You pay your bills, put away some money for savings, and contribute to your 401(k) retirement plan every month. When it comes to managing your money, isn't that enough?
It's a great start, but to get the full picture, you’ll want to take a step back and take a hard look. There's no better time than the start of a new year to take a big picture look at your finances and see where you stand. Setting financial goals isn't always easy, but there are things you can do now to help start building good habits and prepare yourself for the future.
Here's how you can get started.
1. Prepare for the unexpected
With 2020 (finally) in the rear view, this year has taught us all that being prepared for the unexpected can make a huge difference in how you can weather any impending storm. While the light appears to be at the end of the tunnel with COVID-19, there are some financial planning lessons to take from it that you can use in the future.
As you look at your finances, keep that in mind. Here are a few places to focus:
- Create an emergency fund: Save a few months of expenses, and you can use it to cover bills if you lose your job, need help covering for medical expenses, or get hit with an unexpected bill.
- Have a plan for the worst: If natural disasters are a worry for you, it may be good to have a plan in place in the event you were affected by one. Talk with your insurance provider to make sure you have the right coverage in place. Additionally, an emergency kit is one of the best ways to be prepared should a disaster strike.
- Consider life insurance: A life insurance policy is there to help protect your loved ones, giving them some financial security when you pass. If you already have life insurance, the new year is a great time to review it. Your policy through work is likely not enough, so make sure you have the right amount of coverage for your needs.
It's hard to think about bad things happening, but just having even a bit of financial protection can help you weather the storm.
2. Create a budget
One of the very best things you can do to help get your financial house in order is to make a budget. It's probably why so many experts recommend it.
Setting up a budget is easier than you think! Here's how to get started:
- Start with the basics: If you do nothing else, keep track of your income and expenses. The easiest way to avoid going into debt is to spend less than you earn.
- Go deeper: Once you have the basics down, look at the rest of your finances. See where your accounts stand and determine if you can contribute more to your retirement savings, increase your life insurance coverage, or buy long-term care insurance.
- Don't set it and forget it: Your income and expenses can change frequently, so you’ll want to check in monthly to ensure that you’re keeping an up-to-date picture of your financial situation.
If you have any significant life changes, such as a raise at work or a new baby on the way, make sure you adjust your budget accordingly. These can impact both how you save and spend.
3. Handle your debt
If there's one thing that can stand in the way of a happy financial future, it's debt. While living a debt-free life isn't always possible, there are some things you can do to help keep your debt to manageable levels.
When looking at your debt, consider the following:
- Know what you owe: The first thing you need to do, as scary as it might feel, is getting an accurate picture of all the debt you have. Once you do that, you can start developing a plan to pay it off.
- Make a plan: You likely won’t be able to pay off all your debt in one go, but what you can do is set a realistic plan to help pay it down. Start with the accounts with the smallest balance or the highest interest rate and pay them off one by one.
- Lower your interest rates: If you have credit cards or other debt with high interest rates, shop around for a card with a lower rate or apply for a personal loan with a low rate, then transfer the high-rate balances to the accounts with the lower rates. You will be surprised at the difference this will make in your ability to reduce your debt. Just be sure not to use those high-rate cards once the balances have been transferred.
- Pay your bills on time: One of the easiest ways to get mired in debt is through missing bill payments, and then it starts adding up. Set a reminder in your calendar or sign up for automatic payments to take care of it.
- Keep those paid off accounts open: Believe it or not, maintaining your paid off accounts helps improve your overall credit score, which will help you get approved for more credit at a lower rate in the future. Creditors will look for a low credit utilization rate, meaning that the amount of debt you have is less than the amount of credit you have. The larger the spread between these two points, the better for your credit score. Only close these accounts if you need to reduce your overall available credit, like when applying for a mortgage. Your lender will help you determine which accounts make the most sense to close.
Remember, not paying your debt can have life-long financial consequences. High levels of debt can negatively impact everything from your credit score to your ability to retire when you want.
4. Evaluate your investments
Your monthly income, savings, and debts are part of your finances; another big part is your investment portfolio. It's what many people use to help fund long-term goals and supplement retirement income beyond a pension or Social Security.
The beginning of a new year is a perfect time to evaluate your investment strategy. Here's where to focus:
- Review your portfolio: Go over your portfolio at least once a year. Check your portfolio balance to ensure you don't have more of your funds invested in one area than you're comfortable.
- Look to diversify: If your initial review finds that you’re heavily invested in one area, like stocks, you may want to diversify. Diversifying your portfolio means you have your money invested in a couple of different areas. It's a way to help reduce the volatility of your portfolio over time.
- See where you can contribute more: A good rule of thumb is the earlier you invest, the more likely you are to see your money grow. Once you have your budget set, you might find you have some extra cash to invest each month.
Investing doesn't have to be complicated. Anyone can do it, even beginners. All you need to do is learn the basics, start as soon as you can, and have some patience.
5. Map out your financial goals
When you've followed the tips above, you've begun building a solid foundation for your long-term financial future. The next thing you want to do is think about taking all that information and making a solid plan for your goals.
Here are a few things to think about:
- Set your goals: Try to think ahead and consider the big purchases you might have coming up in the next few years. A new home, car, college fund, or even a vacation are common examples.
- Create a plan: Once you have your goals, set up a realistic plan to contribute each month. For example, you might be able to set up a sub-savings account for your goal that you can automatically deposit money into monthly.
- Set milestones: Big financial goals can often feel out of reach. Rather than looking at the final number, break it down into smaller chunks and focus on hitting those. It will help you stay on track and feel as if you’re making measurable progress.
When it comes to your finances, knowledge is power, so knowing where you stand with your income, debt, savings, and retirement plans can go a long way toward helping you meet your goals.
6. Hold yourself accountable
New Year’s resolutions often fizzle out early in the year, financial goals being no exception. Life happens, emergencies hit, and things can slip away from our attention. However, that doesn't mean you can't get yourself back on track.
Consider these strategies:
- Make it part of your schedule: One easy way to make sure you stay on top of your finances is to make it a consistent part of your schedule. Set a time in your calendar each month or quarter to review your finances.
- Track your progress: Find a way to get engaged with your progress. There are plenty of tools and apps out there you can use to gamify financial planning and keep you on the right path.
- Celebrate the wins: Getting your financial house in order is hard work, so pat yourself on the back when you have a win. Set aside a small wins fund that you can use to celebrate with a small gift or a dinner out.
Remember getting your finances in order is a lifelong project. It's not something that happens overnight—especially if you haven't done it before.
Look at your overall financial health
Our Financial Legacy Index found that 82% of Americans want to leave a strong financial legacy behind; however, nearly 40% lack the confidence to do so. Something to think about when you ponder your financial legacy is life insurance. Yes, it's a crucial part of your family's financial future, so you don't want to ignore it. Building a strong foundation for your finances can help you build and protect your legacy. Life insurance is just one other way to help preserve that legacy by helping to continue to provide for your family's quality of life after you're gone.
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