1st Steps to Better Finances?

[Jes]

As of right now, the only thing I know about my money is that I have enough of it to get me through the rest of the year. Sometimes a litte bit extra comes in, and I'll deposit the check a few weeks later. Sometimes I spend a little too much. Other than that, though, I pay no attention to my financial life. And I know that if I keep up this behavior, I'm going to end up somewhere I'll regret.

That being said, does anyone have any suggestions as to what I can do to instantly improve my personal finances? I don't mean a get-rich-quick scheme. I just mean an action that I can do right away to get a grip on my financial reality. There's obviously lots of common sense answers like making a budget or going over bank statements or something, but I don't know which one I should do first, or which one would make the biggest difference. Thanks!

[RT Wolf]

Rich Dad, Poor Dad has many issues, but it does give an idea of the mindset that's beneficial to what you're seeking. Here's a summary:

Rich Dad, Poor Dad Summary - WikiSummaries, free book summaries

Grab of a copy of the Automatic Millionaire or similar book. Not that important which one you get, they all say about the same thing:

1. Save at least 10% of your money to invest.
2. Invest it. There's a few options. Things are a little more complicated here. I'd need to know how young you are and what's your risk tolerance, the two most important factors. There's others, too, though.
3. Learn the power of compound interest. This may help:

In the following table, Investor A starts investing 2000 dollars at the age of 26 and doesn't let up until retirement at 65. Investor B only invests a total of 14,000 but starts seven years earlier in life and for a shorter period of time. The investment compounds at 10% a year and you can see the effects.




Here's a compound interest calculator: Compound Interest Calculator

4. Retire and/or enjoy it!

That's just for beginners. There is more advanced information here:

Getting Finances Done

And most of all, thank you. Thank you for choosing to get control of your finances rather than letting them control you. You have made a great move. Most people are willing to work for peanuts an hour when they could learn thing that could make or save them hundreds, maybe even thousands of dollars in a very short amoun of time. So, good work on deciding to make this change. This is a very simple summary. If you have any questions, feel free to post or PM.

I hope this helps.

[TSchmitt]

First, pay off any high-interest debt you might have (credit cards, etc.). Assuming you are debt-free I would recommend checking out a book called The Random Walk Guide to Investing by Burton Malkiel. It is by no means a get rich quick book. It will teach you some sound investment strategies. By following his principles over the course of many years you just might end up rich ; )

[RT Wolf]

Whoops, I wrote a lot but didn't give you a "Next Action". Next action is this: Figure out why you want to save your money. Are you saving for retirement? If so, how much would you have to save? Are there any large specific goals you'd like to accomplish along the way (buy a house, boat, special car, take a trip someplace, etc)?

More random stuff to learn: The difference between net worth and income. Income is what comes in the door, net worth is what you own after you take out what you owe. You may have an income of 1 million dollars a year yet have a net worth of 0 dollars.

may as well make a list of books I recommend:

1. The Automatic Milliionaire.
2. The Little Book of Value Investing. Learn about proper stock investing.
3. the little book of common-sense investing. Learn about the kind of stock investing (ie, through index funds) you will most likely be doing.
4. Personal Finance for Dummies or similar. Gives a good overview of all the parts and how they fit together, even if some of the details may be inaccurate or useless.
5. The Millionaire Next door. Learn teh surprising secret about how many millionaires live

I'll add more if I come to think of it.

Good blogs to read:

Getting Finances Done as I said earlier. Check out the Best of, on teh left, especially the Zero-based budget one.
I Will Teach You To Be Rich - He's got a helluvan attitude but his advice tends to be solid.
Get Rich Slowly - Also good advice.

I hope this helps and I hope I haven't totally overloaded you and scared you away.

[annie]

Great posts everyone. I wholeheartedly agree with RTWolf, I would recommend everything he did, plus 2-3 more....

I happen to like Dave Ramsey's Financial Peace & Money Makeover
Dave Ramsey's Online Store - daveramsey.com

Also, learning a bit about "budgeting" (I have that word!) can also be a first step!!!

As far as budgeting goes...if you can spend 30 minutes to set up this program and then discipline yourself to to get on the computer for 2-3 minutes to categorize your "spending"...you will MASTER MONEY!!!

I love this program...have used it for years...it saves me several hundred dollars PER MONTH from "awareness" only.

Home Budget Software for Household, Family & Personal Money Management

And of course...don't forget to pound the philosophy of 10% into your brain ASAP. Read The Richest Man in Babylon and do your best to apply it.

If I would have applied it faithfully, I would have retired at the age of 35...but I didn't. I'm now 43 and I'm about 2-3 years away from Financial Freedom.

YEAAHHHHHH!!!!!!

[InJoy]

Great thread, Jes. Thanks for starting the discussion. Looks like you are getting some terrific advice.

Originally Posted by RT Wolf

In the following table, Investor A starts investing 2000 dollars at the age of 26 and doesn't let up until retirement at 65. Investor B only invests a total of 14,000 but starts seven years earlier in life and for a shorter period of time. The investment compounds at 10% a year and you can see the effects.

RT Wolf, I have never seen a table side by side like that. It's amazing. And, well, a little daunting. Especially if one is 41 years old with no investments made yet.

Is there any way to catch up?

