It’s the start of a new year, which is the perfect time to tackle your resolutions and get your finances in shape. Whether you’re hoping to pay down debt, or build your savings, it’s important to start with a solid financial foundation, according to Holly Morphew, a certified financial health counselor.
“Whatever financial success looks like to you, it’s important to have a financial foundation so that you can get where you want to go,” she says.
Morphew shared her 6 steps to building a good financial base.
STEP 1: Make a plan and stick to it
“The reason we want to have our personal finances under control is really so that you can create the life that you want,” Morphew says.
Morphew advises people to look at where they are in their financial life: Do you have debt? Do you have an emergency fund? Are you in the process of saving? From there, you can tackle these goals one by one, she says.
“Having a strategy simplifies things,” Morphew says.
STEP 2: Decide how much you have to work with
Morphew says you need to look at your finances and determine your impact factor: how much cash you have left when you subtract your expenses from your income.
“This number is your power: it’s a budget. How much money am I bringing in, how much money is going out, and how much money do I have left over at the end of the month to put to its best use,” Morphew explains.
STEP 3: Set up a savings account
Once you know what you’re working with, it’s time to start allocating your money. Morphew advises putting money aside in a small savings account so you can avoid charging things to your credit card, potentially accruing more debt.
“The idea is that you have the cash to pay for things when they come up so you’re not constantly having to rely on using credit cards and having high interest rate debt,” she says.
STEP 4: Crush your debt
When it comes to paying down debt, Mophew doesn’t mince words.
“Crush your debt—it’s a strong way to put it, but the goal is to get out of debt as soon as possible,” she says.
In order to crush your debt, identify the highest interest rate debt that you have, and put the money from your impact factor (what’s left of your income after you pay your other expenses) towards paying down this debt first, Morphew says. Then move on and tackle your debts one by one, she says.
“Once you’re out of debt, you have all of that extra money back in your budget to build a huge emergency savings account, or invest in something that you want, like a home or business,” Mophew says.
“To me, not having debt means freedom,” she says.
STEP 5: Build an emergency fund
Morphew advises putting money into an emergency fund to pay for your essential expenses if the unexpected happens.
“This is just a little bit of money you’re going to use in case you’re not able to work—because you have to take time off to care for a loved one, or because you have an illness or you’re injured,” Morphew says.
This money can help you get through financial challenges without having to rely on credit cards or dip into your other sources of savings.
STEP 6: Dream big!
Morphew says once you’ve paid off your debts and have money set aside, there’s nothing left in your way! Now you can dream big, and think about the things you truly want in your life, Morphew says.
“Having freedom and choices to do the things that you want to do in life when you want to do them: that’s what financial security is all about,” Morphew says.
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