5 Key Things for Financial Stability
Happy New Year! New Year = New Resolutions = New Opportunities. So let’s kickoff the new year on the right foot and focus on getting our financial lives in order.
Here are 5 key things to put your financial house in order:
1. Take stock of what you have. Organize your financial life. Most people, and you may be one of them, have a financial junk drawer. Whether this is a physical drawer where you have actually accumulated all of your “stuff” (receipts, paperwork, etc.) or whether you merely have not kept track of your financial information, now is the time to take stock of what you have and arrange your financial life.
- First, see what you have. Empty the drawer on your table or print out your recent financial statements, insurance information, wills, trusts, etc. to see what you currently have.
- Next, create a financial snapshot. In order to control your future, you need to know where you are today by organizing what you have. Whether you use an excel spreadsheet, a program such as quicken or mint.com, or an old fashioned pen and paper, you will be on better footing to determine your next steps once you are able to explicitly put together the pieces of your current financial picture.
2. Maximize protection. Most people think of insurance only as an expenditure, without fully understanding how insurance can work for them. Insurance is one of the best ways to respond to financial uncertainties. It is cost effective and protects you against accidents, death, disability, and long-term care, amongst other things. By underinsuring, you are increasing your exposure to a financial calamity or problems.
3. Save 20% annually. The ability to save 15-20% of your annual income will help create a good balance between your current lifestyle and retirement. The best trick to make this new years resolution stick is to automate it. If you can direct part of your paycheck automatically to savings or permanent life insurance, you will painlessly accumulate robust savings before you know it.
4. Build an emergency fund. Accumulate enough liquidity equal to your annual income. Unforeseen crises, such as losing a job, or a catastrophic illness, can be addressed without causing financial calamity if you have set aside a substantial amount of money that is readily available in the event of an emergency. Just as with tip #3, we recommend setting up an automatic deposit into a separate savings account earmarked for an emergency. Another great savings tactic is to set aside part of your annual bonus (if you receive one) into your emergency fund to help it grow until you reach the target of one year’s salary.
5. Get rid of all short-term debt. Debt is expensive, especially short-term debt, such as credit card debt, which is usually the most expensive and probably eats up the largest percentage of your current income.
There are a number of creative possible solutions to paying off short-term debt. Potential options include financing at a lower rate, consolidate your debt, borrowing from a parent/friends, using a home equity line of credit to pay off larger debt (which could be tax deductable), as well as creating an automated savings plan to set aside cash flow and pay down your short-term debt.
Now is the time that people make New Year’s resolutions! Often people fall off the bandwagon, but the good news is, it doesn’t take much to get yourself on the path to financial stability. By focusing on the 5 key things listed above, you can take small steps to make it work. Get on a program. If not now, when?
If you would like to speak with a financial professional about creating a strategy for financial stability, please contact us.