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Get 2016 Off On the Right Financial Foot
January 4, 2016
By: Stacy Yu
Year after year, millions of people make a New Year's Resolution to get their finances under control. However, without a plan to get their financial houses in order, most have broken and abandoned their resolution by February. To successfully manage your money, you need a strategy.
Here are the five steps you need to create a sound financial strategy that will lead you to optimal financial health.
Step 1: Identify Financial Goals
Begin with your long-term goals. When it comes to your finances, what do you want to achieve in 5 years? 10 years? 20 years? When identifying your long term goals, think about your retirement and what lifestyle you would like to live. How you envision your future will help determine how much money you will need to save now. Create a long-term financial plan. Think about what saving and investment steps you may need to take to reach your goal. Try to break these steps into simple and achievable short-term goals. Doing so will increase your chances of successfully reaching your long-term goals.
Step 2: Eliminate Financial Clutter
Clutter, whether it exists in physical space or in your monthly cash flow statement, can cause major inefficiencies in your home and your wallet. Take a close look at old receipts and credit card statements to determine how you spend your money. As you review each line item, ask yourself, "Does this item add value to my life?" Value can be monetary gain, added convenience, or even emotional benefits. Items categorized as valuable are certainly worth keeping. For items that do not provide an obvious value to you or your family, you may want to consider removing from your regular spend. Eliminating the "non-valuable" items will allow you to put more money in your pocket without making large sacrifices in lifestyle.
Step 3: Identify Needs vs. Wants
Once your finances have been "decluttered," it's time to take a close look at the remaining expenses on your list. Place each item into one of two categories: Needs or Wants. Needs are essential expenses, including items required for survival: food, clothing, shelter, basic utilities, and transportation. Wants are the non-essential, "nice to have" items like toys, electronic gadgets, vacations and the delicious lattes that make life a little more comfortable, but are not completely necessary. How much of what you are spending is on items you need versus items you want? If the amount you are spending on Wants significantly outweighs your Needs, refer back to your long-term financial plan. Do all of your Wants help you achieve your financial goal? Are there some that you would be willing to give up in order to save more money for your future?
Step 4. Review Flexible Expenses
Flexible expenses are areas where your costs can be adjusted. One example of a flexible expense is the cable bill. Cable offers many premium channel packages, such as the movies and sports packages that can be added to your basic subscription for an additional fee. With available services, such as Netflix and Hulu, in many households, the more expensive cable packages can be replaced with less expensive, alternative solutions. Examine your Essential and Non-essential line items. Are there alternative solutions available that can provide you with the same services at a lower cost? By switching to the less expensive solution, it is a great way to save money without sacrificing your lifestyle.
Step 5. Set a Budget
Now that you have identified exactly where you would like your money to go, it's time to set a budget. Look at how much income you take home each year. Then, determine how much you are willing to spend for each line item. Remember, you want to create a plan that uses your money wisely, while giving you a life you will enjoy - so be realistic! Work with the numbers until you find a set of budget limits that do not exceed your monthly and enables you to live the life you want, while maximizing how much money you can save for the future. Remember to add a line item for the occasional splurge. You can still enjoy life while being financially prudent.
Need help managing your money? MAFCU has a number of money management tools to help you keep track of your finances. Go to https://www.mafcu.org/accounts.cfm/manage-your-money/money-management-tools for more information.