Based on established financial planning principles, the first five steps for managing personal finance, ordered by priority to establish stability and wealth, are as follows:
- 1. Assess Your Current Situation and Create a Budget: Before making moves, you must understand your cash flow. Simply, This is how much money you earn and how much you spend. Track every expense for at least 30 days to identify patterns. This includes mortgage/rent, fuel, food, Netflix, gym membership, etc. Don’t forget to think about those bigger purchases throughout the year. You can average them in by dividing their big price tag by 12. (So it spreads their cost out for 12 months). Use a framework like the 50/30/20 rule—allocating 50% of income to needs, 30% to wants, and 20% to savings and debt repayment. This isn’t a bad place to start. Even if you make no changes at this point, at least you will have an understanding of where you are. “What gets measured, gets managed“. Once you get this 50/30/20 dialed in, you can try to need/want less and save or repay more to get closer to financial freedom sooner.
- 2. Build a Starter Emergency Fund: Life in unpredictable. Cars blow up, roofs leak, You get fired because that awesome joke you told wasn’t received so well when you had to recite it to H.R. (You just thought it was so good, they wanted to hear it). Boom. just like that- you need some money to pay the bills. Most would suggest 3-6 months of living expenses. You should be able to figure this out after the budget you created above. If you haven’t established any emergency fund yet, the 20% (or more) described above should probably be allocated to getting this emergency fund juiced up. That way you could fix that car, repair that leaking roof or get that new job and still pay the bills in the meantime.
- 3. Maximize Employer Matching: If your employer offers a retirement match (like in a 401k retirement plan), contribute at least enough to capture the full amount. This is essentially “free money” and should be prioritized even before aggressive debt payoff. Typical example; you make $50k/year and your employer offers a 5% match. That means (50,000 x 0.05 = $2,500) if you contribute $2,500 from your paycheck each year, the employer will match that with another $2,500, but that’s their max. This is free money into your retirement account and should be prioritized in most cases. That’s a 200% guaranteed return on your money right away. *More to come on retirement accounts in the future
- 4. Strategically Tackle High-Interest Debt: Focus on eliminating debts with interest rates over 20%, such as credit card balances. Popular methods include the debt avalanche (paying the highest interest rate first to save money) or the debt snowball (paying the smallest balance first for psychological momentum). I think paying the high interest debt first clearly makes the most mathematical sense. It’s really hard to ever get ahead when you have high interest debt. Pay those credit cards off in full at the end of each month and never carry a balance if you can. Payday loans should be avoided at all costs. When you have high interest debt, it’s like trying to fill a bucket that has a hole in it. Plug them holes!
- 5. Scale Up Retirement Savings and Long-Term Investing: Once high-interest debt is gone and your emergency fund is solid, aim to invest at least 20% of your income for retirement. Beyond workplace plans, consider a Roth IRA or Health Savings Account (HSA), which offers triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical costs. Don’t just stuff cash in your underwear drawer. There are ways better ways to put that money to work so it makes more money and you still have access to it if you need it. 401k’s, Roth IRA’s, Health Savings Accounts, High Yield Savings Accounts, etc are all just savings plans with different rules. It’s still savings but you just need a clear idea of what the pros and cons of each of these “investment vehicles” are. *more to come on that in the future.
Key Principles Throughout These Steps:
Protect Your Assets: Ensure you have adequate insurance (health, auto, home/renters) to avoid financial catastrophe
Automate Savings: Automate transfers to savings accounts to ensure consistency. Consistency is the key.
Live Below Your Means: The foundation of all financial health is spending less than you earn.
Want the templates and checklist? Get the Shift-Worker Money Starter Kit