Restarting your finances is always an awful experience. Often, you can save for years, only for circumstances to take most of it away from you.
When this happens, the goal should be to restart your finances from zero. But how can you do that?
That’s what this guide explains. It explores how to restart your finances from zero and get back on your feet.
Assess Your Current Situation
The first step is to assess where you stand right now. Ideally, you’ll be at zero, but if you have debts or cash flow issues, you may need to speak with insolvency experts for debt clearance or legal protection from creditors.
Apps are helpful for understanding your balance sheet overall. You may think you’re poor because of what your accounts say, but don’t discount your assets or other items that could support you if you sold them.
Create A Simple Budget
The next step is to create a simple budget that runs through your essentials and the money you’re spending on them. For example, you might want to write down your housing, food, and transportation costs.
Ideally, this budget expenses list should be as minimal as possible. The simpler you can make it, the better.
For example, key elements could include:
- Food
- Rent
- Utilities
- Transport (to work only)
- Taxes
These are the five key components that allow you to live without breaking the law or going hungry. Ideally, you should add these up to see what you are spending now, and what you could spend, perhaps if you moved.
Rent is usually the most variable element on this list. As such, you could downsize and halve how much you pay, or you could do the same by moving to a new area.
You can save on food, but it isn’t usually advisable since it can adversely affect your health. Living off white rice, salt, and margarine isn’t sustainable for your taste buds or your overall well-being.
Build An Emergency Fund
When starting from zero, you also want to build an emergency fund. These prevent you from relying on credit cards or other loans.
Most people at rock bottom begin with a target of around $800. This lump sum is enough for deposits on new rentals, food for several weeks, or paying for car breakdowns.
Emergency funds are best kept in high-interest savings accounts that let you access money without penalties. Most pay between 3% and 5% these days, so it is always worth checking around and comparing options.
Building an emergency fund can take time if you have other financial pressures in your life. However, it can reduce stress as you put your life back together, knowing you have money you can rely on in an emergency.
Get Rid Of Your Most Expensive Debt
If you have expensive debt, get rid of this first. Pay off the credit cards and loans with the highest APR while allowing others to roll over on minimum payments.
Debts with the highest interest payments are most damaging to your finances and personal well-being. These cost more over time, especially if you don’t pay them off quickly, leading to increased financial pressures.
Find Extra Income
If you are finding it hard to get out of a debt hole, then it is worth looking for extra income elsewhere to supplement your current work. Additional income streams like Fiverr or Uber can be a lifesaver when you just need a few hundred extra dollars a month to start paying down debts without moving home.
If you have marketable skills, these can be even more valuable. Top skills let you sell your services to the market for extra money, allowing you to get back to financial health faster. It’s worth putting in the extra effort, even if it means working longer hours than you might like.
Teach Yourself About Personal Finance
Teaching yourself about personal finance is your ticket to long-term success. If you really understand how money works, it puts you in a better position to know what you should be doing with it and how to make the highest returns.
Which approach you take to personal finance depends on your specific style. For some people, this means paying bills and investing in property, while for others, it is paying off debts or investing in stocks.
Which you do is very much up to you, but gaining a grounding in these subjects is something that could serve you for life.
Once you know about personal finance, it makes everything else in life go more smoothly. You can build your bank account while enjoying the lifestyle you want, with financial distress something that’s far in the rear-view mirror.
Set Long-Term Goals
As part of this process, you want to set long-term goals. Giving yourself the target of saving a large sum of money in two to five years is critical for success.
How you do this is up to you, but the longer you persist, the more compounding returns grow. Eventually, the size of your portfolio can be so significant that you no longer need to keep investing into it with your income, and sometimes you can live off it.
What your financial goals look like is essentially up to you. Some people want to get by, while others want full financial freedom that allows them to do whatever they want. Which path you go down is up to you.
Automate Your Finances
If you struggle with self-discipline, automating your finances is helpful. If you can siphon funds from your wages to your savings automatically, that can significantly lower costs and help funds go further.
It is also useful when you’re trying to pay off a lot of debt. Paying this way allows you to do it without even having to think about it.
Seek Help
Finally, seek help when starting your finances from zero again. Go to professionals who can put together a plan based on your current job situation and income. You can use them to work through debt repayment or paying off credit card balances.
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