth is paved with goals. If you don’t know why you’re doing this—why you’re making sacrifices, why you’re working so hard—it’s too easy to fail. But if you set goals, they can help guide you even when things get tough. When you have to make decision, your goals can help you stay focused on what’s important.
For your goals to be effective, they have to be personal. They have to mean something to you. Right now, one of my goals is to save money for travel. A couple of years ago, my goal was to save for a Mini Cooper. Before that, my goal was to get rid of twenty years of debt.
To keep your focus front and center, you might use web-based tools like Joe’s Goals, StickK, or 43 Things. You might find an accountability partner. Or you might advertise to yourself. And be prepared for setbacks. You’re not going to meet your goals without mistakes. Stuff happens. The best way to deal with problems is to have a plan before they occur.
Step 2: Track Every Penny You Spend
The authors of Your Money or Your Life urge readers to “keep track of every cent that comes into or goes out of your life.”
[This is] the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes. This is the step that somehow makes the biggest impact.
Earlier this year, I stopped tracking my spending. I was spending less than I earned, and I figured it was too much work. I regret that. In fact, I’ve vowed to resume tracking my spending again in 2011.
It doesn’t matter how you track your spending—the most important thing is to do it.
- You can use a cash notebook.
- You can use an online tool like Yodlee or Mint.
- You can use a piece of software like Quicken.
Whichever method you choose, stick with it. Make it a habit. Don’t fudge the numbers. Record your transactions as soon as possible. Most of all, don’t judge yourself. Tracking your spending is an exercise in data collection; it’s not the appropriate time to change your habits.
Step 3: Develop a Budget
After you’ve tracked your spending for a few weeks (or months), use the data you’ve collected to develop a budget. According to The Millionaire Next Door, budgeting is one thing that sets the wealthy apart from the rest of us—55 percent of millionaires keep a budget.
Many people fail to budget for a variety of reasons: it’s boring, we don’t think we need it, or we don’t know how. But this simple act can provide a roadmap for your money.
There are a variety of budgeting methods you can choose, from Andrew Tobias’ Three-Step Budget to the 60 Percent Budget. My recent favorite is Elizabeth Warren’s Balanced Money Formula: 50 percent to Needs, 20 percent to Savings, and everything else to Wants. Simple but effective.