[RT Wolf]

Yes there is. Where there is a will, there's a way.

I once heard a Chinese proverb I think is relevant here, "The best time to plant a tree was 20 years ago. The second best time is now."

Start NOW. Even if you can't afford to save a lot of money, even 1% of your income is enough to start with, especially if you've got debt, mortgages, kids, whatever. Increase the 1% to 10% or higher over time. This is generic advice, need more info to make it specific.

David Bach also wrote a book called Start Late, Finish Rich. This might be helpful to you, however I haven't read it. This appears to be a summary of it here:

Start Late, Finish Rich

Amazon link:

Amazon.com: Start Late, Finish Rich: A No-Fail Plan for Achieving Financial Freedom at Any Age: Books: David Bach

It seems to have gotten mixed reviews, but I think that has more to do with the people writing htem (if they already knew some of this stuff, rated it lower), versus people who didn't know this stuff who really liked the book.

I would need more information about your personal financial situation before I could offer specific help (feel free to PM me if you want more specific help, AND consult a financial planner). IE, debts, kids, mortgages, income, time horizons, long-term goals, etc. More information about your situations makes it easier to figure out how long it would take for you to achieve financial freedom (depending on how you define that for yourself), how much you would have to save, etc.

You have to make financial freedom/retirement a top priority. You might also consider talking to a financial planner for some help on getting a handle on your money. Either look for a Certified Financial Planner (in many countries, the term Financial Planner is unregulated, anyone can use it, so look for certification), or ask around your friends if they can recommend one.

Good luck! Start NOW! Feel free to ask any questions you may have. Hope this helps.

[InJoy]

Thank you, RT. I have put a hold on that book at the library, and I just might take you up on that PM when I get a few minutes.

[lifeinoleg]

"That being said, does anyone have any suggestions as to what I can do to instantly improve my personal finances?"

No. There is Nothing that will "instantly" improve your personal finances.

But here is something you can start out with that will take some time (you had it in your post!).

Acknowledge you have personal finances by creating a basic budget. Unless you have very little spending, this is hard to do just off the top (an accurate budget can be made in approximately three months because it takes more than a month to average out how much you spend and how much you make). So start with a month. Save all of your receipts for that month and towards the end sit down with them for an hour and separate them into catagories i.e. Food, Entertainment, Bills etc. Get as specific as you want, the receipts will help. Make sure to have a calculator. Write it down on a computer or a piece of paper. Personally, I don't use any fancy personal finance program, Notepad is fine because what you're doing is just adding and recording. And balance it. See how much you make and how much you spend. If they balance out, great! You make some money every month...If not, cut some spending (this may require a few minor changes like not eating out for a few days next month, or big changes like moving, or canceling cable).

Many people flinch at the mention of budget. Why? It's just adding and subtracting (a first grader can do it!), it takes an hour max, and after you finish, you may understand yourself better. That's the first step to better personal finances, that's what you asked about.

With all due respect to the other people who have replied to this thread, I agree that reading books is great. There are literally hundreds of thousands of books about personal finance, wealth management, getting rich; all things money...But before reading any of them, it's important to see if one can afford them. Books are expensive! (InJoy, props on using the library!)

In any case, Jes, use the common sense ways you had in mind already. There is no magic in the first steps (interest is magic though, but it's not the first step. You can't invest if you don't know what you have).

p.s. - Use your bank statements to help you with your budget. They are a backup in case you forgot a receipt or two. I usually check the receipts against bank and credit card statements when I go over my budget on a monthly basis.

[Keith]

It sounds to me like you've fallen into the trap of trying to find the best place to start - and ended up not starting at all. I can relate.

Just start somewhere. And remember that finance isn't the sort of thing that takes up all day, every day - you can set multiple balls rolling simultaneously.

Personally (like lifeinoleg) I suggest starting with a budget. I did this recently, and once I really understood what my financial situation was, I was able to start improving it.

I found the following site helpful:
Getting Finances Done » 3 reasons most budgets don’t work and how to fix them (a.k.a. How to create a budget that works)
Getting Finances Done » How to create a zero-based budget

My budget is done in Excel. That works really well, but there are plenty of other options if you aren't that way inclined. I would suggest staying away from professional finance software, though - it tends to be more complicated and less flexible than you need.

[Edith Yeung]

Jes,

To start, I would highly recommend you first setup the money jar (according to T Harv Eker’s book ‘The Secret of the Millionaire Mind’). Every pay check that comes in make sure you divide it up and deposit into the following saving accounts:

Financial Freedom Fund – 10%
Long Term Savings – 10%
Education Fund – 10%
Play Fund – 10%
Give Fund – 5%
Necessity Fund – 55%

I have been doing this for the past 14 months. It have been really helpful for me because I would spend as much as I can afford in Education and Play, plus I can save up money for Financial Freedom and Giving.

I wrote an article called '7 Habits of Highly Effective Money Managers' on my site that should help as well.

Edith Yeung.Com Dream Think Act » Blog Archive » 7 Habits of Highly Effective Money Managers

Cheers!
Edith

[NathanSII]

Track down EVERYTHING you spend your money on. It's been said a billion times but when you actually do this - it's really eye opening to see where all your money is going.

Dang latte factor

[Brutha]

Education Fund – 10%
Play Fund – 10%

What's the difference?