The Independent Investor: Make a Financial Resolution This Year
As most of us resolve to lose weight, quit smoking or in some other way change our lives this year, don't forget to re-evaluate where you stand financially. There are some simple steps you can take that will reshape your fortunes for years to come.
Most people don't know where they stand financially. Many can't tell you how much they spend or make, what their tax bracket is or how much they have saved. My advice is to create a budget as well as a statement of net worth.
It is not that complicated. Just track your spending for a month, separating essential from non-essential expenses. Next keep track of whatever income comes in. Subtract one from the other and you now have a cash flow. Now you can figure out what you spend and what you make a year simply by multiplying by 12 months.
Now comes the important part. If you spend more than you earn, as most of us do, you will at least know how much debt you are accumulating each year. There is no way anyone can get out from under a heavy debt burden unless they know how much debt they have in the first place. A first step in reducing that debt would be to cut back on those non-essential spending items.
On the other hand, some of us may find that we earn more than we spend each month but somehow the money just disappears. Usually, it is found among those same non-essential items that you don’t need but buy anyway. This is money that you should be saving toward retirement. You should be saving 10-15 percent of your pre-tax income each year, starting in your 20s, and add 10 percent more for every decade you don't.
Personal net worth is also a good thing to know. Once again, sit down and add up everything you own and how much it is worth. Next, figure out what you owe: mortgages, car payments, medical bills, school loans, etc. Subtract one from the other and you now have your net worth.
Armed with this new budget and net worth information, you can now create some goals and objectives. Are you spending too much? If so, create a spending reduction goal each month through the end of the year. Establish a debt-reduction goal for the year and make sure you are on track each month to achieve it.
If you can save, establish a goal for how much you will put away this year, and keep to it. At first it may only be an emergency fund, which in a pinch; would cover 3-6 months of expenses. After that, you might want to think about saving toward retirement through one of the many tax-deferred savings plans available.
These are simple steps that cost nothing but time and effort. The trick is to stick with the process. So often, New Year's resolutions last about as long as it takes to write them down. This year don't let that happen to you.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.