Improving personal finances is the number five New Year’s Resolution. When you’re worried about money, either now or for your future, it makes it hard to relax and enjoy your life. The sooner you get a hold of your financial health, the sooner you’ll be able to live your life in a more meaningful way.

You can live your best life financially if you take a four-stepped approach to the situation. First, you have to know where you stand financially. You are the CEO of YOU. Know your numbers. Next, pay off all debts and work on improving your credit score. Then build your  savings and wealth so that money is never an obstacle to your happiness.

Step 1 – Take Stock of Your Situation

It’s difficult to look at sometimes. We like to keep a blind eye to our finances because when you’re in debt, or not as cash-heavy as you want to be, it can make you feel uneasy. But we choose what we do with our money and how we feel about it. Planning can help you gain a sense of control.

But if you want your situation to improve, you have to know where your starting point is. Don’t think of it as bad, but it’s important to know where your money is going so you can make more informed decisions. Make a spreadsheet, or even use pen and paper and write down all of your expenses and debts.

Try to organize them in order. You can do it in order from least to greatest amount owed, from highest to lowest interest rate, and so on. However you think you might want to pay them off, order them that way.

Write everything down, including:

• Total amount owed
• Minimum payment
• Date due
• Interest rate

Also take stock of your monthly bills, including (but not limited to):

• Mortgage/rent
• Car payment
• Electric
• Water
• Phone (landline/mobile)
• Insurance

Tally up your totals and your monthly minimums to see where you stand. It might be eye opening for you – a sign that you’ve been living far beyond your means. That’s not a bad thing to discover, as long as you take steps to curb your spending habits now.

See my past blog posting The Ultimate Financial Management Tool for additional information and resources.

Step 2 – Pay Off Debt

To live a life with financial peace of mind, you need to be in debt to no one. Owing lenders is a bad feeling, and it just takes one personal catastrophe to bring creditors to your doorstep hounding you for payment relentlessly.

Make a plan to become debt-free as soon as possible. Controlling where your money goes may seem like a hard thing to do. It can be easier than you think. You want to choose how you eliminate your debt according to motivational or money-savvy methods. Either way is okay, as long as it spurs you into action.

The money-savvy method

With this method, you pay off high-interest rate cards first – so that you’re not racking up a lot of needless interest payments that cause you to take longer to get out of debt.

You’ll look at the card or loan that has the highest interest rate and begin knocking it out first. When that bill is paid off, apply whatever minimum monthly payment you were putting toward that card to the next one on your list, and so on.

The motivational method

Here is where you keep your spirits high as you face this mountain of debt. You’ll be paying off your debt from the smallest to the greatest amount owed.

This means you knock out debt faster, giving you a sense of pride and helping you see that your efforts are working. You knock out a small bill and then apply that minimum payment to the next bill on your list.

See my past blog posting Debt Management for additional information and resources.

Step 3 – Improve Your Credit

Part of improving your credit will occur as you begin paying off your debt. You want to find out where you stand, so run your credit report from all three credit bureaus (you can get one free each year) and also find out what your score is.

You ideally want to have a good or higher rating. You don’t want average or high credit risk. You might not be applying for new credit cards once you make the decision to build wealth, but you may someday need to get credit for a big-ticket item like a mortgage or car loan.

Your credit report will tell you what you’re doing right and what you’re doing wrong with your credit. For example, if you’ve missed a few payments, that will put a ding in your score.

If your cards are all maxed out, that can hurt it, too. The more room you have on your cards, the better your score will be, so try to keep balances low. Pay them off in full whenever possible.

Step 4 – Build Wealth

Wealth building means different things to different people. But one thing everyone can agree on is that it means never owing anyone and having the funds to live your life doing the things you feel are important.

First, you need to come up with emergency savings. This is the equivalent of several months’ worth of earnings. You want to have enough cash on hand to sustain you through an emergency.  And don’t wait until all your debt is paid off to start saving. Experts recommend $500 to $1,000. Having this in place will give you a sense of security, you will stress less, and it will help you avoid going further into debt.

Next, you need to save several months’ worth of expenses. You’ll want these savings to be easily accessible and separate from any retirement savings. This is your safety net savings in the unfortunate event you lose your job or have a medical emergency. Hopefully, this would help get you by until things return to normal. Check the business section of newspapers for a list of money market and CD accounts.

A long-term goal is to plan for retirement. You want to have enough to retire at an age when you want to. You don’t want to have to work for years past your ideal retirement age. The earlier you get started the better, and the more successful you’ll be in meeting your goals.

Your annual living expenses at retirement depend on what your desired lifestyle is. What do you want to do in your retirement? Do you want to buy a second home at the lake or travel around the world? Make financial plans to sustain you through those goals while considering that some expenses will go down (such as clothing), some will go up (such as medical), and the rate of inflation will fluctuate.

Pay yourself first and automate as much as possible here to make it easy. Take advantage of the online retirement planner at ssa.gov. Also, take advantage of any employer-sponsored retirement savings plans such as 401k or 403b or some other pre-tax retirement account such as an IRA. Experts suggest 10-15% of your gross household income. Have it automatically deposited into your account.

You might find that your current career can’t support this kind of savings. So that may mean adding additional streams of income to your household, finding a better-paying job, or the launch of your own business as an entrepreneur.

Review your goals, budget, and W2 deductions at least once per year and adjust as necessary. You may also want to find a finance consultant or analyst to review your plan and answer any questions. Money doesn’t have to be a source of stress in your life. If you start managing your financial resources wisely, they can be sources of good for you and for others.

Additional personal finance resources you may be interested in:

Debt Free For Life – The Finish Rich Plan for Financial Freedom by David Bach – Debt is too expensive—if what you desire is FREEDOM!  In fact, Bach believes the best investment you can make today is to pay down your debt, faster and smarter than you have ever attempted before—starting today!

Pay It Down! From Debt To Wealth On $10 A Day by Jean Chatzky – This book explains the mess many Americans have gotten into financially and offers specific, practical advice for paying down debt and saving for the future.

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