Step 1: Prep for Success

ALL TOO MANY Americans lead shaky financial lives. They often overdraw their checking account. They carry credit card balances. They pay bills late. Even an unexpected $400 or $500 expense can leave them scrambling.

We should strive mightily to avoid this sort of financial life—because it’s a life overflowing with stress. How do we escape its clutches? We should cultivate three qualities.

First, we need to build some financial breathing room into our lives by limiting our monthly fixed financial obligations. In particular, we should make sure our housing and car costs aren’t so large that we’re easily knocked off course by surprise expenses. That’ll also give us a decent shot at spending less than we earn, so we can save for the future. Make no mistake: Good savings habits are the greatest of the financial virtues and the key to amassing wealth.

Second, with discretionary spending like clothes, electronic gadgets and eating out, we need to resist impulse purchases—and instead pause long enough to consider whether these are good uses for our money and whether we can truly afford them. If we can’t resist impulse spending, we might use a debit card instead of a credit card, so the money comes straight out of our checking account. If that doesn’t work, we might default to always paying cash.

Finally, we need good financial habits. That includes not just saving regularly, but also paying bills on time and keeping a close eye on our checking account balance. This will allow us to avoid fees for late payments and bounced checks, and put us on track for a better credit score.

Next: Step 2: Stockpile Cash

Previous: Financial Life Planner

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