Home Budget The 8-Point Checklist You Need To Clean Up Your Finances

The 8-Point Checklist You Need To Clean Up Your Finances

7 minute read

Like most people visiting this website, you’ve probably got some new financial goals that you’re ready to tackle.  Or maybe you recently made a commitment that you’re going to clean up your debt and start working toward financial freedom.

If so, before you jump in and start attacking debt and making progress with your finances, you first need to take a sober look at your current situation.

You Are the Pilot of Your Financial Life

I recently had the opportunity to fly on a private plane from NorCal to SoCal.  During this trip, I got to see firsthand a pilot’s approach to flying.  I found out that pilots are meticulous and methodical in their approach to aviation.

  • They carefully study aeronautical maps to determine the best route
  • Pilots get a briefing on the weather to ensure the weather is safe
  • They choose their altitude to make sure they’re flying high enough to avoid hitting mountains and tall structures
  • Pilots calculate the airspeed, distance, and time so that they don’t run out of gas

And, perhaps the most important part, is that they closely inspect the plane to make sure it’s actually working!  The way that they inspect their plane is using a checklist, oftentimes containing 30 or more items to check.

To outsiders, a pre-flight checklist may seem repetitious, boring, or even a waste of time.  But veteran pilots recognize the importance of using a checklist, because they know that it ensures safety and increased certainty that will help them get to their destination.

A good pilot understands that as she continues to grow in experience and skill, checklists become even more important. Checklists help to safeguard against complacency.  There is discipline in using checklists.

1.  Track Your Income and Expenses

About 8 years ago, I got my first desk job and learned what it was like to live a sedentary lifestyle.  Sitting (with bad posture mostly likely) 40+ hours per week in a cubicle and barely exercising, I found that it was quite easy to gain weight, even though I wasn’t necessarily living a terribly unhealthy lifestyle.  Across an 18-month span, I ended up gaining about 30 pounds in excess fat.

One day, after looking in the mirror, I knew I needed to make a change.  So, I set out to start losing some weight.

I downloaded an app onto my phone that helped me track how many calories I was eating each day and how many calories I was expending through exercise and daily activity.  Each day, I diligently monitored the amount of calories I was consuming, closely reading nutrition labels and Googling things like, “How many calories are in an avocado?” (234 calories, in case you were wondering).  And, after a short time, I noticed that I slowly began to drop the weight.

Basic Principles For Financial and Physical Fitness

The same basic principles for physical fitness apply to financial fitness: you must be keenly aware of how much is coming in and how much is going out!

The first thing you need to do, before anything else, is to actually start tracking your income and expenses.  It doesn’t matter if you write them on a piece of paper, track them on a spreadsheet, or connect your bank account to budgeting software.  Either way, you need to take a real hard look at where your money is going each month.

Personally, I like to use YNAB or Mint to track my income and expenses.

2.  Trim the Fat

The next thing I recommend is finding the areas where you’re spending the most and cut them out as much as possible.  For my wife and I, we found our highest expenses were:

  • Mortgage = $2,800/month
  • Dining Out  = $1,000/month
  • Student Loans = $1,200/month
  • Daycare = $1,500
  • Satellite Television = $150/month
  • Car Payments = $500/month

So, after you’ve complete Step 1 and actually looked at all of your expenses, find the ones that are causing the most hemorrhaging in your budget each month.  And then look for creative ways to bring those costs down!  Some different things you can do might include:

  • Sell your home and move into a smaller one (crazy, I know!  Or is it?)
  • Use the envelope system to better control your spending for things like eating out and entertainment
  • Renegotiate your daycare costs
  • Cut the cord with your cable or satellite provider and move to low-cost streaming options, or better yet, use free streaming services
  • Sell your expensive car and buy a reliable, low-cost car with cash (there’s no better feeling that driving your cars that are paid for!)

3.  Create a budget and stick to it!

Okay, so now you’ve looked at your expenses each month and you’ve seen what you’re doing to yourself.  You’ve also found those large expense items and you’ve found creative ways to reduce your spending.  The next step?  Budget.

That’s right, you heard me.  The dreaded ‘B’ word.

This may be the most important step for cleaning up your financial mess.  As Dave Ramsey says, making a budget is simply “telling your money where to go.”

How do you make a budget?  Simply put:

  1. List all of your expected income for the month
  2. List all of your expected expenses for the month (bills, utilities, mortgage, etc…)
  3. Subtract your income from expenses and make sure that it equals zero.
  4. Start tracking your expenses throughout the month using a spreadsheet or online tool such as YNAB or Mint.

4.  Start building an emergency fund

Sometimes, unexpected things happen in life.  And you’re going to want to make sure that you’re covered during those events.  What constitutes an emergency?  Things like:

  • Hospital visit or urgent medical expenses
  • Loss of job
  • Leaky roof
  • Illness or death in the family

Life will throw you a curveball.  you just need to be prepared for it.

If you currently have debt, I would recommend at least starting with an emergency fund of $1,000-$1,500 first.  Then, once you have your debt paid off, you will want to start adding more to your emergency fund.  You can use MoneyUnder30’s Emergency Fund Calculator to help you get an idea of a fully funded emergency fund.

5.  Track your net worth

Tracking your net worth is one of the easiest, yet most important disciplines you can implement when improving your financial situation.  I equate tracking your net worth to stepping on the scale daily.  Just as you’d check your weight to see if you’re gaining weight, losing weight or just maintaining, you should do the same with your net worth.

A couple of other reasons to track your net worth include:

  1. It keeps you accountable
  2. It’s a quick-and-easy just to glance to see how you’re doing
  3. When you’re making progress, it’s nice to see where you came from

Personally, I prefer using Personal Capital to track my net worth.  This is an awesome tool that connects to all of your bank, credit card, and investment accounts and then automatically tracks your net worth each day.  This way, you get an accurate look at how your portfolio is doing and whether or not you’re headed towards your goals.

6.  Increase your income

Another surefire way to improve your financial situation is to start increasing your income.  While increasing your income is not the solution to improving your financial situation, it certainly helps.  A few ways you might be able to increase your income include:

  1. Start a side hustle (Uber driver, delivering pizzas, mowing lawns)
  2. Freelance
  3. Work extra/overtime hours at your normal job (if they offer it)
  4. Find a higher paying job (easier said than done, I know)
  5. Renegotiate your current salary with your boss
  6. Have a garage sale and sell a bunch of that stuff you don’t need

7. Set some financial goals

It’s understandable that you want to clean up your financial situation.  But that’s not enough.  You need to take the extra step to set some actual goals with reasonable timelines to achieve those goals.  Some actual goals might include:

  1. Save $1,000 by Christmas
  2. Increase my savings rate by 10%
  3. Pay off $2,000 in debt by January

8. Get Started and Take Action

The last, and perhaps most important step is to take action!  You can read all the articles, listen to all the podcasts, plan for every possible situation, and even create the best financial spreadsheets.  But unless you are actually waking up every morning and actively focusing on moving towards your financial goals, you will never really change your financial situation.  It takes intense focus, intentionality, and daily discipline to remain centered on your goals.