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.
I'm trying to reduce some of my expenses and try to save more. Having an emergency fund is important too, I've been building my emergency fund that will cover for 6 months.
Posted by: Clarisse @ Make Money Your Way | January 08, 2014 at 07:01 AM
Any suggestions on finding a good mentor? There are so many different "opinions" on finance (and particularly debt) that I've had a hard time finding someone that shares similar values.
Posted by: ASR | January 08, 2014 at 09:42 AM
ASR,
Good luck finding a good mentor!
I am 79, have a net worth that's now 8 figures and I have never had or wanted a mentor. My attitude has always been that it would be impossible for me to find another person that would take care of our money better than myself. I don't think I could ever trust another person, expecially if they made their living helping other people to manage their money.
I must add that I grew up in a working class family in England during WWII where frugality was essential for my parents. My parents died with just about enough money to cover their final expenses, never had any investments. However my father always owned a car and we always had a nice annual vacation. When I first started working I gave my mother a portion of my pay to help out with the expenses. When I was 21 I married my longtime sweetheart and we emigrated to N. America, getting off the boat in Montreal with $400 between us.
Frugality was embedded in our genes and it's still there today even though we don't need to be as frugal as we are. After I retired as an aerospace engineer when I was 58 I took step to learn all I could about investments and that turned out to be instrumental in our financial success.
I also must give a lot of credit to the time period between 1956 when we emigrated and 1992 when we retired debt free. We made a lot of money by owning real estate and a lot more by taking maximum advantage of the dot.com bubble. I also never had a single day of being unemployed in my whole life and my wife worked once our three children were old enough to be left.
We were 2 years in Canada, 2 years in Denver, and the rest of our time in what is now called Silicon Valley.
Posted by: Old Limey | January 08, 2014 at 09:55 PM
ASR, I think you're on the right track by reading this blog. And several other blogs. I found a mentor by talking to a financial adviser. I asked him if he had any retired wealthy clients who had the time and desire to do it. He contacted them and one volunteered. It's been great.
FMF, maybe ASR could post his budget with some descriptions of his situations and we could all comment on it? Kind of a variation on the reader profile.
Posted by: MITM @ Nakedbudgeting | January 09, 2014 at 09:34 AM
Or a "Help a Reader" piece. Either would work.
Posted by: FMF | January 09, 2014 at 12:23 PM