Table of Contents:
8 Steps to Improve Your Financial Situation
All of your financial decisions make an impact on your future. If you want to know how to better your life financially and get out of debt, you need to act now. Even though it may seem daunting to turn your finances around, you just need to take slow steps in the right direction.
Here are our best recommendations to support proper money management and improve financial literacy. These tips have stood the test of time and have already helped so many people.
Step 1. Do the Math
Many people are too afraid to face the situation head-on, which is absolutely not the right approach to take. If the situation is not going well, by neglecting it, you are risking making it worse. You can never fix a bad financial situation if you don’t know where you stand.
Rather than ignoring your finances and leaving them to chance, write everything down. Money comes in; money goes out. Assess your current financial situation in full. It might include looking at your bank statements, your debt-to-income ratio, your housing situation, etc.
You can do it in any form that you prefer: paper, Excel spreadsheet, budgeting software. Luckily for you, there are many different options that will fit your lifestyle. The trick is to track your expenses on a regular basis to get a full picture. Continue doing so for at least the first month – but we also recommend sticking to this habit to prevent financial problems in the future.
Step 2. Assess Your Needs and Wants
Out of all the expenses you have, you probably spend the largest amount on necessary expenses (“needs”). These are categories that you can’t exclude from your budget, and you need to prioritize them depending on your individual situation. The list may include:
- housing – mortgage or rent, maintenance
- food – groceries, work lunches
- insurance – health, home/renters, car, life
- debt payments – credit cards, student loans, auto loans, payday loans
- medical – doctors, dentist, prescription medication
- transportation – gas, taxis, public transport, parking
- utilities – phone, electric, water, cable, Internet
- education – tuition, books, supplies
“Wants” is a category of things you’d like to have, but which are not necessary for survival and normal living. It might be dining out, going to shows and concerts, traveling, subscriptions, etc. These expenses should be an occasional treat, but you probably already know that you shouldn’t over-indulge in this category.
Then, there is an odd category of expenses that fits somewhere in-between “needs” and “wants”. On the one hand, you are not forced to spend money on it for survival. On the other hand, it is something that brings real value to your life, or you may be socially obligated to purchase it. Some examples include:
- personal – clothing, hair care, gym, professional dues
- gift-giving – birthdays, holidays, weddings, anniversaries
- expenses associated with special occasions – flying home for holidays, getting outfits for black-tie events, etc.
Step 3. Set Realistic Goals
Decide where you want to be financially. You may want to save enough to open a business, retire early, buy a house, or move to a different country. It doesn’t have to be an extremely ambitious goal like the ones listed above. It might be paying off your student loans, not relying on help from others, or simply getting back on your feet. There is no benefit in setting an unachievable goal and getting discouraged that you are failing at it.
Take your time to think about it. If you determine a realistic goal that genuinely motivates you, you can begin working backward to find out what you need to change. Whatever the goal is, it will influence how you deal with money.
Step 4. Tighten Your Budget
Having figured out how much you earn and spend, what you can cut out, and where you want to be, you can transform it into a monthly budget. Start with a rough plan and work your way up. For example, eliminate certain categories from the list of “wants”. A strict thoughtfully planned personal budget will help you:
- Set your priorities
- Know your expenses in advance
- Cut some expenses
- Align your budget with your goals
- Make better financial decisions
- Prepare for emergencies
You may not be able to eliminate certain expenses without drastically altering your lifestyle. However, there are many things you can cut out of your life, without noticing much of a difference. If you adopt a frugal yet flexible mindset, some changes will arrive on their own accord.
However, if you want to have noticeable changes in a short period of time or a considerable financial improvement, you will need to sacrifice some part of your current lifestyle. It can be as little as minimizing your variable expenses to something more drastic, like moving to a cheaper area.
Step 5. Contribute to Your Savings
Hopefully, once you cut down on all unnecessary purchases, you will have more money left to put into savings. Make it a regular habit and direct money into interest-bearing savings account every week, month, or a certain time of the year (whatever suits you).
Any “extra” money that you get can be put into a savings account – a tax refund, bonus at work, money that you found on the street. However, it’s crucial that you treat your saving contributions seriously. You can’t put spare change towards it and expect it to grow. Decide on a fixed amount that will always be put into savings, and any extra cash is just a top-up.
You can automate your savings contributions to stay organized. There will be no temptation to set aside a lower amount, and you will never forget to get it done.
Step 6. Find Additional Sources of Income
If you only rely on a 9-5 job for your entire livelihood, you are essentially putting all of your eggs in one basket. It is not always a bad thing, but you can consider multiplying your streams of income. It might not be a lot at first, but as you learn how to juggle multiple responsibilities, you can significantly increase your earnings.
Here are just a few examples of what you can do:
- Invest (ETFs, mutual funds, etc.)
- Offer a product or service through websites like Fiverr
- Start a freelance project
- Babysit, house sit, dog sit
- Share your skills and teach them (woodworking, crochet, playing a musical instrument, etc.)
Step 7. Tackle Your Debt
One of the most expensive mistakes you can make is carrying a lot of debt. If you have high-interest debt, like credit card debt, it is especially impactful on your financial situation. If you are serious about fixing financial problems, you need a solid plan for paying off your debt.
As you accumulate more debt over the years, it gets increasingly harder to sort it out. If you feel overwhelmed by your debt and don’t know where to start, you need to consult with a professional. At DebtQuest USA, we have financial advisors that will help you get to the bottom of the problem and assist you on your journey.
Depending on your particular situation, you may need to consolidate or settle your debts, negotiate a lower interest through your issuer, or transfer high-interest debt to a low-interest credit card, or some other kind of service. Additionally, we will create a financial plan, so that you stay on the right track.
Step 8. Acquire New Skills
Have you heard about the term “money-saving skills”? These are do-it-yourself skills and habits that help you save money on some services. Of course, outsourcing some tasks is sometimes necessary and saves time. That said, if you are on a tight budget, you can learn how to:
- Cook from scratch
- Handle basic car maintenance
- Sew and mend your clothes/accessories
- Do your taxes
- Decorate your house
Even if you think you know how to manage money, you can always upgrade that skill. There are many online and offline resources that will teach you how to how to improve your finances. Look for books and podcasts discussing personal finance-related topics and pick up useful tips. They will also help you get into the right mindset to reach your goals.
Many people come to us with a seemingly simple request: “fix my finances”. At DebtQuest USA, we know that it’s a slow process that requires time and dedication. Plus, it is extremely hard to solve debt problems, and most people will need extra help. We will help you come up with a financial plan suitable for your goals and guide you towards a debt-free, reliable state of living.