How to Get Your Financial House In Order

Do you ever procrastinate to check your credit card or bank account balances? That unease at the bottom of your stomach where you “should” see how much you’ve racked up on the card, but the devil on your shoulder whispers, “if you don’t look, it’s not real.” I have certainly been there. Heck, I still am there sometimes. The times when you least want to check your credit card balance or bank account is when you need to check them the most. That unease is a clear sign that it is time to get your financial house in order. 

Step 1 to get your financial house in order is understanding your current financial situation. The best way to do that is to calculate your net worth.

“But Unbiased, I don’t have enough money to have a ‘net worth’”. 

Everyone has a net worth. My kid has a net worth (it’s $0 btw). My dog has a net worth (also $0). Most recent college grads have a net worth (probably < $0). 

Net worth is just taking the value of everything that you own (assets) and subtracting all of your debt (liabilities). The difference in that equation is your net worth. 

Let’s calculate Timmy’s net worth:

For assets – Timmy rents an apartment, so he has no real estate assets. He has $50,000 in his 401k at work. He has $5,000 in his savings account and his car is worth $15,000. 

On the debt side – Timmy has $10,000 in student loans and owes $5,000 left on his car. 

Timmy’s total assets are $55,000 and total liabilities are $15,000. 

$55,000 – $15,000 = $40,000

Timmy has a net worth of $40,000. Not bad Timmy!

You need to know your net worth. If you have no clue what your net worth is, that is exciting! It’s like in the Matrix when Morpheus offers Neo the two pills. Understanding your net worth for the first time opens the world and opportunity of personal finance.

Step 2 in getting your financial house in order is assessing three things:

1. How much debt you have
2. How much is in an emergency fund 
3. How much you have invested 

Debt

How much debt you have and their interest rates will determine how aggressive you need to be in paying off this debt. If your non-mortgage debt is higher than your annual income, debt pay off should be a priority. 

Consider your debt’s interest rate too. If your debt is above the US inflation rate or higher than a high yield savings account interest rate (> ~5%), debt payoff is smarter than investing. You need the debt monkey off your back, especially if that debt monkey has a double digit interest rate. If its credit card debt, pay those off like your life depends on it! Credit card interest rates are no joke and usually exceed any reasonable investment return you will get. It’s literally the worst thing imaginable for your financial life.

If you have a bunch of different accounts with debt, 2 methods are useful to prioritize paying them off:

• Debt Snowball 
• Debt Avalanche

For the debt snowball, take all your debt accounts, sort them by smallest to largest and make the minimum payment on all of them except the smallest one. Then take as much money you can budget to pay off the smallest one. Once it’s paid off, take all the money from that payment and add it to the payment for the 2nd smallest and knock that one out, etc. This is Dave Ramsey’s preferred debt payoff method. Psychologically, it’s the most effective since you see the progress of your debt going down quickly and it can be extremely motivating to keep it up until you’ve paid everything off.

The debt avalanche is a similar concept, except you sort your debt by highest to smallest interest rate and pay off the highest interest rates first. Mathematically, this is the most effective because you will be saving money by paying the highest interest first, but you may not see the quick wins like with the snowball method.

Emergency Fund 

After assessing all the debt, let’s look at the emergency fund. The rule of thumb here is having 3-6 months of living expenses saved in a savings account, preferably a high yield savings account that says a hella higher interest rate than your brick and mortar Chase or Bank of America (think 4% interest on your cash vs. 0.1% interest). 

Let’s say all your bills add up to $3,000/month. That means you need $9,000-$18,000 stashed in a savings account in case emergencies come up, like job loss, house or car repair. If you save it in a high yield savings account, your big stash of cash will make money for you. For instance, in a high yield savings account paying 4%, it generates $60 every month just by keeping cash in that account. Free money! At the end of the day, emergency fund cash needs to be readily available, so you’re not necessarily looking for this to make you money, but it’s peace of mind in case of catastrophe.

Investing

Time to assess investments. This means how much money is in a 401k, Roth IRA, brokerage accounts. We’ll even throw in cryptocurrency or valuable collectibles here. However, I think a good rule of thumb is alternative investments like these should stay under 10% of total investments and you should only begin to invest in alternative investments when you have 6 figures total in an investment portfolio. 

Fidelity’s rule of thumb is by the time you are 30, you should have 1x your annual salary saved for retirement, 2x by age 35, 3x by age 40, etc. Those are good numbers to shoot for. But if you’re reading this blog, you’re interested in the CoastFIRE life, so those numbers should be higher. 

Many companies will offer a 401k percent match to their employees. That means for every dollar you put in, your employer will put in an amount (like dollar for dollar) up to a certain amount. What this means is… Free Money! If you work for an employer that does this, take advantage of this because it’s free money. If you are in high interest debt payoff model, this is the only investing it’s wise to take advantage of since it’s free money.

After assessing these three areas, it will help optimize for step 3, which is budgeting. If you have a shit ton of debt, prioritize debt payoff. If you have no debt and not much cash, plan to build that emergency fund. If you have no debt and an emergency fund, load up on that retirement and investment account! 

Step 3 in getting your financial house in order is budgeting. That means tracking your income and expenses. A budget helps you track how much money you are bringing in (income), how much it costs to live your life (living expenses) and how much runway you have to thrive (fun money). I love budgeting because it’s the financial roadmap to my life. Start by outlining all of your spending, bills, savings and fun spending. The rule of thumb on spending in each category is the 50/20/30 rule. 

• 50% of your income should go to your bills, like rent/mortgage, utilities, groceries, etc. 
• 20% in savings and investing, like a 401k, Roth IRA or emergency fund. 
• 30% in fun stuff, like dining out, entertainment, Netflix, etc. 

However, to really escalate things I like to switch the 30% and 20%. That way you save 30% of your income and fun money is 20% of your income. This is the best move if you have coastFIRE goals, where saving 30% is just about the minimum savings rate. After you reach CoastFIRE you can revert to the traditional 50/20/30 rule. That way, you’ll have taken care of your future self’s retirement goals and the 20% is a way to fund an early retirement. If there’s heavy debt to payoff, minimize both the savings and fun stuff and put all that cash to paying off that suffocating debt. Sure, it won’t be fun for 6-12 months. By the end of it, it will feel so freeing.

These steps are the best steps to analyze your financial situation and get your financial life in order. After considering these, you’ll be on track for a CoastFIRE life!