Getting your financial affairs in order can feel like a chore. It's easy to put this task on the back burner. But, with just a little time and effort, you'll be glad you decided to do so in the short and long term. Here are just a few good reasons you should put prioritizing your personal finances at the top of your New Year's Resolutions.
- Though thinking about your own mortality can be anxiety-inducing, you never know what could happen to you. Getting your finances in order can help your loved ones out if something should happen.
- Help yourself out by being prepared for emergencies, such as unexpected medical bills, household appliances needing to be replaced, vehicle repairs, etc.
- Streamline your bill paying. This leads to much less stress and prevents missing payments.
- Creating a budget (or at least keeping better track of your expenses) leads to less stress as well, helps you make wiser spending decisions, and helps you save more money.
There are multiple facets to getting your finances in order: Budgeting, reducing debt, smart investing. Fortunately, you don't need a master's degree in accounting to get started on taking control of your own finances. Today, we're sharing some important tips to get your personal finances prioritized for a stress-free 2023.
#1 Create a Budget
Making a budget is the best way to keep track of where and how much money you have coming in monthly, track your expenses, and compare the two to find areas that could use improvement. Implementing a personal finances budget doesn't mean you have to live frugally. It can make your life less stressful and more comfortable.
Here are the basic steps on creating your own budget:
- Gather your financial statements-This includes, but is not limited to, pay stubs, utility bills, and bank statements.
- Total your monthly income-This can include take-home pay amounts as well as other regular monetary sources, such as child support.
- List your monthly expenses-Include all of your regular expenses, such as utility bills, insurance payments, car payments, groceries, and so on. Be sure to factor in eating out and entertainment costs as well. And remember, a budget only works if you are completely honest about your expenses.
- Differentiate fixed and variable expenses-Fixed expenses are those you pay the same (or very close to) each month, such as car payments. Variable expenses include items such as groceries, gas, and fun. Next, determine how much you will need to spend each month on each category.
- Determine your monthly income and expenses-If your expenses are more than your income, changes will need to be made to the amount you “splurge” on each month.
If you are looking for some resources we have included some template links below to get you started:
#2 Review Spending Habits
Most people splurge on comfort or entertainment-related things each month. That latte every morning, pizza night every Friday, a game night to see your favorite team play live. It's normal to spend a little extra on things you enjoy. But, these variable expenses can add up quickly without you even realizing it.
For example, say you spend $3.50 on a latte every morning on your way to work, Monday through Friday. That's not much, right? Over the course of a month, though, it adds up to $80.50! It's easy to see how taking a close look at your “extra” expenses, and reigning them in, can help you save money.
Other expenses can be a little trickier. Not much can be done about the cost of rent in your area or what the gas prices are currently. Food prices can fluctuate too. Luckily, there are a few things you can do to save on necessities.
To immediately lower your utility bills, turn down your thermostat, use energy-efficient lightbulbs, and don't leave your water running when you're not using it. Eat out less and make a grocery list; you're much less likely to buy something you don't need if it's not on your list. Work in a different town where the gas prices are usually lower? Fill up before heading home. That $0.10 difference adds up when you're re-fueling regularly!
#3 Assess Insurance Coverages
An often overlooked way to reduce your expenses is re-assessing your insurance coverage. Don't limit yourself to health insurance either. Many life events can affect your car, life, and homeowner's insurance too.
An article from the Insurance Information Institute provides some valuable things to consider when assessing your insurance coverage for the year. Following are just some of the ways that assessing and making changes to your insurance coverage can positively impact your finances.
- You can get discounts for multi-car policies. (Say, by adding a spouse or child.) Some insurance companies offer discounts to those 50-55 years and older. You may also get lower premiums if you have recently retired and are no longer driving nearly as much.
- Look into cutting your life insurance premiums, especially if your income has decreased. Also, look into consolidating multiple policies into one as you could receive a lower rate.
- Stay “in-network” when seeing doctors. You'll either have no co-pay or a reduced one. Oftentimes, you'll have to pay full price when you see an out-of-network doctor.
#4 Know Your Net Worth
You've likely heard the term “net worth” when referring to a famous actor's worth. But what does it have to do with your finances? Quite a lot!
