Money Talk: Managing money to reach your financial goals
Part 2 of 6
Do you understand where your money comes from and where it goes? Are you procrastinating about putting your financial house in order? Managing your money is too important to put off until tomorrow. Let’s look at four areas to get you started.
A budget is more than columns of numbers; it’s the foundation of your plan to achieve your goals. Start by recording all of your income sources. This could be wages, rental property, alimony or child support, or Social Security and pension benefits. Review your income over several months to get a monthly average.
Next, list what you spend each month, from fixed expenses (such as rent or mortgage payments) to variables (groceries and utilities) to discretionary expenses (like that latte you have every morning). Again, find a monthly average. If you pay for something once or several times a year, divide the total by 12. Don’t dismiss something you think is a one-time expense. Always budget for the unexpected.
Now for the moment of truth: Total your income and subtract your expenses. The difference is your cash flow. If it’s positive, congratulations! You’re doing exactly what you should be doing — spending less than you earn.
If your cash flow is negative, don’t despair. Now that you know where your money goes, you can find places to cut back, leaving you more cash to save and invest. You may have to postpone luxuries and other non-essentials, at least for a while, but the result will be worth it.
Your Net Worth
Calculating your net worth provides you a quick assessment of your financial situation. You’ll need to know all of your assets – and your liabilities. Estimate the value of everything you own including your house, car, real estate, or investments. Subtract from the total everything you owe such as your mortgage, car loans, or credit card balances, for example. From this baseline you can see how near (or far) you are from your long-term financial goals.
Ideally, you should strive to improve your net worth from year to year. If you’re not doing that, you might need to fine-tune your budget – or do a better job of sticking to it.
Trying to reach your goals when you’re encumbered by debt is like running through quicksand. Effective debt management will help you get back to solid ground.
Even if your cash flow is a trickle, you can still practice effective debt management by restricting discretionary expenses and always setting something aside to pay down your debts. Developing this debt-management habit will help you in the future; you’ll naturally start to use extra income to pay debts and/or increase your savings, rather than use it to pay everyday or discretionary expenses.
It’s also a good idea to check the rates and terms of your outstanding loans to make sure they’re competitive.
Boost Your Income
You’ve already figured out your income and your assets. Now you need to stack these numbers against your goals. Is your income enough to get you where you want to go? Is it stable? If you can’t answer these questions positively, think about strategies to stabilize and increase your income sources. Consider asking for a promotion at your current job, turning a hobby into a side business, taking a second part-time job or renting a part of your property to increase your earnings.
– By Erin Eddins
Erin Eddins is a Certified Financial Planner and Chartered Financial Consultant with Stancorp Investment Advisors in Lynnwood.