“It won’t happen to me!”
Job loss, divorce, serious illness, accident, act of nature. Each of these situations happens regularly throughout the country, to people of all walks of life. No matter what demographic, gender, or socio-economic segment you look at, these unfortunate situations happen in each of them. Somewhere, probably even close to you, each of these is happening today.
But many of us don’t expect these things to happen. Sure, maybe we acknowledge that one or two of these types of things could happen, but we don’t dwell on it. Or, perhaps, we have been impacted by one or more in the past, and feel that we have “learned our lessons” or are “past our misfortunes.” Being an optimist, I certainly would like to believe that. I truly believe in positive thinking, and its power. Your outlook can to a large degree shape the direction of your future. That said, we also have to be realistic and accept the reality that stuff happens.
The thing is, its not just the emotional or physical aspect of the situation that ends up making an impact on your life. One way or another, it’s the financial impact that comes into play as well, and that can knock us to the canvas.
In getting back up off the canvas, and making a personal finance recovery, here are 10 steps that can help get you back on track:
1. Figure out exactly what has happened, and why it happened. This may seem sophomoric on the surface, but often times we are on a path to get ourselves in a situation but we just don’t realize it or understand why its happening. Take the time to figure out what the source of the problem was. If a job loss, could you have been more attuned to impending layoffs, performed better, or built your network better? If a divorce, could you have communicated better with your spouse, or more importantly picked the right person initially? If a health issue, could you have done something ahead of time to prevent it, such as stopping smoking, eating healthier food, or exercising more? Figure it out and learn from the experience to better position yourself to succeed in the future.
2. Make a budget. Take stock of your current expenses and your actual needs, and then put together a realistic budget that you could follow. Be sure to add in room for so called “unexpected” situations, and build an emergency fund contribution to the budget. Additionally, save money for future purchases – for example, even if you have a car with no loan outstanding, save regularly as part of your budget for your next vehicle.
3. Track expenses. By this, I mean track your daily expenses. All of them. Even 25 cents for a parking meter or a gumball for your kid – track it, record it. As you track expenses, be sure to categorize appropriately – not to broad, but not too few.
4. Reduce spending. As you track your spending, you will most likely identify categories where you are just shocked at how much you’re spending. For example, if you have been spending $3.00 each morning for a specialty coffee, you may be surprised to see how you’re dropping about $90 per month if done daily. You’ll be aware of the opportunity to reduce spending, and can then make a plan to do so.
5. Set goals, both long and short-term. Where do you want to be 20 years from now? Visualize your future and set goals that a part of the process of getting you there. Short term goals are building blocks to larger term goals. For example, lets say you want to go from a negative net worth to $1,000,000 in those 20 years. First set short-term goals around getting your expenses well below your income, then becoming debt-free. Make the goals realistic, but a stretch.
6. Make it automatic. Pay bills automatically, via online services. This will keep you from missing payments, which will help your credit rating. Don’t forget: make paying yourself automatic as well.
7. Check your credit score: Credit scores range from the 300-range to 850. A higher score will get you better access to loans, and at better rates. Plan to actively work to keep your credit score high. Check Equifax, Experian, and TransUnion once per year each.
8. Correct any credit errors: Inaccurate credit reports can cost you considerable time and energy to rectify, but you could save yourself considerable time, energy, AND money if you clean up your record. Don’t let an inaccuracy impact your ability to get back up on your feet and reach your goals.
9. Improve your knowledge of personal finance. Invest your time in learning many aspects of personal finance: the basics, philosophies, and specific strategies. Read multiple primers on personal finance, to gain different perspectives. Then, on specific issues, drill down further and develop a better understanding to the point that you become confident in your decision-making in that particular area. For example, if you don’t know much about Roth IRAs, read about the subject to the point that you could lead a conversation about the topic and actually make intelligent recommendations to others.
10. Invest in your career. Simply put, for most people, your earning power is one of the greatest assets you have. Most people have a lot of room to increase savings, but there comes a point where you can only limit your expenses so much. Its better to focus on living within one’s means and make that a habit, but really devote your energy and intellectual efforts toward your career.
Overall, being positive, taking action, and taking personal responsibility for your future financial success will be a big help in helping you reach your overall life goals. These 10 steps are a good start in that direction for those who are getting back on their feet