Today we are going to continue listing the 30 steps anyone can take to have great finances.
If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.
Last time we discussed ideas for making extra income. Today we'll shift gears and begin focusing on the second part of the wealth-building equation, cutting expenses.
Let's get started.
Step 13: Have a Trusted, Financially Successful Friend Review Your Cash Flow Plan and Make Suggestions
Early on in this process, I had you create a cash flow plan. You've had a chance to do that as well as tweak it a bit based on your actual spending (which you're likely still working on -- writing down every penny you spend for 30 days.) But now that we're entering the phase where we'll concentrate on cutting expenses, you're going to need some help.
Find someone you know, trust, and respect who is doing well financially and ask them to look over your cash flow plan. Specifically ask for them to help you identify places where you may be spending more money than you need to.
When my wife and I used to do financial counseling, we would have couples bring us their budgets (we provided the forms in advance to make sure they covered everything.) Almost every time we ended the session with a laundry list of how they could save money -- based on our own personal experiences. For instance, one couple had two vehicles that were much older than ours and yet they paid twice what we did for car insurance. When we asked where they got their insurance, they said it was from a family friend, someone the wife's dad had always used, so that's who they used. We told them to quote it out. They came back the next time with a cost that saved them several hundred dollars a year for the same coverage! This is what an experienced mentor can do for you and your budget.
So find a mentor to help you identify cost savings. I'm betting he or she will come up with a lot of suggestions you have never considered.
Step 14: Reduce All of the Expenses You Can
You can add to the cost savings list your mentor creates by developing your own. And lucky for you, I have a ton of suggestions to get you started.
Look in the FMF archives and click on "Saving Money". There you'll find plenty of ways to save a ton of money.
Step 15: Create an Emergency Fund
No matter how well we plan for events in our lives, emergencies happen, and if you aren’t prepared, you will probably have to pay for those emergencies with credit and go into debt.
An emergency fund cushions you from these unexpected expenses. It is not optional if you plan to be on sound financial footing—it is essential.
Even if you can only set aside $20 a week, start doing that. The earlier you start your emergency fund the better.
The rule-of-thumb guideline for the amount of an emergency fund is six months' worth of living expenses, but I actually carry closer to nine months' expenses because I prefer an extra margin of safety. If your job situation is at all shaky, you're paid on commission, or you are paid at variable times and amounts, I suggest you have a higher amount as well.
As your emergency fund grows, make sure you have it in an account that offers 1) safety and 2) easy access. While it's nice to earn at least a decent amount on your money, income is not your primary objective with these funds. Be sure that are in an account that is 100% safe (like a checking or savings account) and that you can get to the money quickly if (or should I say when) you need it.
Well, that’s it for now. Stay tuned for the next piece in this series when I’ll be back with more ways to improve your finances, one step at a time.
Update: Click here to read steps 16 to 18.