How to achieve financial independence in 12 months

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How to achieve financial independence in 12 months

Let's be honest. The financial plan for a lot of us is, "Get rich some day so that all our current financial problems go away." And in the meantime, we ignore our finances or take a passive role in dealing with them. Our financial situation is something that is happening to us instead of something we've created and have control over.

The problem with the "get rich" financial plan is that more money isn't going to make us better with money. That's like saying, "I don't know how to build a house with 1000 bricks, but if I had a 2000 bricks…" Yeah, you still wouldn't know how to build a house.

We're victims of student loan debt and medical bills and acting careers that took a decade to pay off…or maybe that last one is just me.

But really we're victims of our own way of thinking about money. What's another $25 on the credit card when you have $20,000 in student loan debt anyway? Well, it's another $25 of debt and by the time you pay it off it'll be more like $75.

So, I propose that our goal in 2016 be to change the way we think about money. Won't it be nice to say, "I understand my finances. I know what I need to do to feel good about my finances and I'm in the process of doing it."

To achieve financial independence this year, let's take one small step each month to acknowledge where we are and start to feel powerful over our finances.

First half of 2016: acknowledge and organize

January: Educate yourself on your debt.

This is probably the most painful step but also the most helpful, so let's just drink some wine and get it over with in the next couple of weeks.

A: Make a chart that lists each credit card or loan. Username and password. Balance. APR. Minimum payment. Phone number to loan or card company.

B. Start a financial calendar and add due dates.

C. Renegotiate anything that can be renegotiated. Call companies to ask for lower APRs. Transfer balances to lower rate credit cards. Use a refinance calculator online or call a mortgage broker to see if refinancing your house is worth it. Call your mortgage lender about eliminating your private mortgage insurance (this may be possible if the value of your house has increased, even if you haven't paid off twenty percent of your loan).

February: Concentrate on taxes.

A. Do your 2015 taxes ASAP. All W2s and 1099s are supposed to be sent by employers by the end of January. Why do your taxes immediately? 1. Some accountants charge less the sooner you do them. 2. If you're owed a refund, you'll get it sooner. 3. If you owe money, you'll know exactly how much and you'll have two months to figure out how to pay it. 4. Looking at your numbers from last year (particularly if you itemize) is the perfect time to start paying attention to where your money is going and exactly how much you're bringing home.

B. Start a tax box for 2016 where you can put all pay stubs and receipts.

March: Study your bills.

A. Make a chart for your bills. Username and password. Estimated amount. Phone number to corresponding company.

B. Add due dates to your financial calendar.

C. Read the details. The great thing about auto pay is that we don't pay our bills late. The bad thing is, we never look at our bills. That means that we don't catch mistakes or unnecessary fees. If there is anything on your bill that you don't understand, call and talk to customer service. Look for things like: How much data you actually use on your wireless plan versus how much you pay for. Places you double pay like for roadside service on your car insurance when you already have Triple AAA. Mysterious service fees on your internet bill or erratic charges on your electric bill.

April: Look at your credit.

You can order your credit report for free from each of the three major companies once every 12 months at http://www.consumer.ftc.gov. Suze Orman suggests checking one report every few months for a better chance of catching identity theft, so I included a reminder in August and December. But you know yourself, if you're not likely to go through the process again in a few months, then order all three reports now. Look for any information that's wrong. They do make mistakes. Make sure no one has opened cards in your name. You may even be reminded of accounts you have open that you've forgotten about.

I would add that many credit card companies now offer their customers FICO scores and/or if you have your credit run for any reason (leasing a car, opening an account, etc) you can ask the company running the check to give you your FICO score.

May: Study your bank statements from the first four months of the year.

You know how much you're paying in debt and bills. What else did you spend money on? How much? Where? You may be shocked how much you spent on food or drinks or iTunes.

Second half of 2016: cauterize spending, change habits, set goals.

June: Acknowledge your Achilles heel of spending.

A. Identify one or two areas where you are spending a lot. Example: We spend a lot of money on food each month.

B. Identify what triggers the spending. We eat dinner out often. I spend impulsively at the grocery store.

C. Come up with a few solutions. Treat ourselves to dinner out once a week. Send my husband to the grocery store.

July: Make a budget cut a week.

Go from the premium cable package to the basic. Find a cheaper internet carrier. Water the lawn one less day a week. Cancel the gym membership you haven't used in three months.

August: Set financial goals.

A. Pick one long term goal. It could be as general as, "I want to figure out how to talk to my partner about money," or, "I want to feel in control of my spending." It could be as specific as, "I want to save $100 a month. Or I want to live on a $2500 budget."

B. Set three short term financial goals that will lead to the long term goal.

  • Stop going to Target.

  • Designate a "splurge" day a month where I can spend $50 on things I want and I won't feel guilty about it.

  • Make a list of all the things I'm wanting and prioritize the list. Whenever I have a little extra money, I can buy one thing at a time.

C. Order your credit report from one of the other credit reporting companies (see April).

September: Stick to the first short term financial goal.

It helps to think of forming a new habit rather than trying to stop an old habit. Try, "I’m getting in the habit of reading great books during my lunch hour," instead of "I’m trying to stop shopping during my lunch hour."

October: Start working on the second short term financial goal.

Some studies suggest it takes twenty one days to form a habit, and some suggest that no study can suggest how long it will take someone to form a habit because there’s no accounting for stubborn jackasses. But I say (and I am not a study, but I may be a stubborn jackass) that for one month my husband and I did not eat or drink out, and it changed my thinking for the long term.

I realized that I was in the habit of rewarding myself with a treat every time I sat in LA traffic – which was every day. It was eye opening and certainly explained why my pants were too tight.

November: Add the third and final short term financial goal.

By now you should be ready to take on that third goal, but don’t be discouraged if you slip up. We create real and less painful change by taking it one step at a time. At the start of the year everyone vows to overhaul their entire way of eating, or dating, or handling their finances. That’s too overwhelming for most of us. Start small. This year, vow to NOT date another street performer. That’s a goal you can stick to.

December: Don’t screw up the momentum you have going!

A. Control your holiday spending. Be smart with your money so you can start 2017 feeling good about your financial efforts.

B. Order that third credit report (see April).

Let’s learn how to begin building a house with the1000 bricks we have right now, so we know what to do when we finally win the Powerball.

Photo: JD Hancock