4 Steps to a Firm Financial Foundation

You may have seen the steps listed below before, but have you followed them?  No matter what you’re trying to achieve, whether it’s a sport, a musical instrument, or a new job, starting with the basics and setting a foundation just makes sense; it's something to build upon.

Managing your finances is no different. They can be overwhelming, where you’re grappling with big money decisions, working to make ends meet, managing debt in various forms, saving for retirement, and/or trying to figure out what kind of insurance you need, etc.  I can relate! If you're like me and my husband, we didn't start off doing things right, but once we understood the basic framework that I'm going to lay out for you, we pivoted and got back on track in a more structured and financially sound way. 
 
Katalytic Converter in 4 steps
 
With so many Americans really struggling financially, where do you begin to build that foundation?  
 
As mentioned in my previous post, I chose the word Katalytic for my business because I am here to be a catalyst in helping you create a firm personal financial foundation. The phrase “Katalytic Converter” is based on the fact that catalytic converters in vehicles reduce toxic pollutants and controls emissions. The Katalytic Converter method, based largely on Dave Ramsey’s Baby Steps, helps people take control of their finances, reduce stress, and convert toxic situations into hopeful ones.
 
The Katalytic Converter includes four main steps to achieving a solid personal financial foundation. The high-level steps mentioned here will be discussed in greater detail in future posts, but for now I’m giving you the framework so that you can pull things together in a structured way that can be built upon.

1. MANAGE CASH FLOW / BUDGET
Purpose: To take control of every dollar of your income and your spending. This gives you the freedom to deliberately choose how you’ll live your financial life.

The first step in a firm financial foundation is a budget (a foundation of it's own).  I know that the word "budgeting" has bad connotations for some people, but a budget is actually freeing because YOU are in control of your cash flow.  There are many budgeting software tools out there (EveryDollar, YNAB, Mint...), including some that are free, so I suggest choosing one and getting started.  Honestly, a basic excel spreadsheet works fine too.  Here is a copy of a simple, yet effective, Excel budgeting template that you can use for a year's view of your finances.
 
You'll list out your income and your expenses, making sure to cover your highest priorities first: food, shelter, and transportation. Once you've gotten your budget set up, you'll want to tweak it until you have a zero (0) based budget. Hint: If you have $ left over, make sure to assign it to a category needing more $ until you have 0 left over.
 
Total Income – Total Expenses = 0
 
Doing a budget before the start of each month sets you up for success, and then letting your budget drive your monthly spending helps you keep control of your finances.  You can always make adjustments along the way.
 
Ultimately, after 3 months, your budget should be in good shape such that you're aligned and not so frustrated, and you're allowing your budget to guide your spending.  We’ll go into this in more depth in an upcoming post.

2. SET UP A STARTER EMERGENCY FUND
Purpose: You want to be able to cover minor emergencies with cash on hand without having to use a credit card and go into (further) debt.
 
If you’re just starting out, I suggest beginning with a starter emergency fund. This is true for anyone who makes income and has financial responsibilities but doesn’t already have savings set aside for emergencies.  The rule-of-thumb is to have $500-$1000 set aside for emergencies before you start tackling your debt.  This emergency fund will increase once you debts have been crushed.
 
3. REDUCE / ELIMINATE DEBT
Purpose: You want to eliminate all of your debt so that you can use your income to build your own wealth rather than using your income to pay interest to a bank / lender.  In this discussion about debt reduction and elimination, we are talking about debts like student loans, car loans, and credit cards, but we aren’t including mortgage debt as part of this. 
 
The bottom line is that in order to move the needle forward on getting out of debt, first you’ll need to have additional money to throw at the debt.  Easier said than done, right?  The fact is that this is THE essential piece to get moving on debt reduction. 
 
There are 2 mains ways of doing this: 1) reduce expenses and/or 2) increase your income.  This is where your monthly budget and cash flow analysis come nicely into play. When you're aware of your monthly income and monthly expenses, you can see what’s coming in and what’s going out and where you might need to make some changes.

We’ll brainstorm ideas for reducing expenses and increasing income in an upcoming post but let’s assume you’ve done that and now there’s extra cash on hand to apply to the debts. Well done!!  Start by listing your debts from smallest amount owed to largest amount owed.  Then follow this process each month:
1.     Crush the smallest debt with as much cash as you can throw at it each month, while making minimum monthly payments on the rest of your debts.
2.     Each month, repeat step 1 until that debt is eradicated (celebrate this win!), at which point you move onto the next smallest debt and continue to pay the amount you had been paying for the minimum monthly payment, but you’ll also throw in the money you had been using to crush the previous debt. 

You’ll be reducing your debts until eventually you eliminate them all - woohoo! 

​4. FULLY FUND YOUR EMERGENCY FUND
Purpose: You want to be able to cover significant emergencies with cash on hand without having to use a credit card and go into (further) debt.
 
Once you are out of debt, you can use that same momentum that you used to get out of debt in order to build up your fully funded emergency fund, which would cover 3-6 months of expenses. This money is not just there for small emergencies, but it gives you buffer in case you suffer the loss of a job or a medical emergency.  This fund is ESSENTIAL to the early stage of wealth building.
 
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With these four steps and getting the right kinds of insurance to protect yourself (and your family) along the way, you will then be set up to move into serious wealth-building.  If you're already there or if you're still plugging away (you got this!), I'm super proud of you!  There's an amazing feeling of relief and satisfaction when you’re debt-free and have a fully-funded emergency fund with 3-6 months of expenses saved.  Celebrate when you get there before moving on to saving for retirement, kids’ college, and potentially paying off your house.  Remember these are just the basics, but they are essential to a firm financial foundation.

More detail on these 4 steps will be forthcoming, but first I'd like to talk about your WHY...

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.