How to take control of your finances

Quick insights

• Having a strong understanding of your personal balance sheet and spending habits can help you develop a plan to take control of your finances.
• Making sure that the financial goals you set are relevant and specific to your situation may help you meet them.
• Big goals may require significant commitment in terms of lifestyle adjustments, so setting up systems to encourage accountability can be beneficial.

When your dreams feel out of reach, or you’re under constant financial pressure, it can be difficult to clear your mind and relax. But with a proactive, disciplined approach, you may be able to take control of your finances and make progress toward the things you want out of life. In this article, we’ll provide actionable steps you can take to evaluate your financial situation and lay the framework to manage your personal finances better.

Step 1: Evaluate your financial health

Having a clear picture of your personal finances will prepare you to make constructive changes. Creating a personal balance sheet can help you take stock, and reviewing your spending can help identify the routines contributing to the bigger picture.

Create a personal balance sheet

The first step to creating a personal balance sheet is to list your assets, such as checking and savings accounts, investments and property. Then, you can list your liabilities, including any loans or credit card debts in your name. How do the totals of each compare to one another?

The larger your assets are in comparison to your liabilities, the better. If you find that your debts outweigh your assets, taking a disciplined approach to budgeting and implementing debt management strategies can help you regain a healthy balance.

Review your spending habits

Reviewing the last 2 to 3 months of your spending activity can help you understand what your routines are and where your money has been going. This process can be especially illuminating if you overspend or never seem to have any money left between paychecks.

For a comprehensive review of your habits, you can gather your recent bank statements, categorize all expenses and determine your average monthly totals for each. When you’re done, you should have a clear idea of how much you’ve been spending on housing, utilities, bills, groceries and entertainment.

Step 2: Set clear and achievable financial goals

Equipped with your personal balance sheet and information about your spending habits, you can set goals to take control of your finances. If you’ve been struggling financially, goals might include paying down debt or building an emergency fund. It can be helpful to think about your goals from multiple angles, including overall impact and how they can be broken down into steps.

Prioritize high-interest debt

High-interest debts (such as credit card balances and personal loans) typically increase in size so long as there is an outstanding balance. This accumulation of debt can undercut your efforts to save, so people in this situation may choose to prioritize repayments over savings goals.

Build an emergency fund

Establishing an emergency fund can be a meaningful step toward long-term financial stability. An emergency fund is money that’s set aside in its own account specifically for unexpected expenses, such as job loss or major car repairs. Some seek to save 3 to 6 months of expenses; however, starting with even $1,000 can avoid tapping additional savings or applying for loans.

Set SMART financial goals

For better impact, consider setting goals that follow SMART criteria: goals that are Specific, Measurable, Achievable, Relevant and Time-bound. “I want to save money” is an example of a goal that may be achievable and relevant but lacks specificity. To make this goal more specific, and therefore “smarter,” it could be rephrased as “I want to save $4,000 in the next year.”

Break up long-term goals

Achieving your most challenging goals will likely require many smaller steps. For example, clearing a $4,000 debt may seem more attainable when you think about it in terms of setting aside $10.95 every day for a year. Connecting your long-term vision to smaller steps you can take daily, weekly or monthly can help bring meaning to every effort.

Step 3: Develop and follow a financial plan

With your goals in mind, it’s time to begin adjusting your budget to help make them happen. If you’ve been struggling to control your finances, that plan is likely to include reducing costs and staying accountable for necessary lifestyle adjustments.

Make changes to your budget

Finding money in your budget will mean either increasing your income (with a different role, raise or side hustle) or spending less on existing categories. Areas to look for reductions include:

• Entertainment: The money you spend on entertainment (nights out, memberships, hobbies and subscriptions) can be the first place you look to make cuts.
• Utilities: Small changes to how you use gas and electricity at home can have meaningful impacts on your bills. This could be as simple as remembering to turn off lights and electronics or turning down your thermostat at night.
• Groceries: Adjusting your shopping list to use low-cost ingredients, batch-preparing meals, and prioritizing generic brands and sale items are examples of ways you might be able to bring down your monthly grocery bill.
• Housing: If you’re spending a disproportionate amount of your budget on rent (a good rule of thumb is no more than 30% of your income), it may be worth considering moving to a cheaper area, downsizing or looking for a roommate who can share this cost.

Keep in mind, if you’re living with a low income, you may qualify for reduced utility bills, nutrition assistance programs or government housing assistance. Assistance programs may make a big difference in terms of offsetting your costs while you work toward improving your financial situation and taking control of your finances.

Stay accountable to your changes

Changing one’s habits can be a challenge, so it can be helpful to employ different tools to help you stay on track. While what works for different individuals will vary, suggestions include:

• Using a cash envelope system: Many people swear by the cash envelope system as a method to stick to their set budget. Using this technique, you can designate cash for various expenses by stuffing it into labeled envelopes to be used throughout the month.
• Creating visual reminders: This could include writing affirming statements in your daily planner, adding images that remind you of your goals to the fridge or simply keeping a copy of your budget somewhere you can see it.
• Automating payments and savings: Scheduling recurring transfers for monthly bills, debt repayments or contributions to your savings can help you stick to your plan with less ongoing effort. It may be helpful to schedule such transfers for the day after you typically get paid to avoid spending this money on something else.
• Finding an accountability partner: Regular communication with someone you trust regarding your financial plan can help you stay motivated and accountable to your goals.

In conclusion

Understanding your financial picture, devising a plan and remaining accountable for changes can help you stop struggling financially and take control of your finances. This means taking a hard look at your personal balance sheet and being prepared to make potentially major changes to your spending habits. With a solid plan in place, the methods you use to remain accountable may play a major role in successfully controlling your finances, long-term.