 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. *** 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... Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
Katalytic Converter I chose the word Katalytic for my business because I'd love to serve as a catalyst for you to increase your personal finance well-being. And just as a car’s catalytic converter reduces 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. I am passionate about this, so if that’s what you’re after, you’re in the right place. Besides being a certified Personal Finance coach, what sets me apart in the area of personal finance is that over the past decade, I have helped both young adults (high school/college/post-college) and older adults concurrently learn how to manage their personal finances through classes, coaching, and mentoring. What an eye opener! Bright-eyed young adults just want to know what to do to get the engine started on their hopeful financial journey, while older adults are often mired in financial challenges and searching for that hope again. In working with both demographics, I realized that I could make a significant impact on the rising generations in terms of getting them started or re-started with a structured approach to gaining a strong financial foundation. Establish a Firm Foundation The basics of the Kataltyic Converter consist of how to save, budget, eradicate debt, control spending, and protect health, wealth, and assets with insurance. Many of my young adult students ask me frustratedly, “Why were we never taught this in school?!” As of 2015, only 5 states required students to take a financial literacy class in high school. As of July 2019, there are now 20 states have a financial literacy requirement for high schoolers. That’s a decent improvement, but there’s still quite a ways to go. Since these are fairly new offerings, the majority, if not all, of millennials had no personal finance instruction in high school. I started teaching this to high school students in 2010, five years before it was mandatory in my state. I then created an online class in 2015, in order to reach more students, and I haven’t looked back! In fact, I'm retooling and updating that class to make it even better, to reach more people, and to have a greater impact. I love to work with young adults, because once they catch the vision of saving for emergencies, following a budget (aka a cash flow plan), crushing debt, strategically setting aside money for retirement/college/house, and limiting risk with the right insurance, they often move determinedly through the steps it takes to have a sound financial foundation relatively quickly. Although most of my work with this age group is financial mentoring, I also provide guidance toward establishing a healthy mindset and habits from the start for a strong future. Regain Your Footing Older adults often have greater challenges, which may require incremental mindset and behavioral shifts to help them regain their footing, gain traction, and stay on track for sustainable results. Perhaps they never had sound financial skills / interest / discipline in the first place. Or even if they did, things may have just gotten out of control. Oftentimes keeping control of their finances has been clouded by life, family, and financial responsibilities, which have taken a toll. This might include marriage and family challenges, making things even more difficult. This demographic often needs more personal coaching in terms of mindset, goals, new habits, and examining environmental factors, while also crunching numbers and working a plan. It can be done, but takes time, fortitude, and commitment. Keep following me on this blog, as my focus is on Personal Finance Literacy for kids/teens/20s. As I continue work on my own resource called, "Raising a Financial Smarty Pants! (for Parents of kids 3-13)", I want to let you know about Funancial Freedom. I am an ambassador for them, and I highly recommend their free Ebook and free webinar to help your kids become financially smart! Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
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AuthorAs a certified Personal Finance coach (and homeschooler of 15 years), Kathleen has worked with people of all ages, but her passion is to help kids/teens/young adults take control of their finances early, learn entrepreneurial skills, generate multiple income streams, and get on a path to Financial Hope & Freedom so they can live into their passions and purpose. (Free Webinar on how to Empower Money Smart Kids with Financial Literacy & Entrepreneurial Skills) Archives
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