Your relationship with money can blossom with just a few changes.
Is your relationship with money a little rocky? Maybe you spend too much, save too little or just totally ignore the whole situation. If so, make 2018 your year to improve your relationship and begin using your money more wisely.
How do you assess the current state of your relationship with money?
Ask yourself one simple question about your daily life: Do you know how much you spend each month? If your answer is everything you can find—including the loose change in your car—your money relationship likely needs a major adjustment. If your answer is less extreme, but you know you could use some help, our simple tips may also apply to you.
Many people ignore their finances because they don’t know how to begin to take control of them, but it’s surprisingly easy once you make a plan and stick to it. These five simple tips will help you change your relationship with money and develop a more financially secure life.
1. Build an emergency fund
The most important first step is to build an emergency fund, which can help you pay for unexpected expenses, such as car repairs, or help you endure a job loss or other financial catastrophe. If you don’t have an emergency fund, you may be forced to rely on credit cards or other debt, which can turn your temporary emergency into a much longer-term setback.
Most experts say your emergency fund should cover three to six months of expenses. While six months is obviously best for everyone, single people or two-income families may be able to get by with less, while most single-income families should try to put a full six months in reserve. The amount necessary to set aside is dependent on your personal finances. While the default is generally six months, single people or dual income families may be able to get by with less. However most single-income families should try to put a full six months in reserve.
2. Establish goals
The second step is to understand what you want your money to do and what it will take to make that happen. For example, do you have a retirement age in mind? Are you saving to buy a house? Do you want to go into business for yourself? If so, are you actively pursuing these goals? Many people do not look beyond their short-term financial needs, so they never give themselves a chance to build the financially secure future they truly want.
3. Assess your situation
Now that you have established your goals, you can assess your current situation more effectively. Keeping your goals firmly in mind, what changes do you need to make to ensure your success? You’ll probably be working on several goals simultaneously, depending on your specific situation. For example, retirement is a goal that nearly everyone will always be working on simultaneously because of its long-term nature. Don’t let more short-term goals, such as buying a house or a car, overshadow this very important long-term goal. Allocate appropriately to fund each of your important goals.
4. Track your current circumstances
Know what you are saving versus what you are spending. If you have too much debt, you may need to reduce it and stop unnecessarily using debt in the future. If your monthly living expenses are too high, you may need to look at new options. Can you downsize? Move to a less expensive area? Cut your commuting costs? Once you’ve made necessary spending adjustments, pay yourself first. That’s right, you owe it to yourself to make your goals your ultimate priority. Determine how much you can (and need to) save each month, and write yourself a check before any other expenses. If you don’t, your savings account will probably be filled with nothing more than good intentions—and your goals will never be met.
Your goals cannot be met by merely collecting interest on the money you have in savings. Retirement, alone, is a big goal that requires a judicious investment strategy. Start with your employer’s retirement plan. If you have access to a 401k or similar plan, maximize your contributions. This is particularly important if your employer matches all or part of that contribution. Workers who don’t contribute at least enough to qualify for an employer’s match are just throwing away part of their annual salary and benefits package.
If you don’t have access to a retirement plan through your employer, you can start an IRA account on your own. Once you have an account, you need an investment strategy that matches your tolerance for risk – which can be governed through diversification – and your investment timeline. You may have different strategies for different goals, but you should always track your risk and keep overall costs to a minimum.
With smart spending, consistent saving and effective investing, you can achieve your financial goals—and these five tips will help you begin. If you need help with some of the details, a skilled advisor can assist with your needs.
Shannon Lynch, CFP®
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