Do you feel like the financial aspects of your life are out of your control or you would simply want to get a better understanding of your financial situation? You may currently be missing out on potential returns on your assets or you may just have that lingering sense of uncertainty that prevents you from having peace of mind. There are a few simple steps that will help you sleep at night AND better help you achieve your financial goals, but it will take some initiative on your part.
Step 1: Organize
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The biggest challenge I come across with clients is their inability to understand their aggregate financial picture. Typically, they have many different accounts at a variety of financial institutions yet they only use one or two of them. So naturally, the fewer accountsyou need to manage, the easier they are to manage.
Gather all your bank account statements, including savings accounts, checking accounts, certificates of deposit, money jar, and maybe even check under your mattress for any cash you stored away during the banking crisis scare when deposits were inappropriately thought to be at risk. Do the same thing with all of your retirement accounts. 401K plans You may have from a previous employer, an IRA, rollover IRA, and/or a Roth IRA.
Evaluate all your bank statements and determine which ones you really need. You may only need a personal checking account, a business checking account, and a personal savings account. If you have accounts with very small balances or very little activity, they are prime suspects to be closed and rolledinto one. And all of your accounts don't necessarily have to be maintained at the same bank but you may get extra perks for doing so.
As for your retirement accounts, if you have accounts that you are no longer contributing to such as 401Ks from a former employers, you can roll them into a 401K rollover and have all the assets in one place. TD Ameritrade, Fidelity, and Schwab all have fantastic platforms for IRA 's. My preference is TD Ameritrade. If you haven't done this because you feel comfortable with the choice of mutual funds in your employer's 401K, think again. The funds in 401K plans are usually not the best of their kind and typically carry higher fees. Don't be intimidated by the vast number of choices available through to TD Ameritrade platform. Get advice if you have to.Once you set up the account, roll over as many accounts as possible. (Some accounts may not be eligible for rollover)
Once you've collected all the information regarding your investable assets, calculate all of your current income. This may include salary, bonuses, commissions, rental income, etc. I like to break down my income to a monthly figure. For example, for income received weekly, multiply by 52 and divide by 12. For bi-weekly income, multiply by 26 and divide by 12. You get the picture. If your income is not predictable from period to period, take a long term average and calculate a monthly figures. Got it? Now you know how much you can spend!
Next, jot down all of your expenses. I know I know, this is a painful process. This is when you realize how much you spend onall the little things that go unnoticed but add up to huge numbers. It would also help if you categorize them into groups such as food, clothing, rent/mortgage, car payment, insurance (auto, health, life), telephone, entertainment, personal care, gasoline, daycare, school, credit card payments, and any other expenses you may have. DON'T LEAVE ANYTHING OUT!
Step 2: Budget
Now that you know how much income you have and what your expenses are, set up a budget. First and foremost, pay yourself!!. I can't stress this enough. We already mentioned 401K's and IRA 's. You should allocate a reasonable contribution to your own retirement. If you leave this item for last, by the time you are done budgeting for all other items, you won't have anything left. Pay yourself first! Ifyour employer has a 401K plan, you should contribute, whether or not they match your contributions. If they do match, then you should at least contribute the amount that would maximize your employer's contribution. After all, this is free money! What dollar amount should you contribute to your retirement account? Well, it will depend on how much you could afford, but you should also figure out how much you should contribute to increase the probability of retiring with enough in your account to live the life you want in retirement. An investment advisor can help you calculate the amount you may need to contribute and the amount you will need to have at retirement.
Once you figure out the monthly contribution to your retirement account, you could start filling in the other budgetitems. You may have to adjust the original retirement account contribution but try to adjust all other line items first. You don't know how much to allocate to each expense? Well, you just calculated all of your expenses in a previous step. Start there! You may find it an eye opening experience to see how much you spend on certain items. There is a good chance that your total expenses have exceeded your income in previous periods. That's why we are going to develop a budget. This is the hard part: To get your expenses in line with your income, you may have to make some tough choices on where to pare back spending. Finally, once you set your budget, STICK TO IT. It takes a bit of discipline and record-keeping but it will be well worth the effort.
There are a variety of softwareprograms available that can help you track your budget. I actually found some very good ones that can be used on your iPhone. Go to Apple Apps and look up ' Budget '. There are also some programs available that can automatically download your bank account information. Quicken is a very popular one and Quickbooks also has a budget function. If you're not sure which one works best, ask your accountant to guide you. After all, they may ask you to provide them with some of these expenses when they prepare your taxes. If you prefer, you can even track your budget expenses the old-fashioned way ...on paper. The key is to make sure you budget and track your expenses.
Step 3: Invest
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