Five Steps to Kick Off Your Personal Finance Journey
In 2019, I graduated law school with over $220,000 worth of debt, a six-figure salary, and no clue how to manage my finances. Six months into my “dream job,” I realized I was living a nightmare that I did not know how to escape. Eventually, as my physical and mental health began to decline, I had enough and quit. As a true Millennial, instead of living modestly and budgeting for this time of unemployment, I decided to go on a credit-card-sponsored month-long, “Eat, Pray, Love” journey that took me to Antigua, Hawaii, and Costa Rica. I had a blast! I then came home to no savings and an ever growing mountain of debt. I knew then I had to make a change.
Enjoying Honolulu with money I did not have…
That’s when I discovered the FIRE (Financial Independence, Retire Early) movement and I was immediately sold. FIRE is a movement where people save and invest aggressively to reach retirement earlier than most people, who generally retire at the age of 67 (if they are lucky). Since learning about FIRE I have become debt free, built a six-figure investment portfolio, and gained confidence about my financial future.
I am now on a mission to teach women of color how to become financially independent and live their best lives. Are you ready to get started? In this post we will be covering five steps that will get you started on your own journey to financial freedom!
Financial freedom is not only the key to early retirement. Having a handle on your finances will give you the power to leave less than ideal circumstances including relationships, jobs, careers, and living situations. Financial freedom thus allow you to pursue your passions without fear by preparing you for the unexpected. Are you ready for freedom? Let’s get started!
# 1: Know Your Numbers
To get started on your financial goals you need to understand your numbers. Start with your income. Your gross income is what you earn before taxes, benefits, and other payroll deductions. What you actually take home is your net income.
Calculate how much money you’re bringing in each month. This should include your net income and any other side hustle income you may have. If you’re a student, calculate how much money you’re getting from grants, scholarships, student loans, or part-time jobs. For students who receive money on a semester basis, add all of your income and divide it by the number of months you need to make that money last.
Once you know your income, you’re ready to calculate your net worth. Your net worth is a useful snapshot of your current financial position. To calculate this number you need to add everything you own: cash, savings, cars, houses, or other valuables that you have completely paid off. Now subtract that number by anything you owe: credit card debt, student loans, car loans, mortgages, or any other debts. If you find yourself with a negative number, remember that you are not alone and that is where many of us start. Now that you know, it’s time to take charge.
Network = Assets - Liabilities
By figuring out your net worth you are already ahead of many people who live in blissful ignorance. Congrats on doing the scary part!
# 2: Create a Budget
I know, I know–everyone hates budgets, because we see budgets as a restriction on what we can do with our money. However, budgets are how we understand our spending habits so we can make a plan to achieve our financial goals. You should start off by looking through all of your expenses for the last few months to see your spending patterns.
There is no right or wrong way to budget, you have to find a system that works for you. Some of the most common budget methods include:
Zero-Based budgeting where you assign every dollar you bring in each month to do a specific job: pay bills, grocery shopping, fun money, ect. There are many digital applications such as EveryDollar and Rocket Money that allow you to track your money using this method.
The envelope method for when you need a more strict way to budget. This method entails calculating how much money you want to spend on entertainment, groceries, gifts, ect. and placing cash in labeled envelopes. This allows you to keep track of when you’ve run out of money for each of your spending categories.
The 50-20-30 budget where you allocate 50% of your monthly budget towards essentials, 20% toward financial goals like savings or paying debt, and 30% toward things you want.
It is okay to play around with different methods, a combination of methods, or create your own, until you find one that works for you.
# 3: Build an Emergency Fund
According to Investopiedia, 37% of Americans could not cover a $400 emergency without having to turn to credit cards or personal loans. A good emergency fund should cover 3-6 months worth of expenses. But you can work your way there. A good goal to start with is saving your first $1,000. You should keep your emergency fund money in a separate High Yield Savings account so you are less tempted to use it on brunch or other non-emergency. Having an emergency fund will give you some peace of mind when the inevitable comes—and I promise you it will.
An emergency fund will also prevent you from having to rely on high interest credit cards during emergencies which can derail your financial goals.
# 4: Make a Plan to Pay off Debt
Paying off debt is an important part of your financial journey and often the part that seems most daunting. Whether you owe $1,000 or $500,000–come up with a plan and get started. There are two common methods for tackling debt:
Snowball method where you make minimum payments on all your outstanding accounts, then pay any extra money towards paying down the smallest debt first and work your way up, regardless of the interest rate. This can be a great method of the interest rates of your debt at similar and it will give renewed motivation every time you pay one of your debts off!.
Avalanche method where you make minimum payments on all your outstanding accounts, then paying any extra money toward the debt with the highest interest rate. This is a good method when you have debts with different interest rates. Tackling those accounts with high interest rates (such as credit cards) first can save you lots of money!
# 5: Invest
Once you have a plan for your finances, create a brokerage account from trusted investment management companies such as Vanguard, Fidelity, or Charles Schwab and start investing! It really is as simple as creating a checking account. Sounds too good to be true–stay tuned as we go over investing details and the investment brolingo.
Remember that the key to financial freedom is to get started! Don’t get overwhelmed by the new terminology. This post is meant to provide you with a broad overview that we will be breaking down step-by-step over the coming weeks and months. Follow us on social media and subscribe below so you don’t miss anything.
Congratulations! You’ve officially embarked on your financial freedom journey.
