Kick Start Your Financial Plan in 5 Steps

If you've always known you need to put away money or pay off debt but haven't gotten around to it, there is no time like the present to start. If you are fortunate enough to be earning an income amidst the Covid-19 crisis, you're probably realizing the importance of saving and avoiding debt and are grateful you have some control right now.

In this post, I've outlined 5 steps to get your financial plan started, see results fairly quickly and feel good about the changes you will make. Time is on your side! The sooner you start saving or paying your debt down, the better off you will be mentally and financially, even if it doesn't seem like a major difference right now. If you have debt, you could save yourself thousands of dollars in interest or if you're ready to save and invest, you will earn more from compounding interest and growth with more time.

1. Build at least a $1000 emergency fund if you don't already have it. You might not be able to save it all this month, but could you save $200/month over the next 5 months? Whatever you can do, whether it's $20 or $500, do what you can and keep this priority as you move on to the next step. If you have no debt, consider saving enough to cover 3 months living expenses (basic living expenses like food, rent/mortgage, utilities, transportation).

2. Re-evaluate your monthly living expenses. Start by categorizing everything as either a need or a want. Axe what can you do without. How can you rethink your grocery bill? Entertainment? Can you get the same value by spending less? Can you renegotiate your cell bill or internet bill? Is there a way to reduce transportation costs? Be sure to keep #1 and #3 and/or #5 in mind as you consider everything.

3. Start to pay off your debt with the intention of eliminating it ASAP. How will this affect your monthly budget? Does something else have to give? While I'm not a professional financial advisor and this is only to provide guidance, studies have shown that by paying off your smallest value of debt first will trigger momentum and psychologically set you up for success to tackle your next debt. If you are more interested in saving interest payments in the long run, you should consider paying off your debt with the highest interest rate first. Another way to speed up your get-out-of-debt process, is find out if there is a way to consolidate your debt into a lower interest rate. Could you repackage your current loan against an asset, say a car or your home at a lower rate?

4. Create a monthly budget and STICK TO IT. The hardest part is not to lose sight of the long term benefits of saving money and getting out of debt. Remember that being debt free and having cash in the bank is going to feel so much better than that purse is going to look in 5 years from now. I understand this is a hot topic, so in a future post I will provide some help on how to mentally keep yourself in the game.

5. Start paying your future self. Now that you have your monthly budget together, with a focus to save an emergency fund and eliminate debt, you should try to make some room to pay yourself. By that I mean, pay your future self...yes, saving for retirement is the hope, but also it could serve you in a rainy day moment. Another awesome benefit of saving in an RRSP (Canada) or 401K (USA) is the amount you save up to your annual maximum is tax deductible (woohoo!). Even if you put away $25, $50 or $500 each month into this type of fund, you will be starting the process of accumulating wealth. Once your debt goes away, you will be able to save so much faster because you can move your debt payments to pay your future self!

*If you don't have any debt, look at the % of your after-tax income that you are currently saving. What will it take for you to be able to increase your savings rate to 25%, 30%, 50%? Try to make even a slight improvement on what you're currently saving.

I'd love to hear your findings as you go through this process. Leave a comment below and let me know if you have any other tips you discovered along the way. Have fun with it!