30-Day Investing Challenge, Day 2: Get Your Financial House In Order
Before you enter the fabulous world of index fund investing, you’ll want to make sure your financial house is in order. Investing is only one side to growing your wealth. Paying down debt, living below your means, and having a healthy budget are also important aspects to living your dream life.
Create a Budget
When you’re first starting to get your money right a budget is key. You don’t have to keep it forever, but sticking to it and building certain money habits in the beginning will be super helpful in understanding where your money goes every month.
Action Step: Create a 50/30/20 Budget
This is the simplest budget to make and works well for 90% of folks. Here’s how I like to allocate each percentage: 50% of your take home pay goes to essentials like housing, utilities, transportation, insurance, etc. 30% goes towards saving* and debt payments. And 20% goes towards wants like vacations, Netflix, or concert tickets. Here’s how to create your own:
Add up your total income for the month and determine how much you can spend in each category (you can use this handy calculator).
*Note: investing isn’t included in this simple budget. Since investing has tax considerations, it’s hard to allocate a percentage based on take home pay, which is post-tax. Once we get to the challenge where we determine how much you should be investing, we can take it from the “saving” category. For now, you can use this template to determine your current spending habits.
Live Below Your Means
The best way to get ahead is living below your means. If you’re living paycheck to paycheck or spending more than you make every month it’ll be very difficult to build wealth. The next step is to audit your spending and see if there are areas you can optimize and reallocate towards saving, investing, and debt payoff.
Action Step: Do a Spending Audit
Follow these steps to audit your spending:
Track your expenses and income for the past 3 months and write everything down. You can use an app, a spreadsheet, or pen and paper.
Label each expense as a need, debt payment/savings, or want. I like to use different colors to make it easier visually.
Then add up each expense category and see if the amount you’re spending in that category matches the 50/30/20 rule you made in the last Action Step. Take note of what areas you can scale back on (like eating out or getting your nails done) so you can balance out your budget.
Get a Handle on Your Debt
One of the biggest detriments to growing wealth is high interest debt or debt that’s over 7% interest. However, I am a proponent of still investing something even if you have this kind of debt. Two keys to growing your investment portfolio are getting into the habit of investing and starting early. Even investing $25/mo while you pay down high interest debt will help you build the habit of setting money aside for your future.
Action Step: Make a Plan for Your Debt
To make sure you’re tackling your debt, do these 3 things:
Take inventory of all your debt: balance, minimum payment, interest rate, payment terms (if applicable). Write down all your debts that are above 7% (everything else you can pay the minimums on).
Given the budget you created above, write down how much extra money you have every month. Determine how much of this you want to go towards your debt and how much you want to put into an investment account.
Increase your minimum debt payments by the amount you decided on above and set it on autopilot.
Once you’ve determined your financial house is in tip top shape, you’re ready to start your wealth building journey! Stay tuned for tomorrow’s challenge: Knowing your Financial Independence number.
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