Fresh Year - New Financial You
Happy New Year! Many of us approach the new year with resolutions to be physically healthier. That may include pledges to exercise more, eat better, or lose weight. Whether or not you’re planning enhancements to your physical health, we suggest it’s also a good time of year to get organized and look at your overall financial health. Proactive and purposeful management of your goals can often help you satisfy the dreams you may have to travel more, buy a house, spend more time with friends and family, or even learn a new skill.
Set Your Priorities
Before you jump into the task of budgeting for the year, we suggest it’s important to step back and think about your priorities. Do you love your current job? How are you doing with your savings? Do you want to travel more? Do you want to make a bigger dent in your student loans? Priorities are personal and reflect what is most important to you. And it’s important to separate those priorities between “wants” and “needs.” For example, you want to take an international trip in the next one to three years, but you can’t find the money to save for that trip. At the same time, if you realize your monthly DoorDash costs would fund a nice savings toward that trip, then maybe you need to reassess your priorities. Likewise, if you find you’re spending a small fortune grabbing your morning coffee, but that IS a priority for you, then enjoy every cup!! The goal of setting priorities is not to suggest you can’t spend on anything you enjoy; it’s to help you prioritize what is most important and make sure you’re spending your money there.
Track What You Spend
Once you understand what your priorities are, then you need to dig into where you’re currently spending your money. Most of us don’t really know. I’m not about to suggest you do this forever but pick a month or two or three and go through it. It’s pretty easy to download all the transactions from your bank accounts and/or credit cards. Categorize those and sort them to figure out where your money is going each month. First, separate the known fixed costs – rent/mortgage, car payment, loan payments, and insurance. Now add the other non-discretionary items – groceries, medical costs, gas, utilities, etc. Also note your regular savings – emergency, mid-term, and retirement savings. Now, what else are you spending your money on? Is your morning coffee habit costing as much as your car payment? Are you using that gym membership? Does your closet truly need the additions being funded? Do you really need that expensive salon treatment? Are you paying for high-interest credit cards? Once you’re able to really understand where your money is going, it’s easier to compare whether your spending matches your priorities.
Set Up Your Financial Plan
Finally, use all this information to set up your financial plan. At a macro level, we suggest prioritizing your spending after your main bills to the following: 1) Emergency Fund, 2) Paying off high-interest rate debt, 3) Saving for retirement, and 4) Saving for other priorities. Once you think about that, look at your monthly income and work through priorities for those funds. Generally, we think it’s important to pay yourself first, and if you save off the top, then you force yourself to live on what’s left. We suggest everyone should have emergency savings that equals three to six months of living expenses. If you don’t have that, you need money saved each pay period to fund that emergency savings.
Generally, we don’t like credit card interest. We get it – everything goes on the card to get the points, airline miles, or cash back. And that’s fine, but you need to make sure you’re setting aside what will be needed to pay that off every month. If your balances haven’t gotten to where you can’t do that, then you need to prioritize paying that off first because those interest rates are crazy high. Likewise, we think it’s important to get those student loans paid off, but it can definitely depend on what interest rates you’re paying. Federally subsidized student loans can be at lower interest rates. It’s important you understand what you owe and what the respective interest rates are. Pay off the highest-interest loans first.
Saving for retirement matters – the younger you start, the longer your contributions have to grow before retirement. Saving through your company retirement plan is generally the easiest and the best way to maximize savings. Finally, if you have mid-term goals you want to save toward, you need to add those. That could be things like funds for a down payment on a house, a travel fund, savings to buy a new car, etc. Now, be intentional with your discretionary spending and make sure where you’re spending supports your initial priorities.
We’d love to talk to you about your financial health and financial plan – give us a call.