We’ve all experienced a moment in our lives when we decided it was time to get serious about our finances.  Some call it an “a-ha” moment, or a financial awakening.  What triggers this feeling is different for everyone, but it’s common to hit rock bottom – deep in debt and down to your last dime – before realizing you need to change your money habits.

I’ve been there.  A home-owner at 24, I got caught up living a lifestyle I couldn’t afford and racked up $8,000 in credit card debt, in addition to the tens of thousands I owed in student loans.  When the credit cards eventually hit their limit, I had to figure out how to deal with a $400 per month shortfall.

Related: My biggest regret was getting in over my head as a first time home buyer

It wasn’t easy but I dug my way out of debt and turned my finances around just a few short years after hitting rock bottom.  Here are 5 steps to take control of your finances once you’ve had your “a-ha” moment:

Start where you are

The first step is to acknowledge your current financial state and decide what needs to change.  For singles, that means serious self-reflection about your goals and what you want to accomplish.  Couples, on the other hand, will need to get on the same financial page and decide what’s important to them.

Understand that you can’t accomplish every goal at once and so you’ll need to prioritize.  Start with a net worth statement and list everything you own and everything you owe.

This is the financial yardstick used to measure your progress over time.  It may not be much, heck it might even be negative, but your objective is to grow it each and every year.

You need a budget

Before you can decide how much to save and allocate toward your goals you need to understand how much you’re currently spending and what’s left over at the end of the month.  To do this – there’s no way around it – you need to track every dollar you spend.

There are apps and software to automate the process but, as Carl Richards says, when you automate you miss the chance to understand what the numbers mean.

“The act of looking at each receipt and adding those numbers ourselves mimics the act of hearing something and then putting it in our own words.  We know where the money went, and, hopefully, we know why.”

That’s why I recommend using an Excel spreadsheet to track and record your monthly spending.  You can find free templates and worksheets here.  Download one and customize it to fit your unique situation.

Determine your cash flow

Once you’ve tracked your expenses for a solid three months you’ll have an idea where your money is going and why.  Now is a good time to reflect on your money habits and make changes to any areas that don’t align with your goals and values.

What’s left over at the end of the month to allocate toward your goals?  If there isn’t enough to meet all your objectives then you need to go back to your spending report and find additional areas to save (or earn) more money.

Related: My best financial tip is to make more money

Match your spending to your goals and use any extra savings to fund your top two or three objectives.  That could mean paying off credit card debt, saving for a down payment, or starting an RESP.

Review your insurance coverage

Some people don’t need to hit rock-bottom before they decide to get a handle on their finances.  Sometimes a major life milestone is all it takes to trigger that “a-ha” moment.  That moment could be when you get married or have your first child and realize that someone else depends on you and your income for support.

Preet Banerjee calls this step “disaster-proofing your life” and it means reviewing your life insurance, disability insurance, and job-loss insurance (also known as an emergency fund) to make sure you’re adequately covered in case disaster strikes.

If your kids are young you’ll want to have enough life insurance to cover 10 times your income, plus any debt you owe.  So if you make $50,000 per year and owe $250,000 on your mortgage then you’ll want to make sure you have $750,000 in coverage.

Sounds expensive, but research your options.  A 30-year-old non-smoking male living in Ontario can expect to pay about $50 per month for a 25-year term with a $750,000 face amount.

Many employers provide group coverage at around 2.5 times your salary.  So in this case you’d already have $125,000 covered through your group plan at work, so you’d only need to top up with an additional $625,000 policy that costs about $40 per month.

As for disability insurance, you’ll want enough to replace at least 60 percent of your income in case you get sick or injured.  Most workplace benefit plans include disability insurance but review your coverage to make sure it’s adequate.

Emergencies happen and you’ll need a plan to deal with them if and when they arise.  Whether that’s a healthy cash buffer, an untapped line of credit, or stocks inside your tax free savings account, the important thing is to have a strategy to deal with short and long term needs.

What type of investor are you?

Your goals are likely to include some type of long term savings plan which means you need to figure out how you want to invest.  Many people have their financial awakening at this point once they realize their financial advisor is nothing more than a mutual fund salesperson in disguise.

After years of high fees and poor returns you might decide to go the DIY route or to hire a fee-only financial planner for advice.

Whether you go it alone or use an advisor, it’s important to know what type of investor you want to be and to stick with your plan for the long term.  You might decide that plain vanilla index funds are the way to go, or you might want to build a portfolio of blue-chip dividend stocks.

The point is to understand who you are, how much time you want to spend on your investments, and how much risk you’re willing to accept.

Final thoughts

These steps are the building blocks to creating your financial plan.  Once you’ve set course, it’s critical to check-in from time-to-time to review your progress and make any necessary adjustments along the way.

Try to forecast or predict what your finances might look like a year from now, or five years from now.  What’s on the horizon?  A wedding, children, maternity leave, job promotion, new car?  Maybe you’ve accomplished one of your goals, like getting out of debt, and so you’ll need a plan to allocate that extra cash flow toward a new goal.

Keep score by updating your net worth statement at least once a year.  You’ll be surprised how quickly you can move the needle forward once you’ve had your financial awakening.

What was your big “a-ha” moment when you first took control of your finances?


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