Through good times and bad, having a strategy for managing your money is the key to creating more security. If you don’t already have a financial plan or you’re not sure what you should be doing with your money, it’s time to get more clarity.
In this post, I’ll help you kick-off the New Year with five action steps to create a money strategy for a better financial future.
5 Steps to Create Your Money Strategy
- Understand your current financial situation.
- Decide what you really want to achieve.
- Review your spending.
- Automate your savings.
- Optimize your debt.
Here’s more detail about each step to create a solid financial plan for the New Year.
Step #1: Understand your current financial situation.
The first step to creating any plan or strategy is to understand where you are right now. The best way to assess your current financial situation is a simple document called a Personal Financial Statement or PFS. You can create it on paper or using a computer spreadsheet, such as Excel or a Google Sheet.
The purpose of creating your PFS is to centralize what you own and what you owe in one place. It’s a bird’s-eye-view of your entire financial life so you can easily see what you want or need to change.
To create your PFS, first make a list of your assets and their current values, such as cash accounts, investments, real estate, and vehicles. Then list out your liabilities, such as a mortgage, car loan, student loan, or credit card debt, and the outstanding balances.
Having a higher net worth from year to year shows that you’re getting healthier--at least in a financial sense.
When you add up your total assets and subtract your total liabilities, the resulting number (whether it’s positive or negative) is your net worth. Figuring your net worth isn’t difficult; it just takes a little time to gather and accurately record all your information.
For example, if you own $150,000 in assets and have $125,000 in debts, your net worth is $25,000. I recommend updating your PFS every year so you stay focused on increasing your net worth over time by either increasing assets, shrinking liabilities, or both.
Having a higher net worth from year to year shows that you’re getting healthier—at least in a financial sense. But if your net worth is declining over time, you probably have too much debt that needs to be addressed sooner rather than later.
See also: A Blueprint to Prioritize Your Personal Finances
Step #2: Decide what you really want to achieve.
You probably know that you should have financial goals to steer your decision-making, right? But sometimes we don’t set goals because we don’t really know what we want. Or it may seem too difficult or like a waste of time if we don’t know exactly how to attain specific goals.
You may have created financial goals in the past, but they didn’t help because you completely forgot about them just a few weeks or days later. Yeah, I’ve been there.
Why not try something new this year? I recommend using a completely different way to think about success with your finances that I call your One Money Objective. It’s a single word or short phrase that gives you an intention or direction for your entire financial life.
Instead of trying to focus on too many big financial goals, staying laser focused on a single idea or achievement can feel much lighter and simpler.
Instead of trying to focus on too many big financial goals, staying laser focused on a single idea or achievement can feel much lighter and simpler. Having a One Money Objective can make you more effective when faced with a major money dilemma or when you just need a fresh perspective to get your finances back on track. Boiling your financial strategy down to one word forces you to get to the point and is much easier than trying to remember a huge, overcomplicated plan.
Now, I’m not saying that you shouldn’t have big, challenging financial goals. But what I am saying is that financial success comes as a series of small wins. You make one good decision and then another and another. Over time, the positive effects of each small decision build up for massive success.
Take a moment to choose one word or phrase that encapsulates what you really want to achieve with your money so you can live it with gusto, passion, and clarity. Dig deep to uncover what financial activity or concept drives you and gets the results you want more than anything else.
Your One Money Objective may remain constant for your entire life, or it could be a “word of the year” that captures your aspiration and motivation right now and then is re-evaluated in 12 months. Ask yourself the following questions to help figure it out:
- What am I disappointed about in my financial life?
- What worries me the most about my financial future?
- What would I be proud to accomplish with my money over the next 12 months?
- What would I be proud to accomplish over the long-term with my finances?
For example, if you want to pay off a credit card over the next year, maybe your One Money Objective is “no debt.” Or perhaps you’re disappointed that you didn’t save money on a regular basis for an emergency fund, your objective could be “consistent savings.” My One Money Objective is “retirement” because I’m passionate about investing enough so that I’ll always be able to maintain my lifestyle if I can’t work or want to work less.
Once you’re clear about achieving one main goal, you can work backward to chunk it down into smaller goals that are more specific. Financial goals don’t have to be complicated, but each one requires an action plan that breaks it into bite-size pieces that you can work on over short periods of time.
For instance, if you want to pay off a $6,000 credit card debt this year, create a goal to stop making new charges and pay $500 a month or $125 a week to the card. Or you could save that amount each week or month to build up a $6,000 emergency fund within 12 months.
