Budgeting How to Improve Your Financial Situation Follow this plan to get back on track By Miriam Caldwell Miriam Caldwell Miriam Caldwell has been writing about budgeting and personal finance basics since 2005. She teaches writing as an online instructor with Brigham Young University-Idaho, and is also a teacher for public school students in Cary, North Carolina. learn about our editorial policies Updated on July 12, 2021 Reviewed by Anthony Battle Reviewed by Anthony Battle Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional®, and Certified Retirement Counselor designations for advance retirement planning. learn about our financial review board If you find yourself in a lot of debt or are barely making ends meet, you may be wondering how to turn your finances around. Depending on the seriousness of your financial situation, it may take some time to get back on track. But don't get discouraged—you can improve your financial situation if you take several small steps. 01 of 10 Assess Your Current Finances Getty Images Before you determine an end goal for your finances, honestly evaluate where you are now. This activity will help you see what, if anything, you need to change and create a plan that will move you toward your final destination. A good approach for gauging where you are financially is calculating your net worth, which amounts to your assets less your liabilities. Write down or use a spreadsheet to record all your assets, including bank accounts, stocks, mutual funds, retirement account assets, and real estate, but not your home or car unless you plan to sell them. Likewise, list your liabilities, including credit card debt and other loans, but not your mortgage unless you included your home as an asset. Subtract your liabilities from your assets to figure your net worth. Hopefully, it's positive. If you find that it's not what you expected, don't despair; let the information serve as a wake-up call that you need to make lasting changes to turn around your financial situation. 02 of 10 Set Financial Goals rkankaro / Getty Images Once you have established your current financial situation, the next step is to determine where you want to be. It's important to establish clear goals so that you know exactly what you are working toward and what you need to do to get there. If, like many Americans, you have zero or even a negative net worth, meaning your liabilities meet or exceed your assets, you might set a goal to get completely out of debt or spend less. If you determined that your net worth is positive but lower than expected to fulfill your life goals, think of ways to increase it—for example, save more, become an investor or homeowner, or start your own business. If you've started your career, you might even set a target to retire early. Whatever the goal, once you have it in mind, begin working backward to find out what you need to change or do in order to reach that goal. It's useful to write the goal down or find a picture that represents it and hang it on a wall in your office or bedroom on put it somewhere else where you can see it on a regular basis and draw inspiration from it. 03 of 10 Set up a Budget Lesia_G/iStock You can't identify unhealthy financial patterns until you put in place a budget, which is a plan for how to spend your money each month that factors in how much you earn and spend. Start by listing your income and expenses. Look at your spending over the last few months or even in the same month last year to get an indication of what you usually spend in each category. Then, subtract your expenses from your income. If the amount is zero or negative, aim to cut back on expenses or increase your rate of savings. Some common areas where many people can spend less are food and entertainment. If the amount is positive, put together a budget for spending each month. For example, with the zero-based budget, every dollar has a purpose, and there should be no more money left to budget by the month's end. Or, use the envelope system, divvying up cash between different envelopes that you will use to pay for different expenses. Once you have a budgeting system, use financial software, a spreadsheet, or pen and paper to stick to it. In order for the rest of the steps to work, and improve your financial situation, you need to get your budget to work for you. It may take a few months of tweaking, but it is the key to financial success. 04 of 10 Tackle Debt Caiaimage/Paul Viant / Getty Images If you want to free up your budget and improve your financial situation, you must get out of debt. Regardless of how much you have or how manageable it is, pay it off as quickly as possible; the longer you stretch out the loan term, the more you will likely pay in interest and total loan costs. For example, you are likely paying more in interest on credit card debt than you are earning on any investments you may hold. First, you need to create a debt repayment plan. If you have a lot of high-interest debt, list your debts in order from highest interest rate to lowest, and then begin paying all of the extra money toward the first debt. Once you have paid off that debt, move onto the next debt on the list. If you have an unmanageable number of debts, however, you may want to pay down the one with the smallest balance first and then proceed to pay down those with increasingly larger balances. If any of your debts are in collections, you may choose to pay them off first and bring them current to stem the negative impact to your credit and reduce the number of calls you get from creditors. In order for any debt repayment plan to work, you need to make a commitment to stop using your credit cards and stop acquiring new credit. 