There’s no getting around this one. You should never hold a credit card balance. EVER! If you have a balance on your credit card, paying it off should be your first and only goal in the next few months.
If that means eating rice, beans and ramen packets for the next month then so be it. With credit cards charging more than 20% interest, each month you hold a balance you will go further into debt. This is truly an emergency and should be treated as such.
If you have no credit card debt and pay off your balance each month, you’re doing well, keep it up. This is a prerequisite for becoming financially stable.
2. You have a plan of action for paying off student loans.
In many cases, paying off your student loans by 27 years old is not realistic. That said, you should be paying off the minimum balance each month and have no plans to change that. Set it and forget it. Most payoff plans are 10 years long, so at the end of ten years, you should be free of your student loans.
3. You have an emergency fund of at least 3 months expenses.
At this point you should be starting to save (and keep saved) a little bit of cash for emergencies. 3 months is good, 6 months is great.
I personally love having six months of expenses in a bank account easily accessible. If my car breaks down or I get fired from my job, I have a level of security and confidence knowing I won’t be living on the street with no food to eat. In the case of losing your job, having cash on hand allows you to take your time in choosing a new job, rather than taking the first offer you get because you’ve run out of funds. Having cash on hand allows you to live from a position of power (more on this in future articles).
4. You have a monthly budget.
You’ve decided how you want to spend your money and you’re intentional about spending money on things that you care about and not spending money on things that don’t bring you happiness.
It seems simple, but this is harder done than said. I personally try to buy less things and instead money on activities that I enjoy. For example, this month I bought an expensive ski pass for $520, but I know I’ll get a lot of enjoyment from that purchase in the upcoming season.
5. You understand that having fun doesn’t have to mean spending a bunch of money.
Maybe you like to go hiking, or running, or play board games with friends. Many fun, social things don’t have to cost much money.
Of course, some social things definitely do cost money, but there may be a better way to have fun and save a little money at the same time. For example, instead of going out for drinks the whole night at bars, start at a friend’s house and make your own drinks to save some cash.
6. You’re tracking your net worth.
Net Worth equals Assets minus Liabilities. You might currently have a negative net worth, but that’s okay. The first step is to track it. Improvement will come. The things you track are the things you improve. For me, this has had one of the biggest impact on the improvement of my finances. I use Personal Capital and a spreadsheet for backup.
7. You’re thinking about how you want to retire.
You don’t have to have all the details figured out, but start thinking about it. Maybe you want to retire early at 40 or semi-retire at 45 and work 15 hours a week. Maybe at 55 you want to fully retire and sit on a beach. The key is to start thinking about how you envision your life. Long term thinking will help you make better decisions in the short term.