Are you having trouble to make ends meet? Are you struggling with debt? I will outline the steps you have to take to leave all of this behind you and live a happy life without stress about money.
Many people struggle
A while ago when I was working at my day job, my colleagues and I were chatting about money and spending. A colleague of mine told us that she only had a few euros left on her bank account, a few days before her next salary would be credited. Other colleagues told similar stories and they’re not the only ones who lives like that.
In fact, many families live from paycheck to paycheck, even people with a high income. Lots of people don’t really seem to know how to handle money. And I think it is because we don’t learn much about managing money in school.
When we are young, we are told to study hard, get good grades, go to a good school and make sure to get a high paying job so we can pay our bills. And while that can and will work out for some people, the problem is that when we earn more, we tend to spend more. People live up to their paycheck.
Problems occurs when we run into unexpected events. The car breaks down, the house needs expensive maintenance or you lose your job. Before you know it, you start collecting debt and have no idea how to ever get out of this situation. Soon you’ll end up stressed and unsure how to pay the bills and feed your children this month.
From broke to financially independent in 7 steps
It’s time to make changes to live a happy, stress free life:
- Step 1: Make a list
- Step 2: Save money
- Step 3: Make money
- Step 4: Build an emergency fund
- Step 5: Pay off your debt
- Step 6: Build a bigger emergency fund
- Step 7: Build up a passive income
Step 1: Make a list of your expenses, your income and your debt
You need to be aware of what comes in and what goes out in order to get out of your problems. You can make a spreadsheet to put everything in:
- Start with the monthly costs like your mortgage, insurance, energy, etc. Calculate everything to monthly numbers.
- Add the flexible numbers, like groceries, eating out and everything that you buy during the month.
- Don’t forget the little things you spend money on, as little expenses can add up quickly.
- Keep the list up to date
When you’ve got all of your income and expenses on paper, make a list of all your debt, starting with the debt with the highest interest rate.
Step 2: Save money
If you spend less, you can use the money for other purposes, like to pay off debt of to invest. So saving money is key in getting towards a worry-free life.
There are lots of ways to save money. When you want something, you should really think about it before buying. Do you really need it? If the answer is actually no, don’t buy it!
If you can teach yourself to always take a week to decide about a purchase, you will stop impulsive buying, which saves a lot of money. To spend less, try doing a buy nothing challenge to make you aware of your spending habits.
A few tips:
- Car(s): do you really need one or more cars? Maybe you can trade your big car for a smaller one that uses way less gas. Have you checked your car insurance? Are there cheaper options?
- House: While moving isn’t cheap, it could potentially save a lot of money. A smaller house usually means a lower energy bill and less maintenance costs. Living closer to your work could mean you can sell your car or at least use it way less. This can save lots of money.
- Groceries: Check what’s at sale and plan your meals around that. Also go to different stores for the best price. Of course don’t spend much on gas for going further, because then you don’t save anything and might even make it more expensive.
- Toys: Children don’t need tons of toys. They love to play with stuff that isn’t even a real toy. Like cardboard boxes or pots and pans. You can also look for second hand toys, it doesn’t have to be new. (My two boys play a lot with cars, but not all cars survive long, so I rather have a bunch of cheap secondhand cars)
- Daytrips: Going out with your family doesn’t have to be expensive. There are so much things to do, like go to the beach, the woods, play and have a picnic in the park or go to a playground in the neighborhood. Maybe you can make a quiz to search for signs, buildings or special objects around town and then let the other family members take the quiz.
More tips: 85 Tips To Save Money
Step 3: Make money
If you earn more money, you can use that money to pay off debt for example. More money means that you can reach your goals sooner.
You can make money in lots of ways, a couple of examples:
- Find another job: If you have a low paying job, you could look for a job that pays more. But make sure it’s a job you love, because otherwise it only leads to more stress and make you unhappy, which we are trying to get rid of. If your dream job doesn’t pay much, just look for other options to make money.
- Sell stuff: Go through your stuff and think about what you don’t use anymore. You can sell anything on Facebook marketplace or on other websites for second hand items. Do you still need the books you’ve read? Do you still wear all of your clothes? Are there toys that no one ever plays with? And how about bigger things, like a boat or a trailer you never use which sells for enough money to pay off a high interest debt?
- Rent out a room: If you’ve got a spare room in your house, you can rent it out using Airbnb. It’s a pretty way to make extra money and you meet lots of new people from all over the world.
- Side hustles: There are lots of side hustles you can do, like walking dogs, babysitting, build websites, give online courses, help people with maintenance on their home or car. Whatever suits you.
More tips: 10 Great Ways To Make Money From Home
Step 4: Build an emergency fund of € 1,000
When you are working on step 2 and 3, the difference between your income and expenses should go up. The difference can be put on a savings account (preferably with a high interest rate, but that’s not easy nowadays).
Build this up to € 1,000 for now to be able to overcome unexpected events. When the car breaks down and the repair costs you € 500, you can use this fund to save yourself from going into debt. Always fill your fund afterwards back to € 1,000.
Note: This money is not for your new Iphone or other shiny new toys you want to buy, this is only in case of emergency, for things that really cannot wait.
Once you have your emergency fund in place, you can start to pay off your debt.
Step 5: Pay off your debt
In step 1, you made a list of your debt, starting with the ones with the highest interest rates. The debt at the top of the list is costing you the most, so we need to get rid of that one as soon as possible. Pay as much as you can each month.
Every time you have paid off a single debt, you can add that payment to the next debt on the list and you can pay off the remaining of your debt faster and faster.
When you’ve got a lot of debt, this step takes a lot of time, but it’s definitely worth it. You’re on your way to a life without stress about money!
Note: Debt with less than 2-3% interest rate isn’t so bad and you could choose to leave them, as those are actually cheap money. Investing the money can be a better choice, but that’s up to you.
Related: Why We Don’t Pay Off Our Mortgage
Step 6: Build an emergency fund to cover 6 months of your expenses
Now that you are free of debt besides maybe some low interest ones and your mortgage, you can build up your emergency fund further. The little fund of € 1,000 is very nice for unexpected events, but when you lose your job or other really big things happen, you probably need more than that.
If you build up a fund to cover at least 3-6 months of your expenses, you can keep paying all the bills for a while if you for example lose your job. Your fund gives you time to find a new job or make other changes to your life to fix the problems.
Step 7: Build up a passive income
When you have gone through step 1 to 6, you should have a lot less stress about money and are set for a life where you never have to worry about money again.
To be able to have more options in your life, like work less to take care of the children or change to a job you love, but doesn’t cover the bills, you want to build up a passive income.
There are many ways to start a passive income, for example:
- You can invest in peer-to-peer lending, which is what I’m doing. It comes with risk, as all investments do, but I really like this form of investing. IF you are interested, you can check out my Ultimate Guide
- Another option is to invest in bonds or stocks. I don’t have experience with those yet, so I can’t give you advice in that area at the moment, but a good site with a lot of information about this is ESI Money.
- You can also invest in real estate. You can pay off your mortgage to invest in your own house or you can buy another property and rent it out.
It’s all up to you how you want to invest. Just make sure to investigate your options and choose what feels good for you. And always fill up your emergency fund first, before putting more money into investments.
Remember: Only invest money you can afford to lose!