I know, I know, another year, another list. But, I always look at the New Year as the opportunity to hit the reset button or the catapult button. Businesses have 5 and 10-year plans and revisit their business plans yearly, quarterly and monthly, individuals and families should as well. Your household finances are your personal economy and we should treat it as such. So take these steps to get financially fit for 2017.
1. Identify your financial goals and make them SMART
What do you want? Before you start making plans to “save money,” “get out of debt,” or “make more money,” ask yourself why. What is important about this goal? How will your life be different as a result of reaching this goal? Be specific and honest with yourself. Once you’ve identified the why, then you have to quantify it.
Make sure your goal is SMART:
Specific – Measurable – Actionable – Realistic – Time bound
So, if you want to get out debt, you want to be specific in determining how much debt to you have, when do you want to get rid of it, how much money do you have to put toward paying off that debt? Same thing for saving for a goal, what is the goal, how much is it, when do you want to have it, how much can you put toward it each pay period, etc.?
A financial goal without a dollar and a date is a dream!
2. Know Your Net Worth – Do an overall assessment of your financial status.
In order to get to where you want to go, you have to know where you are. Look at your cash flow in 2016. How much money did you make? How much money did you spend? How much did you borrow? Review your pay-stubs, W2’s, 1099’s, QuickBooks, Quicken and see how much money you earned this past year. Next look at your bank statements, credit card statements, receipts and see where your money went. Are you in the red (more debt than cash in hand) or in the black (more cash/assets than debt). Notice any trends?
You may have to track your expenses for a couple of weeks in order to start to find your spending leaks and triggers.
Then, take an assessment of your assets (what you own) and liabilities (what you owe) to determine your net worth. Assets – Liabilities = Net Worth. Is the number is negative (in the red) or is it positive (in the black)? You want to work toward getting in the black.
3. Create a Spending Action Plan
Next you have to plan what will you do to reach your goal. It starts with the “b” word: budget. A budget is a way to plan your spending. After you’ve calculated your net income, you want to put 10% into savings and then itemize all of your necessary expenses (housing, food, clothing, transportation, etc.), and then you can enjoy the rest. In order to be successful in your budget, you will have to ask yourself 3 questions: what do I need to start doing? Stop doing? Reduce the frequency of something you do too often? This will take some soul searching, prioritizing needs and wants, and understanding your spending choices has trade-offs. Break your action steps down into bite size pieces. Start with no more than three things that you can and will do. You don’t want to overwhelm yourself, causing you not to get started or quit too soon.
4. Ditch the Debt
Good debt gives you leverage, you use it with anticipation of getting a return on your investment. Examples of good debt: property mortgage, student/education loan or a business loan.
Bad debt is money you borrow to live beyond your means, buying things you really cannot afford that will not give you a return on your investment. Examples of bad debt: vacations, clothing/shoes, electronics, and toys, “stuff.”
We are being affected by our culture of debt, making us believe carrying debt is the norm and that its ok, but too much debt will affect your net worth and your ability to borrow for investment needs. We have to attach our debt and get rid of it!
Ideally, no more than 20% of your net (after-tax) income should be paid to all consumer debt payments (credit cards, student loans). So, work on a debt management plan to get your debt down to as little as possible.
You may have to put your overspending on ice – literally freeze your credit cards for 2-3 months to break the habit and remove overdraft protection from your debit cards.
5. Use Super Savings Strategies
The best strategy to reach your savings goals is to set up separate savings accounts specifically to save for your major financial goals. This will help you focus and track your progress. Next, you want to automate your savings – set up an automatic transfer from your paycheck to your bank account, including investment accounts. You may need to curb impulse buys at the supermarket: plan meals and use a shopping list. Also, make mini-cuts: Buy a medium coffee instead of a large, or try similar downsizing in other ways you spend. A daily 50-cent savings equals about $15 per month or $180 a year.
6. Your Mindset Matters – Tell Yourself You Deserve More
You deserve more! Not another dinner, gadget or clothing item, but to be safe if you lose your job, to be free of bad debt and to save for something that will truly make you happy. The next time you’re tempted to spend, ask yourself: Do you deserve this $40 candle/$25 dinner/$100 pair of shoes, or do you deserve more? Your circle of influence will also affect your mindset and behaviors around money. You need to hang around people who share the same mindset around money in order to be successful in your financial goals. Lastly, you have to live below your means – stop spending mindlessly and stick to your spending plan. Take note of your behaviors that help you move toward your goal and those that take you off course, specifically “people, places and things” and make the necessary adjustments.
7. Schedule Time with Your Money
Your relationship with money will be one of the longest lasting relationships in your life; therefore you need to spend time with your money. That means scheduling time to look at your accounts, your spending, your goals, your net worth, and your credit. You can put an alert on your calendar to check your accounts daily, do weekly, monthly and quarterly check-ins. You should also make this a family affair, schedule meetings with your spouse, parents and children to talk about your financial status and your financial goals. Nurture the relationship and it will do you well.
As you embrace 2017, face your finances head on. Don’t be afraid. Take your time to make your plan and do the work. If you need advice, seek it. If you need coaching or accountability, ask for it. You have to focus on what you want, so get to it! Happy New Year! Make it a prosperous one! Start today!