See also: 3 Money Mindset Tips and Tools for Surefire Financial Success
Step #3: Review your spending.
After considering the big picture of your finances and what you really want to accomplish, turn your attention to spending. Start by looking at how you’ve spent money over the past several months and where you can cut back.
Getting clear about your priorities and values is so powerful because it turbocharges your financial will power.
Get aggressive about carving out more money for what you really want to achieve, especially if you’re living paycheck to paycheck right now and can’t seem to get ahead. But even high-earners can outspend their income and many do.
If I reviewed how you spent money over the past 30 days, I could tell you exactly what you value, such as clothes and nights out with friends, or investing for the future and paying down expensive debt.
Getting clear about your priorities and values is so powerful because it turbocharges your financial will power. Every action you take, including your spending, either builds up or breaks down your values. When your financial life doesn’t align with your core values, you know it deep down in your soul and feel unhappy, anxious, or worried.
Controlling spending is a key to living below your means so you have enough money left over to save, invest, and pay down debt. That’s how you build wealth over time and achieve your dreams.
I’m not saying that it’s easy because controlling spending is a struggle for most people, including me. But being aware of the dangers of impulse spending can help you resist it. The cost of small things adds up over time and can rob you of the ability to create financial security.
There are low- and high-tech ways to monitor your spending. You could get a small notebook and jot down every time you spend money. Or you can use a money management program such as Mint, Quicken, or QuickBooks to create a spending plan and track your finances digitally.
The purpose of having a spending plan is to make sure that it includes your financial goals. For example, if maxing out an IRA is one of your goals, you’ll need to allocate $450 per month for that purpose in your plan. That may force you to cut back in other spending categories such as entertainment or eating out.
A good spending guideline to follow is the 50/30/20 rule. It’s a budgeting framework where you spend no more than 50% of your take-home income on fixed expenses and true necessities, such as housing, insurance, utilities, food, transportation, and debt payments.
You limit variable expenses, such as dining out, clothes, cable TV, travel, and gifts to 30%. And the remaining 20% is for financial goals like building an emergency fund and making retirement contributions.
These are rules of thumb that you can tailor to your situation and priorities. For instance, if you can spend 40% on fixed expenses, you could increase your variable costs to 40% or boost your savings to 30%.
The first two chapters of my award-winning book, Money Girl’s Smart Moves to Grow Rich, are jam-packed with information including:
- Understanding your money mindset
- How to create your PFS
- How to create a spending plan
- How to set short-, medium-, and long-term goals
- The right amount of emergency money to accumulate
- What types of insurance you should have
- How to create a retirement plan and estimate how much money you’ll need
- 15 clever ways to save more money
You can click here to download Laura's two FREE book chapters.
Step #4: Automate your savings.
Once you know your overarching financial objective and turn it into one or more savings goals, putting them on autopilot is one of the best ways to be successful. Financial automation works so well because it protects you from yourself!
Once you know your overarching financial objective and turn it into one or more savings goals, putting them on autopilot is one of the best ways to be successful.
Since it’s so easy to go off the financial rails, anticipate challenges and create ways to stay on track. Here are some ways to automate your finances:
- Participate in a retirement plan at work, such as a 401k, 403b, or 457 plan. They work so well because contributions come out of your paycheck on a regular basis before you ever see the money.
- Set up recurring transfers from your bank account to an IRA. As long as you have some amount of earned income, you’re qualified to have one. I’ve written many posts on this topic, so type IRA into the search bar at the top of this page to learn more.
- Open a 529 savings plan to pay future college expenses for yourself or a family member.
- Use direct deposit for savings by having a portion of your paycheck, benefits, or tax refund sent to a bank savings account. By the way, this is a great strategy to build your emergency fund or to save for short-term goals like holiday gifts or a vacation.
The sooner you automate saving and investing, the more financial security you create for your entire life.
Step #5: Investigate options to reduce debt.
Once you create a Personal Financial Statement, set your One Money Objective, and review your spending, you may find that debt is putting a big squeeze on your finances. If you have expensive credit cards or loans, stay vigilant for ways to get of out debt faster by doing a consolidation, refinance, or balance transfer.
So, join me by taking some time to create a new or updated financial plan this year. Challenge yourself to make tough decisions that might be uncomfortable in the short term but could really improve your financial well-being in the long term.
Don’t be afraid to turn to a professional—such as a retirement planner, tax accountant, credit counselor, or insurance agent—when you need help. Successful people usually seek advice and rely on pros who specialize in different areas. They cost money, but usually pay for themselves quickly.
See also: Financial Planning Success in 3 Easy Steps
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