Personal Finance Basics

PHASE 1: FIGURE OUT WHERE YOU STAND

Start by understanding your financial situation. Gather this information:

• 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.

This will give you a clear picture of where things stand and where your money is going.

PHASE 2: CREATE YOUR BUDGET

Create a budget that accounts for every dollar you earn. You should pay essential bills then use your remaining free cash flow to first build a $1,000 emergency fund. After that, repay any high-interest debts. Finally, save and invest for your goals.

If your earnings do not cover your essential bills then you need to find a way to decrease your expenses or increase your income. The largest expense for most people is housing 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 your healthcare expenses and SNAP to lower your 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 focused on home-cooked meals.

• 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.

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: PAY OFF HIGH INTEREST DEBTS

There are different methods that work well to pay off high interest debts. All methods require making at least the minimum payments on all debts so you do not incur fees or penalties.

• Snowball Method: Make the minimum payments on all debts, then allocate all remaining free cash flow to the debt with the smallest balance until it is fully repaid. Once that debt is paid off, shift the free cash flow to the debt with the next smallest balance. This method can help build confidence by getting some debts fully repaid sooner but takes longer to get totally out of debt than doing the avalanche method.

• Avalanche Method: Make the minimum payments on all debts, then allocate all remaining free cash flow to the debt with the highest interest rate until it is fully repaid. Once that debt is paid off, shift the free cash flow to the debt with the next highest interest rate. This method gets your debts repaid more quickly than the snowball method but can feel less rewarding psychologically.

• Consolidation Loans: Combine multiple debts into one loan to simplify your finances. This can be a good option if you have high-interest debts and qualify for a lower interest rate. But taking on new debt to repay old debts can create a debt cycle, so be careful and intentional. Take it slow, do not act in a panic and rush into the first offer you may qualify for. Be cautious of fees or unfavorable terms. Consolidation loans only help if they truly lower your borrowing costs, you avoid running up new debt afterward, and you stay consistent with payments, paying extra when you can.

PHASE 4: 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.

PHASE 5: PLAN FOR THE FUTURE

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.

Reading List: Consider visiting your local library to explore books on personal finance. You can borrow books for free and reading even one can have a big impact. Our recommendation for a good place to start is The Total Money Makeover by Dave Ramsey. It is a straightforward plan for getting out of debt, saving money, and building wealth based on discipline and a series of clear financial steps.