Finance 101: Understanding Your Finance Philosophy

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The first step to any financial planning is understanding your overall finance philosophy.  Before you can determine where you want to get to and how to get there, you need to know where you’re starting from and how best to get there.

Step One – Assess your current financial situation: One of the most painful parts of financial planning is assessing your current financial picture.  Often times we put this off because we’re worried we won’t like what we see.  Unfortunately, there’s only one way to get past this and that’s by dealing with it head on and reminding yourself that no matter what the current situation is, there is always room for improvement.

Take a look at what debts you may have, as well as your regular and fixed expenses such as rent and car payments.  Be honest with yourself and admit to your current financial situation whatever it may be.

Step Two – Monitor your spending: Part of understanding your financial philosophy is understanding where your money goes.  By tracking your spending for a month you can get a good sample of where your income goes.  You can do this the old fashioned way with a pen and paper, or you use a website like mint.com to analyze your spending.

Make a note of which expenses are necessary and which are within your control.  Double back and look at the expenses you can control.  Give some thought as to which of these contribute to your happiness, and which you could have done without.  If that $3 latte at Starbucks is the bright spot of your day, then look for other items you can give up.  If a night out with your friends it what makes you happy, budget for those fun times.

Step Three – Determine your priorities: Give some thought to what your short-term and long-term financial goals are?  Do you hope to spend time traveling now and slowly squirrel away money for retirement?  Would you rather save as much as possible now and retire early?  Are those thoughts too lofty to start with and you just want to get out of debt and save for an emergency fund?  There is no wrong answer.

Step Four – Develop a plan: Try to structure an action plan that will get you closer to your goals, but will allow you to prioritize what is important to you.  Working on your finances is like being on a diet, there will be good days and bad days, but everyday is an opportunity to start again.  Make sure you’re not cutting out all of the things you like because ultimately that will be unsustainable.  Also remember that plans can change, and allow yourself to be flexible.

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