Learn the Basics

This guide provides a simple path for learning the basics and improving personal finances. Start by figuring out the current situation with your finances, building a budget, paying off any high-interest debt, building an emergency fund, and then planning for the future.

PHASE 1: FIGURE OUT WHERE YOU STAND

Start by understanding your financial situation.

• Your Total After-Tax Income: Review bank deposits to calculate your monthly take-home pay.
• Your Total Debts: List all debts, including account balances, interest rates, fees, and minimum payments.
• Your Typical Monthly Expenses: Track at least three months of spending. Categorize spending into:
  • Essential Expenses: Housing, food, utilities, transportation, and minimum debt payments.
  • Non-Essential Expenses: Subscriptions, dining out, delivery services.

Start now with a best guess so you can get a rough draft completed and start making visible progress. You may be surprised how your assumptions about your income, debts, and typical expenses may differ from the actual numbers that will be found later in the process.

PHASE 2: CREATE YOUR BUDGET

Create a budget based on the real numbers. The budget should pay all essential bills, then use your remaining free cash flow to first build a $1000 emergency fund, then repay any high-interest debts, and finally save and invest for your goals.

If your earnings do not cover your essential bills, then you will need to find a way to decrease expenses or increase income. Housing is the largest expense for most people, so downsizing or getting a roommate can make a big difference. If you earn below the median income for your area, then you may qualify for government assistance programs such as Medicaid to lower healthcare expenses and SNAP to lower food expenses.

Step 1: List Your Income

Write down all sources of income.

Step 2: Identify Essential Expenses

Include only expenses necessary for survival or maintaining your ability to work:

• Housing: Rent or mortgage.
• Utilities: Power, water, gas, internet.
• Food: A modest grocery budget.
• Transportation: Gas, public transit, car insurance.
• Minimum Debt Payments: Credit cards, loans, etc.

Step 3: Identify Non-Essential Expenses

Review your spending on things that are not essential, such as subscriptions, eating out, delivery services, shopping for non-essential items, and hobbies. Check out the Spending Scorecard to help understand and change your spending habits.

Step 4: Use Your Free Cash Flow Wisely

Free cash flow is the money you have left over after you subtract your essential expenses from your income. This leftover money is what you can use to reach your goals or for non-essential expenses.

• Take Action Right Away: As soon as you get paid, pay your essential bills, and set aside the leftover money in a different account.
• Build A Small Emergency Fund: As a first priority, use your free cash flow to save $1000.
• Pay Off High-Interest Debt: After you have $1000 saved, use your free cash flow to make extra payments on high-interest debts.
• Save and Invest: After your high-interest debts are paid off, use your free cash flow for saving and investing for future goals.

Step 5: Stick to Your Budget

Review and adjust your budget monthly to ensure it aligns with your goals and actual spending.

PHASE 3: BUILD FINANCIAL SECURITY

After paying off debt, focus on building a larger emergency fund in a high-yield savings account that will cover six months of essential expenses. This financial cushion protects you from unexpected events like job loss, health emergencies, or major repairs. Avoid falling back into debt by continuously reviewing your budget and goals, resisting lifestyle creep, and planning ahead so you are prepared for unexpected large expenses.

After successfully funding a six-month emergency fund, continue saving and start planning and investing in your future.

• Decide Your Goals: Identify what you want to achieve, whether it is saving for retirement, buying a home, or funding education.
• Consider Investing: Explore investment options that align with your goals such as retirement accounts or traditional brokerage accounts.
• Seek Guidance: Consider working with a financial coach to ensure your savings and investment strategies and allocations align with your goals.