Steps to Financial Health

The following steps are designed to help you get started in improving your financial health. Some basic steps are given below. I get more in depth with the topics in my blog.

Step 1 - Financial Assessment

The first step on the path to financial health is to assess your finances. Look at the past few months and make a detailed list of your income and your expenses. Don't forget to look at your credit card spending too. I like to look at three months to get the full picture of where money is being spent. You don't need sophisticated budget software or website to do this. A pen and paper is fine. Usually most people fit in the following categories:

Crisis Mode

I consider someone in crisis mode when they aren't bringing in enough income for their basic needs so they are increasing debt just to get by each month.

Paycheck to paycheck

Living paycheck to paycheck means that someone is barely getting by and by the time they get their paycheck or even before they get their paycheck, they have no money and no savings. So although they're paying their bills, they aren't getting ahead.


Many people are living comfortably and able to pay their bills, but may not be using their disposable income as effectively as they could be. They may have debt but not be actively working towards paying it off. They may have money in savings but not 6 to 9 months of living expenses. They may not be putting enough into retirement.

Financially Sound

And of course there are those who are financially sound, have little to no debt, and a fully funded savings and retirement plan.



Step 2 - Start making changes

Now that you know where you stand financially it's time to start making some changes.

Cut Spending

Most people start by looking at which expenses they can cut. Look at what you can reasonably go without or reduce. Some expenses are relatively easy to cut, such as eating out. With a little planning you could cook more meals at home. Another typical expense to cut out is cable. Other expenses will take a lot more time and effort, such as selling your house, selling your car to get a cheaper one, shopping around for better insurance rates, etc.

Increase Income

There are a lot of options to increase income. You could work towards getting a promotion or raise at work. You could actively look for a higher paying job. Or you could get a second part-time job. You could also sell some of your stuff.

Step 3 - Save money in an emergency fund

Everyone needs to have a small amount of money in savings for emergencies. The amount that you start with depends on many factors such as whether you own or rent your house, how good your health insurance plan is, whether you are a good handyman or have to hire out most car and house repairs, etc. I would set a goal in the $500-$2,500 range depending on what you're comfortable with.

I think having a small emergency fund is important to get out of a paycheck to paycheck rut.

Step 4 - Pay off debts

This step relates to paying off debts such as credit cards, car loans, and student loans. Usually you hear to pay off the debts with the highest interest first, which I think is really great advice. Focus all of your extra money on paying off that debt while making minimum payments on the rest. Then when that debt is paid off, use all extra money to pay off the next debt, and so on. Do whatever you are comfortable with. I like paying off the very small debts that are only a few hundred dollars first just to make life easier and less complicated. But do whatever works best for you.

A good visual tool for motivation is to keep a running total of what you owe for each debt in a visible spot. As you make payments, you could update the balance so you visually see the numbers get smaller. A printable Excel spreadsheet would be an easy way to do this.

Step 5 - Build wealth

Once you pay off your consumer debt, it's time to start working on building wealth. The following are things to work on building:

  • Build your emergency fund. It's okay to build slowly and set small goals. For example your first goal could be to have one month's salary in savings. Your second goal could be to have two months salary in savings. And so on. Ultimately you should have 12 months of living expenses in savings.
  • Maximize retirement accounts. Take full advantage of any 401K plans your employer offers. Contribute as much as possible to it, especially if your employer offers any matching contributions.
  • Increase assets. Some popular types of assets to choose from are stocks and mutual funds. ┬áThink about what would work for your lifestyle. Speak to a trusted financial advisor if you want to set up any investments such as mutual funds or stocks. Another type of asset that you may want to invest in is real estate. This could be in the form of owning your own house outright before retirement, and/or investing in rental properties. Just keep in mind that real estate can be expensive to maintain and also expensive to sell due to realtor commissions. It could be a great way to build wealth though.