Net worth isn't just a term used for the very wealthy. It's actually a very helpful tool in keeping track of your overall financial health. Net worth refers to the value of your assets after all of your liabilities have been accounted for. It paints a more accurate picture of your financial situation and whether you're reaching your goals or not because it does not take your income into account.
You may also hear the term “liquid net worth”. It is slightly different in that it doesn't consider non-liquid assets, such as real estate, into its amount.
Calculating your net worth is fairly simple. Add up all of your assets (I.e. the value of your house, investments, retirement savings, etc), add up your debts (mortgage, loan payments, medical debt, and the like), then subtract your debts from your asset total.
Knowing your net worth will let you know how your personal financial goals are progressing over the months and years. You will see noticeable increases when your retirement savings accumulate, when you've worked on building your emergency fund, pay off debts (such as student loans), and much more.
#5 Pay-Off Debt with Highest Rates
Paying off debt is an important (and liberating!) step to financial freedom. But, which one should you work towards paying off first?
While making minimum payments on all of your loans, credit cards, etc each month may sound tempting, that often leads to paying much more in interest over time. Several other recommended strategies will help you pay off those outstanding debts faster.
- Pay off your high-interest loans first.-No one likes paying extra on interest. This strategy helps you save money in the long run.
- Pay off your lowest debt first.-This is a great motivator for sticking to your debt repayment goals.
- Pay off the debts that affect your credit score the most.-This plan is in your best interest if you're looking to make a big purchase, such as a home or vehicle, where your credit score needs to be favorable.
#6 Consolidate Debt
Debt consolidation can give you lower interest rates, helping to pay off all of your debts faster. It also helps streamline your bill-paying, making it easier and less likely for you to forget a payment. So, what is debt consolidation?
Debt consolidation is simply combining several debt payments into one monthly payment. There are several ways you can consolidate debt. Let's take a look at some of the most common ones below.
- Debt consolidation loan-If you have a decent credit score and are timely with your payments, you may qualify for a special bank loan to help pay off your smaller debts.
- Balance transfer credit cards-These allow you to transfer your current credit card balance. The perk being that these credit cards often come with extended 0% APR periods, giving you a lengthy headstart on paying back the debt, interest-free.
- Home equity loan-These are similar to mortgages and you will receive a lump sum upfront. One of the main differences, though, is that you must make equal monthly payments of interest and principal until it is paid off.
#7 Make Wise Investments
With so many options for retirement funding, there is no reason to not get started right away! However, this can also make it overwhelming to know which ones are best for you.
For many, it is easy to simply rely on an employer-sponsored 401(k) plan, or the like, to save for retirement. But why stop there? A plethora of ways to invest for retirement are waiting out there that can be used in conjunction with traditional savings plans. These include IRA plans, annuities, stocks, and bonds.
Each option has its own perks and drawbacks. Before choosing any IRA plan, you should consider whether you want taxes taken off your deposits now or wait until you start withdrawing from your account upon retirement. When it comes to investing in stocks, you may want to take more risks when you are younger (and have time to make up for any major losses). It is recommended to stay more conservative when it comes to risk-taking if you are closer to retirement age.
Getting your personal finances in order can seem like a daunting task. But, if you take some time to create financial goals and plans that you can stick to, you're sure to get your financial priorities straight in no time.
- Making a budget is a smart choice no matter what stage of life you are in. It can help you not only save for a rainy day, but help you tackle debt.
- Evaluate your spending habits. This can be very eye-opening. Oftentimes we don't even realize how much we are spending on unnecessary luxuries!
- Reassess your insurance coverage. Certain life events can create opportunities to get discounts or reduced rates on medical, car, and homeowner's insurance.
- Calculate your net worth. This is greatly beneficial to keeping track of your long-term financial goals.
- Make an extra effort to tackle your debt. It's much easier to save money once you've rid yourself of mortgages, school debt, car payments, credit card debt, and more.
- Consolidate debt. This not only makes bill paying easier, but can also get you reduced rates.
- Make smart investments. Whether you're saving up for a child's college fund, your own retirement, or just because, be sure to research all of your options first to find the ones that are right for you.
Need help with financial goals and planning? The professionals at Benefit and Financial Services are happy to help you make informed decisions about your financial future. Give us a call or send us an email today!