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The 3 Most Important Tools to Turn Around Your Financial Life

tools hanging in background turn around your finances

This week’s post is from Greg Johnson over at Club Thrifty.  I know Greg from FinCon and my occasional jab at his love of the Minnesota Vikings.  While this post is from another author, it’s what I teach and guide people to do brick by brick on their road to financial freedom.  Get ready to turn your finances around!

It’s no secret that financial matters are a struggle for a lot of us. Just think of how many people you know that don’t have money set aside for a $500 emergency. Yikes!

Nobody’s perfect with money. At some point, we all make dumb purchases, ignore our savings, or don’t pay attention to where our money goes.

Turning your finances around sounds impossible sometimes, right? I’ve been there, too. If you’re feeling like you’re at the end of your rope and your money will never start working for you, it’s time to change that mindset.

The truth of the matter is that anyone can turn their financial life around. These are three tried-and-true tools that will strengthen anyone’s finances!

Tool #1: A Monthly Budget

You guessed it: The first step for fixing your financial life is making a budget! Whether you’re just starting out or you’re already a millionaire, a monthly budget is one of the most powerful financial tools at your disposal.

Did you groan when you read the b-word? Trust me, everything will be OK.

A budget is not a punishment for messing up with money. In fact, learning how to budget is a skill that everyone should learn if they want to be successful with money.

Your budget will become a powerful tool to get your finances on track. You see, once you know what’s happening to your money, you gain control over what you do with it!

burger and fries keep it siimple

Zero-Based Budgeting

Let’s investigate the basics, shall we?

A budget is simply a plan for your money every month – both your income and your expenses. That’s it!

Personally, I like a method called zero-based budgeting, and it totally works! Your goal is to get your income and expenses to match up to the penny.

Here’s a super simple equation to help you out: Income – Expenses – Savings = Zero

So, what you’ll do is write down (on paper or in an app) how much money you’ll make in the upcoming month. If your income fluctuates, make your best guess.

Next, write down how much you plan to spend in the upcoming month. Assign a job to every dollar you make.

Consider fixed expenses, such as mortgage or rent, insurance premiums, car payments, and cell phone. Those are easy – just list how much each bill is every month.

Next, get into the variable expenses – categories like groceries, utilities, and gas for your car. In these areas, you’ll find some wiggle room, so estimate a bit high, just in case. You might need to look at past receipts or bank statements to make your best guess.

Once you’ve written down your projected spending for every category you can think of, do the simple equation of income – expenses – savings = zero.

It probably won’t balance out on your first try. No biggie! Simply adjust your numbers in the variable categories until everything zeroes out.

If there’s a negative number, decrease the spending for a category or two until it balances. If there’s income left over, add it into the savings column or use it to pay down debt.

Each month, you’ll do this same budget exercise and adjust it as your income and spending vary. It’s as simple as that!

{Steven:  This is the exact budget my wife and I use today.  I guide and teach the zero-sum budget with my clients for the exact reason Greg mentioned, it’s Simple.}

Tool #2: Tracking Your Expenses

It’s not enough to create a budget. The budget is kind of like a road map for your monthly spending, but you have to actually follow the map! Tracking your expenses is essential to making sure this happens.

You can’t analyze your budget accurately without a clear idea of where your money actually goes each month. Keep in mind, this will often change from month to month. That’s why tracking your spending closely, especially for the first few months, can help get things back in order.

Take note of every single dollar going in and out during the month. Whether you like the old-fashioned pen-and-paper method or you use an app that tracks your expenses, the key is to find out exactly how much you spend in every area.

woman dancing with lights and power

The Power of Tracking Expenses

Want an example of how tracking expenses helps? Let’s say you discover that you spent double the amount of money that you budgeted on eating out. That knowledge can freak you out, but it also informs your next month’s decisions.

Will you go on a restaurant freeze for 30 days, set a goal to reduce your dining-out expenses, or simply shift more money for that category in your budget? Whatever you choose, it starts by tracking the spending. That’s why it’s such an essential tool.

You may find that you spend more than planned in multiple categories. Maybe you’ll spend less in other categories. It may be a huge wake-up call.

By tracking expenses, you’ll clarify how much you spend in each area so you can determine where you might cut back or save more. Knowledge is power. Expense tracking gives you the knowledge to propel you forward in making better financial choices!

{Steven:  I track all of my expenses using a free website and app called Personal Capital if you sign up using this link as an added bonus we will both earn a $20 Amazon gift card if at least one valid investment account (brokerage, 401k, IRA, etc) containing a balance of more than $1000 within 30 days of registering.}

Tool #3: An Emergency Fund

This brings us to the third vital tool for fixing your finances – an emergency fund.

Most Americans don’t have enough money in savings to cover an emergency, even one that’s as little as $500. So, they often resort to credit cards or borrowing from family, which can be risky.

An emergency fund and a budget go hand-in-hand because, let’s face it, it’s unexpected expenses that typically screw up your budget! So, think of your emergency fund a lot like an insurance policy, but for your budget. Expect a few money curveballs, and you’ll be prepared for them when they arrive!

How much money should you keep in an emergency fund? Well, if you have zero right now, $1,000 makes a nice starter fund. That’ll cover most minor emergencies that tend to pop up. Generally speaking, storing your emergency funds in safe investments – like a high-yield savings account – is also a solid bet.

As your financial situation improves, create a goal to save a full 3-6 months’ worth of expenses in your emergency fund. This ensures that even in a severe emergency like a job loss, you’ll be able to keep paying your bills for quite a while. That’s pretty reassuring!

{Steven:  Having an emergency fund really is crucial to long term success.  The advice that I give my clients is to create an emergency fund that will allow them to sleep well at night if a job loss did occur.  This could mean 3 months or even more!}

Final Thoughts

As you can see, these three tools can work wonders for your finances. It may not be easy, but it’s pretty awesome to know you’ve got the power to turn around your financial life!

Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.

 

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