Most of us view some form of financial situation as a goal: save more, spend less, and earn more. “Putting my finances together” is on everyone’s list, but with each new list added, it usually gets pushed down. Getting started is a daunting task, and many people are afraid to do so – but you don’t have to be a savvy investor to manage your finances. Your financial health is as important and requires as much attention as your physical and mental health. Managing your financial situation should not be considered optional. Like diet and exercise, this is an area of life that must be supported. Not only can a poor financial situation cause obvious money problems, but it can also cause stress, depression, marital problems and health problems.
The following steps are easy to follow and will make significant progress in the New Year. After a year of experience, what better time to start on your financial health path than 2021?
- Organize your net worth
Start by listing all the places where you have money. This would include retirement accounts (such as old 401Ks, IRAs, etc.), brokerage accounts (any non-retirement investment accounts), savings, checks, CDS, and 529s. Find the most recent statements for each account online or in your file and list the total amount for each account. Then transfer to other assets, such as houses, cars, valuable jewelry, etc. List the approximate value of each item. The sum of all these items is equal to your total assets. Do the same for your debt – list the value of each account as well as credit cards, student loans, mortgages, HELOC, and so on. The total is your debt. Subtract your liabilities from your net worth and you get a snapshot of your financial position.
- Set goals
Because the financial goals are obvious, a lot of people see it, spend less. Save even more. But real financial planning involves your life goals. If you don’t know what to save, how do you know how much to save? Money is only a tool that can help you reach your goals. Maybe you want to save as much money as possible to retire early – great, that’s a goal. Maybe you want to buy a house in four years – goal. Or, you may be looking for an easier way to travel and don’t want to be saddled with 9-5 office jobs. Your goal may be to earn money as a freelancer. By schedule goals: start in 1, 3, and 5 years. List them and how money can help you get them.
- Keep track of your budget
Setting a budget is the hardest part, and I don’t mean “setting” a budget. A budget can also be a four-letter word, but it doesn’t have to be an ordeal. The goal is not to set a strict spending schedule or spend more than that amount in extra dollars. The purpose of a budget is simply to see how much you earn, how much you spend, and what is left over each month. List fixed monthly expenses (rent/mortgage, bills), discretionary expenses (travel, dining out), and how much you save each month. Our goal is to maintain a positive balance after subtracting expenses and savings from income. Then, use it as your spending guide. Instead of constantly monitoring it, you check it once a month to see if you’re on track.
I often have clients ask me where is the best place/means of transportation to put their money. Should they retire it, keep the cash, pay off the mortgage faster or invest in the market? While there are multiple saving strategies depending on your age, goals, and value, for those just getting started, the simple answer is to start saving. Automatically transfers $100 a month from checks to savings. Set your 401K at work and contribute 2% of your salary. There is no wrong way to save. The goal is to get into the habit of not spending all that money, and to create a safety net. From the beginning, you can develop a more detailed strategy.
The start of a New Year brings the opportunity for a fresh start and this year's performance is better than last year's. By completing each step in this list in just a few hours, you have become financially healthier, which will improve your overall health, confidence, opportunities, and improve your life.