While a new year is nothing more than a simple change of the calendar, it still brings with it endless possibilities and hopes for a better tomorrow. There are many among us who aim to acquire more control over our finances and handle our expenses and investments in a more strategic manner than we have in the past.
Unfortunately, many people have never been taught how to manage their finances, or in some cases what managing them even entails. Smart financial management is not limited merely to managing your income and expenses. Instead, it may involve choosing the right investment opportunities, managing and minimizing debt, tax planning, saving for retirement and maintaining good credit. While not all of those will factor into everyone’s life at all times, often dependent on health, age and income among other things, they are things that everyone should be aware of.
To analyze your financial situation, you must first discover what it is. To do this a financial journal is an excellent tool. By writing down all credits (income) and debits (expenses) for an extended period you can get a better idea of how you can make changes to improve your financial progress. Some people only spend cash to help them purchase only those things that they really feel they need, others may use a lower limit credit card for everyday expenditures to limit spending. No matter if you do one of these things already or not, by looking at an actual list of how much was spent, and what it was spent on, maybe a real eye-opener.
Once you have kept a journal for a few months, you will know exactly how much income you have during an average month (totals may vary monthly due to commissions, seasonal income, tips, etc.) as well as how much you have spent. When looking at your expenditures it is important to categorize them between obligations (bills you MUST pay, rent, vehicle, insurance, groceries to name a few) and discretionary (eating out, attending sporting events or weekend getaways for example). If your journal shows that your average monthly income is more than your monthly expenditures than you may just be looking for minor savings on less important areas of discretionary spending. If, however, you are spending more than you are taking in it is critical that you make some changes. Bills can be difficult to reduce, after all, you must have a place to live, the vehicle gets you to work and it’s imperative that you eat), but the discretionary spending can be a place to start. $5 a day on coffee, eating lunch out every day, going out three nights a week, those are all things you can do less to save significant money in the long run. Alternatively, you can seek to increase your income, either by earning a raise and/or promotion at your current job or adding a second job in the evenings or on weekends. Whatever change you decide to make, you won’t know what’s needed until you have a comprehensive understanding of your current situation.
Create an emergency fund
It is natural for an individual struggling with debts to never even consider the idea of saving. However, it is beneficial to set aside a portion of your income for tackling any future, unforeseen financial emergencies. Again, this can be done by utilizing your disposable income and setting aside a portion of it each month. It may take a while for that savings to grow but it will be very rewarding to watch it do so. One way to start a bit of a buffer is to get in the habit of paying bills as you get them instead of waiting for the due date, especially when dealing with accounts on which you pay interest. This will not only reduce future interest charges but also give you some time to decide the best way to deal with financial emergencies when they occur. That bill you have gotten used to paying on the 3rd but is not due until the 20th can give you some time to plan when situations arise, rather than forcing you to make a poor decision due to a lack of time to decide on the best strategy. It can also be very rewarding, as well as liberating when a problem can be solved without having to go to an outside source for assistance.
Save for your retirement
Unfortunately, most us do not pay enough attention to the need for retirement savings until we are nearing the end of our employment days. However, it is important that you start considering your retirement plans early in your working life to maximize your savings. Company-sponsored 401(k) plans are a good way to start your retirement fund and take little effort. In addition to that, you can also have your paycheck deposited into multiple accounts, the major portion going into your everyday bank account with a smaller portion going into a savings account specifically set aside for retirement or available for any emergencies that arise. When you do start to plan for retirement, you want to make sure that you are also taking advantage of any tax benefits you can take by the IRS
Strategize your investments
If you are fortunate enough to have funds available for investment after the bills have been paid, some money has been saved and you have enjoyed an indulgence or two you may be in the position to invest to create additional income. Far too many people blindly invest in plans that their friends or colleagues invested in without researching, or even thinking about what their specific goals should be. Traditional thinking dictates that the younger you are when you start investing the more risk you can take. While you usually will want to spread around your investments, not putting all your eggs in the same basket, most should be relatively safe – earning decent, but not spectacular, dividends while presenting less risk – if you are younger you may want to invest some of your available funds into riskier plans, there is a greater chance that those funds may be lost but also a chance for a much greater return on your investment. Unless you are in the finance business or have an education in economics you may not have a complete understanding of the options available and it is probably advisable to talk to a financial advisor to create a strategy tailored to your specific circumstances.