Which part of personal finance is tough for you? Sticking to a budget? Saving enough? Maybe it’s dealing with debt or knowing how to invest. Skillfully managing your finances helps you create the life you dream about. Adopting sound habits in the key areas of budgeting, saving, managing debt and investing is the best place to start.
A budget is a roadmap that tracks your expected income and expenses. It can be an important tool for helping you live within your means. A popular guideline is the 50/30/20 rule, where you allocate 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment. To create a budget, you’ll need to look at your spending and income and determine which expenses are necessary and which are discretionary. Budgeting apps can be helpful, or you can use your bank and credit card records to look at your cashflow. Regularly reviewing your expenses can help you identify where you can save. It might also inspire you to make more money!
What about saving? If you consider using the 50/30/20 rule, you’ll be saving 20% of your income. You should try to make sure to have an emergency fund, or cash cushion, of three to six months of necessary expenses. If that feels hard to do, try systematic saving to $1000 first and then move up to 1 month of expenses. Leaving some of that cash cushion in your checking account helps with not having to time payments to when you receive paychecks. You’ll also want to save for other things like vacations, big purchases, and retirement. Remember that vacations will most likely be discretionary income, where big purchases may not be. Targeting a monthly amount to save toward big goals like these is a smart way to reach your funding goals. For retirement, you should always consider a plan to save at least as much as your company matches in your retirement account. You’ll want to consider working with a financial advisor to help calculate how much money you’ll need to save to achieve financial independence. Your advisor can also help you think about saving in a tax-efficient way for now or for the future.
The best way to manage debt is not to have any! Consumer debt can become unmanageable, which is why it’s important to understand your cash flow and think about using a budget. Some debt can be effective, like a mortgage or a business loan. For any debt, you will want to consider the rates you pay for borrowing and seek rates as low as possible. It’s also important to consider your debt-to-income ratio. You don’t want too much of your gross monthly income to go to debt. Your advisor can help you with strategies to manage and effectively use debt in your financial plan.
Finally, it’s important to consider investing your savings. Keeping it in cash under a mattress or in a safe deposit box might feel secure, but the hidden enemy there is inflation. Inflation erodes purchasing power in the future. An advisor can help you determine the best investment vehicles for your money based on your goals and risk tolerance. There is a wide array of investments available, and each has its own risk and reward profile. Work with your advisor to balance the risk and return you’ll receive and help ensure your portfolio is diversified to reduce shock waves of ups and downs in the market.
Managing your personal finances is a major task, yet most of receive little formal education on it. Partnering with a professional can help you understand key areas to focus on, giving you a clearer view of your finances and how to use them to create the life you want.
If you’d like to learn more about these strategies, or others, call us at 602.923.9800. We are here to educate and help you tie together the personal and technical sides of money.
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