Financial health is arguably as important as physical health. But unfortunately, many households aren’t particularly healthy. In fact, according to MarketWatch research, half of Americans are barely making it from one paycheck to the next.

Anyone who has struggled to pay the bills knows how stressful this can be. For many of these individuals and households, improving financial health is a major priority.

Fortunately, you can take almost immediate steps for improvement.

Step 1: Take Stock of Your Current Position

You can’t move forward until you have stood still and examined your situation. If you’re always scrambling and throwing cash at bills as they come around, it’s hard to know exactly where you stand. Taking stock can be painful, especially when you add up your total debts and obligations, but it must be done.

Look closely at your spending for the past few months to determine how much you spend on food, housing, debts, entertainment and transportation. Expect to find surprises along the way.

Step 2: Buy Some Breathing Room

It’s easy to feel like you are drowning in debt, and in some cases, you are facing a billing emergency. If you are at risk of losing a basic need like transportation, power, heat or food, it is important to get a bit of breathing room to handle your financial emergency.

You can sell household items, work a short-term weekend gig, or take out a quick payday loan to get cash in hand almost immediately to pay the wolf at the door before taking the next steps to financial health.

Building a larger emergency fund should be part of this step. Ideally you should keep $500-$1,000 on hand at all times in a bank account to cover an emergency when it arises in the future.

A second job, a large yard sale, work bonus or overtime payment can help you establish a comfortable cushion in a short time for future emergencies. It’s remarkable how much this step alone can do to put you on your way to greater financial confidence and peace of mind.

Step 3: Make a Budget or Spending Plan

The next logical step to regain financial health is to make a budget or plan for your spending. Some payments will be firmly established, while others are flexible. For example, a car loan or mortgage isn’t going to change because you want it to, but you often have full control over your discretionary spending like entertainment, food and clothing.

You can also use your budgeting work to determine if you should make long term plans to reduce payments or debt. Downsizing into a smaller apartment at the end of your lease terms or selling an expensive car to buy a cheaper one might be part of your long-term strategy. Likewise, totaling up your credit cards and loans might make you realize how much you can save by investigating a debt consolidation loan.

As you are building your new budget or spending plan, keep it simple with the rule of 50/30/20.

  • 50% of your take-home pay should be for your needs. These are items you actually need including housing, utilities, transportation, food, and childcare. The minimum required debt payments should come from this 50% as well.
  • 30% of your take-home pay should be spent on your wants. Every individual will have different wants, of course, and while one family might find travel to be important, others might opt for a gym membership or motorcycle. What is important is that your wants are only taking up 30% -at most – of your total take-home spending.
  • 20% of your take-home pay should be used for savings and debt repayment. This includes your emergency cushion and your retirement savings.

Step 4: Set Up Your Savings

20% of your take-home pay should be used for savings. This savings falls into three categories:

  • Your small emergency fund of $500-$1000 that is easy to use when a true emergency arises.
  • A larger savings account that can cover periods of unemployment or larger or long-term emergency situations.
  • Retirement savings
  • Some families might also start saving plans for college tuition or travel plans

Once your small emergency fund is established and protected, examine your retirement and savings options. It is important to get started with long-term saving as soon as possible to give your money time to work. The longer money is invested, the more it compounds and earns over time.

Use automated savings to move money immediately into your savings account when you get paid or use your company’s retirement account to save money in your 401k. Be sure you invest enough to take advantage of any company match.

Step 5: Tackle Your Debt Payments

Debt is taken for granted in our modern society. Collectively, Americans spend more than 26% of their take-home pay on personal debts, with more than half of Americans spending more than that per month. This can make budgeting a challenge, especially if your minimum debt payments exceed the 50% you should be spending on your essential needs.

If this is your situation, you will need to dip into your 30% spending on your wants to help cover your minimum payments and reduce your discretionary spending until you have paid off loans and gotten your spending more in line with your budgeting goals.

You can adjust your budget numbers by increasing your income or lowering your payments. You can take on a second job or side gig to raise more income to help cover more payments while also cutting spending where you can.

Eventually you will need to pay off as much debt as possible, including large debts like car loans and mortgages to have true financial health. Some debt is worse than others, of course, and consolidation loans can help to reduce high interest rates on loans to make your budget go farther when repaying debts. When repaying debt, you should apply your extra funds to pay off loans in this order:

  • Credit cards and unsecured loans
  • High or variable interest student loans
  • Secured loans like vehicle payments
  • Low interest student loans
  • Mortgage loans

Step 6: Enjoy the Rewards of Financial Health

Once you start the process to get control of your income, spending and budgets, you will see an immediate improvement. You can enjoy the confidence of knowing that you are on the right track, that you are making better spending decisions, and that ultimately you will be debt free and beholden to nobody but your own wants and needs.