Going through life without getting your finances in order is “sort of like saying, ‘I’m going on vacation and don’t really know the destination,’” says Alyson Klug, Head of National Sales at TD Wealth.
By taking the time to know your money coming in and money going out, create goals and practice good financial habits, you’ll set yourself up for the trip of a lifetime.
Start with the basics
You can’t drive on a road trip without a license. Similarly, Klug explains that the first step of getting your finances in order is making sure you have the basics in place.
“The very first thing you need to have is an emergency fund.” She suggests aiming for 3 to 6 months of your monthly income, or 6 to 12 months if you’re in a single income household or have a highly specialized job with few marketplace openings.
Next, Klug says, is to look at your net assets. “Add up everything you own and subtract out what you owe. Hopefully it’s positive, but if it’s not positive, start looking at credit and how to get rid of debt.” Aim for a credit score above 700, and create a plan to pay off debt.
“Once you have that under control, then we can start looking at future goals,” she says.
Think about what sounds good and make a plan
When do you want to retire? Do you want a college fund set up for your kids? Organizing finances starts with a goal and envisioning your future. As Klug says, “Getting your finances in order is asking yourself, ‘Where am I going? What do I need to do to get there?’”
Everything you do to organize your finances is, in some way, looking out for your future self. Once you have a long-term vision of what you want in life 30, 40 or 50+ years down the road, you can make goals today that can get you there.
"Setting goals is important, but simply having a general idea or saving here and there won’t cut it," according to Klug.
“Specific goals are critical,” says Klug. “It’s not good enough to say, ‘I want to save for retirement.’ You could ask anyone on the street if they want to save for retirement, and they’ll say, ‘You bet.’ You need a specific number.”
Luckily, Klug says that coming up with a specific number is not that difficult, regardless of your financial goal.
“For retirement, for example, you’re going to need about 80% of your current income to cover your future years. So if you earn $50,000 a year right now, 80% of that is what you’re going to need in retirement. Multiply that number by however many years until you want to retire—there’s your number.”
Turn saving into a habit
No matter the financial goals, no matter the financial portfolio, there’s one thing that every person can benefit from, Klug says: saving.
“I have never heard a single client ever say to me, ‘I wish I didn’t save so much,’” she says.
Getting your finances in order is an ongoing, lifelong process. Making saving an instinct is like knowing when a dish needs a little more salt or when the chicken is done: the payoff is huge. Klug offers some easy ways that you can minimize your day-to-day-expenses (and reach your financial goals faster).
- Scale back on streaming services (do any of us really need 5 different platforms??)
- Make getting coffee or eating out a special treat, not a regular occurrence
- Turn the thermostat down in winter or up in summer, especially when leaving the house
- Give yourself a weekly cash allowance to cut back on excess spending
Klug also talks about how leveraging banking tools can play a massive role in helping you save and organize your finances. “Some accounts will give you low balance alerts, some have overdraft protection and whenever you can, take advantage of the free money!” Klug recommends looking for 401K matches or IRAs with good interest rates. Even if your employer doesn’t offer a 401K match, compounding interest adds up and helps grow your retirement fund—and the interest is typically higher than if you were to just leave that money in savings.
Planning out your finances means asking some essential questions that aren’t all that different from planning a trip. “Where are you headed?” asks Klug. “What do you need to take with you? How are you going to get there?” But just like planning for an upcoming vacation, all your hard work ahead of time will be worth it.