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Had A Financial Awakening? 5 Steps To Take Control Of Your Finances

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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14 Comments

  1. Asset-Grinder on May 18, 2014 at 1:56 pm

    I took a finance course a few months ago and it has really got me motivated to stay on top of everything. It gave me so much clarity to everything financial. I hired a fee based adviser for a quick plan and it really pushed me into the right direction so i can manage everything myself.

    • Echo on May 18, 2014 at 2:07 pm

      @Asset-Grinder – Thanks for stopping by. I checked out your blog and it looks like you’re doing great. What kind of course did you take?

      • Asset-Grinder on May 19, 2014 at 2:05 pm

        Took a continuing education course at Camosuen college in finance and investing. Was a short course about 24 hours total. Was the best $249 I ever spent. Since then I have been increasing my financial education by reading finance books, blogs, magazine,websites and I am getting a lil bit obsessive my wife claims lol.

  2. Debby on May 19, 2014 at 6:20 am

    I always felt like we were never getting anywhere despite having a pretty good income. When I started to track our spending I realized that we consistently spent more than we earned. It was pretty shocking. I have totally re looked at our family spending and cut out a lot of the excess, and am quite content with less stuff. I am much more thoughtful about what I choose to spend money on. A financial planner gave me the necessary encouragement to get serious about really getting my finances in order; I have accomplished a lot financially in a few years -more than I would have ever thought possible. I am fortunate to have the option to earn extra money so I can cover some really big expenses that are coming up ahead of time. It takes a lot of stress away when you don’t have daily worries about money.

    • Echo on May 19, 2014 at 7:56 am

      @Debby – Thanks for sharing. It is a big eye opener to track your expenses for the first time and see where all the money goes. Taking control of your finances is truly empowering.

  3. CanadianDaniel on May 19, 2014 at 6:42 am

    I resisted multiple wake-up calls for years. My maxed-out credit cards were magnified by heavy day trading losses. In 2008 when the Great Recession began, I could no longer deny a serious problem that would eventually threaten our home.

    Years earlier I was making $1000/wk on the stock market, but I can assure you that short-term gains are no more sustainable than expecting to earn a living by visiting a casino daily.

    I truly believed I got addicted to debt — a feeling that I could beat the system as it were. Yes, I know how crazy this must sound.

    I started reading blogs including Boomer and Echo, tracked my expenses and income daily on an Excel spreadsheet so I could feel the money coming in and out. And I discovered replacements for chasing easy money and ignoring debt: my wife and I now focus on savings and are eliminating one debt at a time — with our mortgage now under $4,000. This is an ongoing process, and we’re still not fully out of the woods.

    Although it was ultimately liberating, I don’t want to understate how painful my aha moment was. I had to publicly admit some very stupid mistakes. Do you agree that debt itself can be addicting for some people?

    • Echo on May 19, 2014 at 8:02 am

      @CanadianDaniel – It sounds awfully similar to gambling addiction. It must have been difficult to face reality and change your behaviour. Glad to hear you’re on the right path now!

  4. Dave Lalonde on May 19, 2014 at 6:52 am

    Tracking all my expenses has really opened my eyes to why I always struggled to survive before payday. It’s so easy to lose money when you put yourself in a situation where you think you need something. Thankfully, with careful handling and budgeting, I haven’t’ had this problem in years. 🙂

    • Echo on May 19, 2014 at 8:06 am

      @Dave – So true! For me it was the irregular expenses that always tripped me up. A spending summary would only tell me what I spent in the past. I needed to look into the future and predict what my expenses would be 3-6 months from now so I could plan and save for any extras that might come up.

  5. Dan @ Our Big Fat Wallet on May 19, 2014 at 10:59 am

    I recently got a rude awakening on our home insurance bill – up around 30% from last year! We didn’t make any claims (we never have) and there was no explanation for the change. I understand it’s related to the major flooding from the last year (even though our house was not affected). I would have reviewed the coverage soon anyway but its always a good idea to review insurance coverage at least once a year to make sure there are no additional coverages that aren’t needed

    • Echo on May 19, 2014 at 11:18 am

      @Dan – Ours went up 30% last year, mostly due to a new mandatory and separate premium for hail coverage.

  6. Rick Manjin on May 19, 2014 at 7:48 pm

    The main thing that opened our eyes of how much our family could accumulate in RRSP’s and TFSA’s.

    For example, our family of four husband, wife and 2 adult kids can contribute just in our TFSA’s, $22,000 annually.

    If we do this for 38 years and compound our money at a modest 4.10% annually, we would have $2,013,097 income tax free.

    We all have decent incomes so we just got to make sure that we are disciplined to max out every year our TFSA’s and RRSP’s as much as possible.

  7. Norman on May 19, 2014 at 10:51 pm

    In my youth, I was very blase about my finances. I maxed out my credit cards once, but with some determination, I was able to claw out… mostly. I still kept a balance on my credit card, thinking nothing of paying $30 in interest every month. I even took a seminar on personal finance that I sort of scoffed at. My path of financial redemption began with a little funny app on my iPhone called “Stocks.”

    I didn’t know anything about the stock market, only that people can get rich or lose all their money in the stock market. I remember that I wanted to know what that app did, so I Googled “How to invest in the stock market” and read some of the articles I found.

    I remember one of the first articles I ever read went something like this: “The stock market averages a 10% return a year. The first step before you invest in the stock market is to get out of debt. It does not make sense to invest and get a 10% return on your money when you are paying 20% interest on credit card debt.”

    That was the “a-ha” moment for me. I knew at that moment how stupid I have been all these years with my money. I had just spent $2000 on a new camera, and I was planning on buying the new MacBook Pro for $3000, and other crap that I didn’t need. I decided to cancel all my spending plans, and devoted all my disposable income to paying off my credit cards. I started investing in index funds and dividend stocks soon after.

  8. Stephen Weyman on May 20, 2014 at 6:54 am

    My financial awakening was a bit different than some because I was raised in a home with good financial discipline where my father taught me to manage money and use credit responsibly at a young age.

    What really changed things for me was when I was in high school starting to earn my own money with summer employment. I started buying some stuff with my money while saving most of it for school and realized how expensive everything was. I would just go to my favourite store and buy what I had my eye on because I thought that was how it worked. The price displayed was the price you paid.

    Then, I started looking at flyers and quickly realized that the price at one store wasn’t actually “the price” set in stone for that particular item. The very same thing would often go on sale or have a regular price that could be half as much at another store. That’s when I started to comparison shop like crazy for every purchase and began adding tools to my tool belt that help me to save substantial money on almost every purchase.

    This article is a really great crash course on getting your finances under control. I’ve done almost all the things listed here. I did track every expense for a while but I eventually found it took too much time and is too burdensome. It was necessary for a time and may be again, but not currently. I just focus on getting value for my money all the time and the rest pretty much takes care of itself.

    For me, the rule of thumb is to plan. Financially speaking, a little bit of planning goes a really LONG way.

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