Ten Steps to Securing Your Financial Future
With the current economic climate you may wonder during these challenging and uncertain times, “What can I do to protect myself?” or “What can my family and I work towards to responsibly take control of our financial future?” The 10 financial tips discussed below will get you on the road to financial well-being and peace of mind.
1. Learn to Track Expenses Effectively
“How much do I spend monthly?” If you do not know this number, how can you possibly plan for your future? You may have discretionary money (money left over after your fixed expenses) that you can redirect to the goals most important to you. Creating a budget can make your expenses manageable and provide you with peace of mind. A budget identifies negative spending habits and encourages you to change them. It is easier than ever to create and manage a budget. There are many tools online to help with budgeting. One worth looking at is www.mint.com.
2. Reduce, Reuse, Recycle
Known as the 3 R’s of waste management, this principle can also be applied to your finances. Reduce your spending. Reuse rather than replace items. Often times the cost of repairing is more reasonable than the cost to replace, such as a vehicle or shoes. Recycle by hosting a garage sale or shop at second hand or thrift stores.
3. Determine Needs vs. Wants
“Do I need this?” What is your motivation for buying things? Distinguish between your needs vs. your wants to help improve your finances. This is an important step in reducing your amount of debt. Not all debt is created equal! There are two types of debt. The first is “good debt” or debt on an appreciating asset. Student loans and home mortgages are great examples. The second is “consumer debt,” the least favorable which is debt on a depreciating asset. Credit card debt is a classic example of “consumer debt” since it also has no tax benefit and the interest rate may increase.
4. Have a Personal Balance Sheet
A personal balance sheet gives you a snapshot of your financial situation. Start off by calculating your assets, such as checking/savings accounts, investment accounts, household belongings or any real estate you might own. Then calculate your liabilities such as student loans, credit cards, car loans, and mortgages. Finally, subtract your liabilities from your assets to determine your net worth. The calculation is ASSETS - LIABILITIES = NET WORTH. A consistent increase in net worth indicates good financial health. Consider a couple with the following assets – primary residence valued at $250,000, retirement investments valued at $100,000 and other assets valued at $50,000. Liabilities are primarily an outstanding mortgage balance of $100,000 and a car loan of $10,000. The couple’s net worth would be $340,000. ([$250,000 + $100,000 + $50,000] minus [$100,000 + $10,000]).
5. Start an Emergency or Opportunity Fund
An emergency or opportunity fund eliminates the need to borrow money during unexpected life events. It should consist of three to six months of living expenses, to cover your needs in case of unemployment, medical emergencies, or other life events. Keep this money in a savings or money market account, separate from your checking account. If you are a small business owner, you may want to consider setting aside a year of expenses to help bridge the slow seasons. Start small and work towards achieving your goal.
6. Create a Debt Repayment Strategy
After creating a budget and personal balance sheet you should have a good idea of your financial situation. Use a debt repayment calculator to determine your timeline for paying off debt. Pay off your higher interest rate cards first. Try to make payments above the minimum to speed up your timeline.
7. Further Your Credit Score
Credit scores are used by potential lenders to determine your financial history and your debt behaviors which determine the rate of interest they may charge you on the loan. Repaying debt and paying your bills on time can help establish credit. If you already have good credit, consider a “credit freeze” to lock in your score. To get a free credit report, go to www.AnnualCeditReport.com or call 877-322-8228.
8. Secure Your Retirement Savings Plan
Pay yourself first! We all must take the steps necessary to ensure a comfortable retirement. Become familiar with your company’s retirement offerings and make appropriate investment choices. Set aside a portion of your spending to invest in your long term future.
9. Review Your Asset Allocation
Know your time horizon. When will you need access your money during retirement? Every investment has a certain degree of risk. It is important to understand your loss tolerance and how that relates to the types of investments in your portfolio. Being honest with yourself about loss tolerance will help you feel comfortable with the types of investments you own. Diversify between asset categories, such as stocks and bonds and within asset categories.
10. Review Your Insurance Coverage
Know your policy dates and arrange a meeting with your insurance provider to review current coverage. Determine how your deductibles fit with your financial situation and risk tolerance. Find out what records your insurance provider will request in case of an emergency and put them in a safe place. Also check your beneficiary designations and make sure they are current.
The above tools will help you manage your money and prepare for a better tomorrow. Make the commitment and follow through with tracking every day purchases to identify your spending leaks. Then set realistic financial goals that are SMART (Specific, Measurable, Achievable, Realistic, and Time-bound).