Money Basics

Improve Your Finances in 2021: A Guide

Personal finances are, well…personal. The advice I give my neighbor is different than what I’d tell you. But there are foundational principles that apply to most everyone. If you want to improve your finances in 2021, I can’t give you specific advice. But I can talk about the foundational principles that help everyone. Let’s discuss those ideas and improve your finances.

Step 1: Create a Net Worth Statement

You need to know where you stand today. Sum up all your assets and debts. What do you have, where is it, and what job is it doing? This is analogous to stepping on the scale before starting a weight loss plan.

First, what’s in your bank accounts? Checking, savings, etc. And why are you keeping money there? Some of it is likely supporting your monthly expenses. Some of it might act as an emergency fund. But be careful. It is possible to have too much money sitting stagnant in a bank.

Next, how much money do you have in long-term investments? You might own stocks. Maybe you have a 401(k), Roth IRA, or other retirement accounts. If you want to, you can even find the current-day value of your pension or government retirement account.

Many people also include their house and property as an asset. I’ll leave that choice up to you. The argument against doing so is that you can’t live in your house and also sell it for money. You can’t have your cake and eat it too.

After you’ve summed up your assets, you’ve got to account for your debts.

Credit card debt. Student loans. Your mortgage. Car debt. Account for every single debt.

For now, sum your assets and your debts to see where you stand. If you’d like, you can compare compare your net worth to your age group.

But the real point of building a net worth statement will be apparent after today’s exercise is complete.

Step 2: Create SMART Goals

Your net worth statement shows you where you stand. Next, you need to ask where you want to be. It’s time to create SMART goals. The SMART acronym stands for specific, measurable, attainable, relevant, and time-based.

This should be a fun exercise! Write down every goal, big or small. We’ll prune them down later. Use the financial order of operations or your net worth statement to help with ideas.

Note: You can download a free PDF on the financial order of operations. It comes with detailed explanations and a flowchart about optimizing where your dollars go.

Alternatively, I recommend asking yourself some important questions. For example:

  • Who matters most to you?
  • What activities do you most enjoy?
  • How do you prefer to spend your time?
  • Where do you want to live?
  • What drives you? What’s your ‘why’?
  • When do you want to retire?

These kinds of questions will shed light on the best uses of your money, the best ways to improve your finances. That is, how your money can optimize your position on the fulfillment curve.

You can then fit those answers into the SMART framework.

For example, “I want to get out of debt—about $21,400.” We can quickly check off the SMAR boxes, but we can’t do the T (yet).

Or, “I want to pay for my kids’ college. I want to save $250K in the next 15 years.” For this one, I’d argue that the MRT boxes are filled, but we could use some specifics about how attainable it is. How much do you need to save this year in order to reach that goal? Can you actually save that much this year?

Write down some goals for your loved ones, for yourself, for the life you want to live.

And the next steps will help you fill out any missing letters on your SMART goals.


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Step 3: Create a Budget

Your budget measures and controls your cashflow. Money coming in (e.g. paychecks) and money going out (all the stuff you buy). Creating and maintaining a budget is the third step to improve your finances.

Your budget informs you how much extra money you’ll have at the end of each month. This is the money that you can use to reach your goals.

In fact, many budgeters—myself included—build their goals directly into their budget. For example: I set aside money every month to eventually purchase a rental property with my brother. It’s part of my budget. It’s part of my process.

In Step 2, we had some partial goals. How long will it take to repay our debt? Our budget tells us. How attainable is paying for our kids’ college? Our budget tells us.

A goal with a budget is a plan. A goal without a budget is just a dream.

This step takes some time, but it’s the habit that will change your future. It’s also the hardest part of this list. Losing 20 pounds is a great goal, but jogging and dieting are tough. Similarly, developing a new budgeting habit can be difficult. The most important part of your budgeting habit is adherence.

If you’re looking for budgeting methods, here are many ways experts budget.

Step 4: Tie It All Together & Improve Your Finances

All the hard work is done. It’s time to tie the steps together.

Your net worth statement (Step 1) showed you where you stand. It highlighted places for improvement.

The goals you created (Step 2) are tied to what’s most important for you. Those goals describe where you want to be, who you want to be with, and what you want to be doing.

Your budgeting (Step 3) informs how much money you can put towards your goals every month. This is how you can ensure your goals are actually SMART.

And now you step back, review your work, and make sure everything is in sync.

Do your goals address holes in your net worth statement? Is your net worth going to improve?

Are your goals specific to what’s most important in your life? Are they SMART?

And does your budget give you the data you need?

This all sounds pretty simple…because it is! If there’s anything I’ve learned in two years of personal finance research and writing, it’s that 90% of money problems are straightforward to fix. Today’s advice isn’t specific to you—but each of the steps asks you to consider your situation. And it will help improve your finances.

Thank you for reading! If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

-Jesse

P.S. – If you enjoy podcasts, check out the Best Interest Podcast! It’s getting some rave reviews!

About Jesse Cramer

Jesse Cramer created The Best Interest to explain personal finance and investing in simple terms. His writing has been featured by CNBC, MSN, The Motley Fool, and other national publications. He resides in Rochester, NY with his girlfriend and their dog. Follow him on Twitter: @BestInterest_JC
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