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Eliminating bad habits, exercising and eating better are always popular New Year’s resolutions, but creating healthy financial resolutions are just as vital to your wellbeing. So where do you start? Here are our recommended steps to setting financial decisions that will help you this year and beyond.
First, you should perform a budget and cash-flow analysis on your current finances so you can clearly understand your cost of living. Then, you need to highlight areas of excess spending compared to other earners in your income category and ask yourself the tough questions. Do you need to make any lifestyle changes that will help you save money and build wealth?
After assessing your needs, audit your current financial portfolio, analyzing the structure, risk levels and expected return on investment. Will your current portfolio build sufficient wealth to sustain the lifestyle you want to live when you retire? Will it help you build an independent source of income if that’s what you want?
Most financial experts will tell you if you want to manage your debt or be in sound financial condition, then one of the first things you should do is create a budget and follow it. Many people overlook this step because they think that it is complicated and tedious. But planning a budget is simple. You have to write on paper your total take-home pay each month and how much you should spend on your needs like food, utilities, transportation, bills, entertainment, hobbies, and so on.
Then after writing down and estimating how much of your income should go to a particular expense, faithfully follow your budget. Some expenses might change, but at least you have a reasonable estimation that lets you see if you meet all your financial responsibilities.
Many people think that budgeting is only for people who have less money and want to save more of it. This is not true. Everyone can plan a budget regardless of his income. Even governments and corporations have their budgets, so you should, too.
In conjunction with the above step, having a budget can help you live within your means because you are more aware now as to how much of your income must be going to every expense. If you don’t have a budget and buy whatever your impulse tells you every time you see something in a store, you will be spending your hard-earned money for sure and have little money left for your debt payments and other important things.
We are in an environment where we are always told to buy, buy, buy. We always think of snatching up our hard-earned money from our pockets in every opportunity when we could save by doing it ourselves instead. When we want to read, for example, we think of buying a book instead of going to a library or borrowing it from a friend.
There are many other ways you can avoid spending more so you can save more money and pay off your debt.
When you finally receive your take-home pay, it is easy to spend it all on things you want to buy. But you should at least save a portion of it and leave it untouched. Saving just $25, or $200 a month and storing it in your bank account can prepare you in emergencies that can significantly need a large amount of money and can, in turn, hurt your long time financial goal if you are not otherwise prepared. Saving 10% of your income is a good goal, which can easily accumulate every month.
There will be unexpected crisis such as loss of job, sickness, or lawsuits that can ruin your financial stability if you have not prepared in a long time. Having an emergency plan in hand can, therefore, prepare you for such disasters. In your emergency plan, you must include a list of assets you can liquidate, a list of resources you can use such as insurance, a lawyer you know who knows the financial facets of law, a severance package your employer is offering, and so on.
In wealth management, as in life, risk and opportunity go hand-in-hand. From financial risk to political risk to competitor risk, and more, there is a myriad of potential threats that can affect your investment portfolio. The question is, how tolerant are you to risk?
For example, a younger person may be more risk-tolerant and may want to invest in high-risk/high-reward investment early, knowing they have a longer “runway” before retirement to make up for any losses or mistakes. Conversely, those with a shorter retirement runway may want to protect their portfolio from significant losses as they reach their golden years, so they’d be more risk-averse.
After that is settled, it’s time to set your financial resolutions. Start with a primary goal that answers this question-how much money do I need at a certain age to provide an income stream that will allow me to live my preferred lifestyle during retirement?
Then, determine other short- and long-term financial priorities and goals-such as saving for college or saving for a down payment on a house that will help you build and maintain the lifestyle you desire for you and your family.
Goals can’t be met without sufficient follow-through. So, find a trusted financial advisor who can help you to establish wealth management strategies that are customized to your lifestyle needs, financial goals and risk tolerance.
Think of wealth management as a step above portfolio and investment planning. It looks at everything and ensures you make full use of tax-advantaged tools and options such as 401Ks and IRAs. It also considers your estate and transfer-of-wealth objectives.
Once your wealth management strategy is established, work with your advisor to craft a portfolio strategy that not only determines which asset classes are most appropriate from the perspective of risk/reward, but also identifies the optimal allocations to each of the asset classes-whether its equities, fixed income, real estate, or others. When that is decided, loop back to your wealth management strategy and determine what type of plan best fits each investment.
You ultimately want to marry your portfolio selection choices with the wealth management tools and options available to you. And at the end of this process, you will be in the best position possible to achieve financial goals that go beyond trivial one-year resolutions and help you build wealth over your lifetime.
Find more ways to manage your finances well and make sure you are in control of your money instead of your money controlling you.