The First Step to Improve Your Finances

If you’re like the average person, you have about $10,000 in credit card debt, two cars that are worth less than the loan amount with three or four years worth of car payments remaining, college loan debt of about $30,000, and a home with a few thousand dollars in equity and a payment that consumes about half of your income.  You also probably have four or five credit cards on which you originally paid the balance in full each month, but now owe $10,000 or so among them that you periodically reduce but never seem to pay off.  But hey, you also have $300 in your checking account!

You are not normally late on any bills, but you also find that you don’t have any money to save most months.  College is coming up in four or five years, but you have no savings for it.  Maybe they’ll get some scholarships.  You have some cash in a 401k that you think maybe you could withdraw to pay for part of college, but you know that will result in some stiff penalties from the IRS.  Plus, you really want to retire someday.

This is normal.  This is average.  Still, it isn’t great.  Finances always feel tight and there is a lot of tension with your spouse.  Because you just make enough to get by each month, you’d be in real trouble if your were laid off or got sick and missed a few weeks of work.  Really, if anything interrupted your paycheck at all you would start to drop some of the balls you’ve been juggling.  You want to get to a more secure place but don’t know how.  So what is the first step to take to go from living on the edge to a place with a little more breathing room?

Step 1:  You need to determine your free cash flow. 

The first step to go from normal to fiscally secure is to find out where your money is going and see how much you have left over.  Sit down with a sheet of paper (or with a spreadsheet program if you wish).  Write your yearly income at the top from all sources.  Sum these values and circle the sum, or highlight it on the spreadsheet.

Next, write down your expenses.  Start with your fixed expenses, such as your mortgage payment or rent, your cable bill, and your car payments.  Next, estimate values for recurring expenses like groceries, clothing, and utilities.  Pull out your checkbook and find your insurance payments.  Finally, allocate payments for your credit cards and other loans you have outstanding.  Total this and circle it.

Now subtract your expenses from your income.  This is your free cash flow.  Hopefully this number is a positive value.  If not, you are spending more each year than you are earning and you’ll need to figure out ways to make more income or cut back on expenses.  If you have positive free cashflow, you can start directing that money to paying off bills and investing to grow wealth.

Once you have looked at your free cash flow, you’re ready for the next step:  creating a budget.  That will be the topic of the next post.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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