05 of 10 Control Your Spending Getty Images This step can help you modify the spending behaviors that got you into debt, stick to your budget, and find additional money to apply to your existing debt. To start, review your expenses and identify budget leaks, which are hidden problems in your spending. Once you have done this, devise strategies to address the issues. For example, you may find out that you eat out too often, which can add up quickly, especially if you have a family. Find ways to cook ahead so that dinner is ready with very little meal prep; this will help you plug the budget leak and save money. If you shop too much at certain stores, or use your credit card too much in general, leave your credit card at home and only take cash or a debit card with you when you go out to avoid overspending. Similarly, take a look at your bills to identify services you aren't using and cut them from your budget, such as a gym membership or a seldom-used streaming subscription. As you focus on saving money, you may be surprised by just how much you can sock away for the future. 06 of 10 Address Income Issues Clandestini / Getty Images No matter what your income is, you may find yourself in a financial situation where you barely break even or spend more than you earn. If you do, you may have cash flow issues. It may be a temporary issue, such as the need to defer a purchase every now and then. Or, you may be so burdened by debt payments that you are regularly unable to cover day-to-day expenses like groceries or utilities. Once you have your budget in front of you, identify whether you have an income issue. If it is temporary, you may able to solve the problem with the help of a second job or an income-producing investment that supplements your primary income. If you have persistent cash flow problems, however, you may need to take more drastic measures to turn your financial situation around, such as paying down your debt faster to reduce long-term costs, moving to an area with a lower cost of living, or going back to school to qualify for a higher-paying job. 07 of 10 Plan for the Unexpected Michael Blann / Getty Images You can prevent financial worry by planning for unexpected life situations. First, ensure that you have the proper insurance. This includes health, renter's/home, car, and life insurance. Insurance may seem costly and unnecessary when you are struggling to make ends meet, but a car accident and any related medical bills can set you back by thousands, damaging your finances far more. Insurance protects you from the worst when something awful happens and can give you the financial resources you need to get through those moments without breaking the bank. Additionally, build a financial cushion with an emergency fund, which is a pool of money you draw from to pay for unplanned expenses. Saving between three to six months of living expenses can help you in the event that you lose your job or have a major emergency. 08 of 10 Start Saving sorbetto/iStock Curbing spending on non-essential items may keep you from going further into debt, but you can't fundamentally alter your financial situation if you don't also find ways to save money every day and allocate money for upcoming expenses. Paying less for the things you need is one way to create room in your budget for the goals you earlier established. Buying in bulk, shopping secondhand, or using coupons can help you save on a daily basis. To save for a future expense, be it a down payment on a home, a car, or your child's college education, consider establishing a sinking fund. This type of fund works like an emergency fund but is used for planned instead of unplanned expenses. Take the time to figure out what you need to save, and then establish a sustainable schedule for saving (biweekly or monthly, for example) and stick to it to stay on top of your goals. 09 of 10 Create a Long-Term Financial Plan Geber86/iStock As you save for upcoming expenses in the near term, don't neglect to develop a long-term financial plan that will help you grow your wealth and keep moving forward. This should include investing and saving for retirement. Experts generally recommend paying off credit card debt and other high-interest debt before you start investing. But once you are out of debt, you will likely be ready to invest. It helps to talk to a financial planner about your goals and situation and to receive advice about the best strategies for your long-term goals. 10 of 10 Stay Motivated RyanJLane / Getty Images The more difficult your circumstances, the more time it will take to turn them around. Granted, this can be frustrating, as you may have to compromise your lifestyle for months or even years to get out of debt and start working toward your goals. The key to being successful is to stay motivated throughout the process. Share your goals with friends or family to keep yourself accountable, break down your goals into smaller steps, and reward yourself when you hit major milestones. With patience and commitment, you can improve your financial situation and rest easier about your future. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Merrill Edge. "Calculating Net Worth for Decisions About Your Future." Board of Governors of the Federal Reserve System. 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