With all the economic turmoil in the last year, managing your financial life may seem like an overwhelming task. But with a few simple steps and some potentially tough decisions, you can have more “green” on your path to financial fitness.
Step 1. Take inventory of where you are now. Calculate your monthly income sources, monthly expenses and value of your assets. In financial terms, that means determining your cash flow (income less expenses) and your net worth (assets less liabilities) so you have a true idea of your current status. More expenses than income (negative cash flow) is your first sign of trouble.
Step 2. Determine what you want to accomplish. What financial goals are important to you, how much money do you think you will require and what is the time frame for each desired outcome?
Step 3. Identify where the money will come from to satisfy these goals. Does your current cash flow allow you to set aside the necessary funds to achieve your objectives, or will you have to liquidate assets/investments or borrow money?
The third step is usually where the plan hits a snag. Tough choices come into play at this point in the process, but there are really only two things you can do with money – save it or spend it. Your financial success is determined by how well you do both saving and spending. Creating a budget will challenge you to decide if each expenditure category is a monthly “want” or “need.”
Step 4. Manage debt and credit wisely. The following are a few general rules of thumb that you may find helpful:
You may be financially overextended if more than 20 percent of your take home pay goes to paying non-housing debt, or if more than 30 percent of your take home pay is utilized to pay your rent/mortgage.
Whenever possible only borrow for things that will increase in value (home, education) or big ticket items that will still be in use after the debt is paid off (car, computer) using installment credit.
Revolving debt, such as credit cards, are open ended lines of credit. The amount of credit extended and the finance interest rate charged is based on your income and payment history, and the monthly minimum payment will fluctuate based on the total outstanding balance for that month plus fees. Paying only the minimum due on a $2,000 balance could mean making interest payments for more than 10 years. Be aware of what the convenience of plastic money really costs you.
Be a savvy consumer. Shop around for your best credit options and assume everything about how you handle your finances is going on your “permanent record.”
Valerie Johnson is a certified financial planner for Kolb + Co. S.C., Brookfield.