At the start of the year, many people make New Years’ Resolutions to get a handle on or improve their finances. Unfortunately, by now, many of those people have given up on their resolutions. The main reasons for abandonment is not having enough time to focus on the task, or feeling that putting a financial plan together is too daunting.
If you’re finally ready to get it together, here’s where you should start.
The difference between what you owe and what you own.
You might associate net worth statements with the ultra-rich or some media tycoon. But everyone can calculate their net worth, and it’s and it’s important — as it acts as a “snapshot” of your financial health. Net worth is the sum total of your assets (bank account balances, savings, investments, retirement accounts, etc.) minus your debts (loans, mortgage, credit card, etc.). Your net worth is the easiest way to get a big-picture perspective on your finances and allows you to see if you are making your progress to your financial goals.
If you need help, use a net worth calculator. This will only take five minutes, tops.
Income versus expenses.
Many think that budgets are only for people with too much debt, have trouble paying the bills or are blindsided by unexpected expenses — but that couldn’t be further from the truth. Everyone should have a handle on what they spend.
Your living expenses are just one part of the cash flow puzzle. How can you know how much you should be saving for retirement, investing for your child’s education or have in an emergency fund if you do not have a handle on your cash flow?
Keeping track of all of your expenses can be a tedious process, but start by doing it for one month. Then, figure out what expenses you pay annually, semi-annually or quarterly, and add their monthly amount to your tracker. You can use pen and paper, create a spreadsheet or even track using online tools and apps. Completing the exercise will be extremely valuable.
How accessible your money is.
Cash is the most liquid, because you can access it immediately. A home, on the other hand, would be on the opposite side of the liquidity spectrum. Even if you sold your home today, it takes a couple of months before the sale closes and the proceeds are made available. Never mind the fact that you would need to find somewhere to live.
Because you never know when an emergency will arise, have enough money fully liquid (in cash)… but not too much where your dollars are sitting around not earning interest. Figure out how much time it would take for you to get your hands on $10,000, $25,000, $100,000, and $250,000.
Passive income can be referred to as the holy grail of personal finance, because it can provide financial independence.
If you’re interested in generating passive income, try this valuable exercise: Using the assets in your net worth statement, figure out the amount of income those assets could generate if you stopped working today. Then, set some goals on how much passive income ($100,000 a year, $250,000, $1,000,000, …) you’d like to have. Lastly, put a plan together that includes the actions needed to achieve that. Schedule a complimentary consultation with our advisors if you need assistance.
Planning for a Catastrophe
Catastrophes, disasters or other emergencies don’t take income levels into account, meaning stressful times can fall upon us all. In these times, having a plan in place can ease the burden on you or your loved ones.
If you calculated passive income opportunities in the exercise above and found that you do not have enough passive money to cover your expenses — or, in other words, your assets cannot generated enough income each year until you are slated to stop working — it may be wise to consider adding life and disability insurance.
If you need help determining how much life insurance you need, there are calculators available online to do just that.
Getting a handle on your finances can seem like a daunting task, but if you start by focusing on these five areas, you’ll create a good foundation. Once you have the above in place, it’s time to plan for your specific goals (Ensuring you have enough money to retire, paying for your children’s education, buying a vacation home, etc…)