By Patrick Amey
Many of us cringe at the thought of cleaning – of any sort – but especially when it comes to how we use our money. But don’t worry; I’ve outlined 4 easy steps to help you get started. The good news is that you don’t have to do them at once and they shouldn’t take too long to accomplish. Much better than storing a bunch of sweaters and coats or removing all the winter sludge from your flower beds.
- Aggregate your balance sheet – With so many online data organizers out there, this is easier than ever. Set up all your accounts in Mint.com or a similar site that will give you snapshot of your total net worth. The setup process is simple if you have online access to all your accounts and the information you gather will be used in many ways. It can help with net worth tracking, cash flow management, and investment allocation review.
- Shred – That stack of unopened envelopes sitting in a corner somewhere can be a big hurdle when organizing your finances. The reality is, only a few of them need to be addressed. Go through the pile, keep and follow up with the few that require action, and shred the rest. When you are finished with this, you will feel great!
- Review your personal financial ratios – I like to track three to give me a sense of my financial health. They are easy to calculate, and if you have the information from the online aggregator in Step 1, they are easily accessible. You could even start slow and do one of these per day.
- Savings Rate (Dollars saved to long-term / Total income)
This ratio will tell you how much you are saving toward long-term objectives. Is it 5 percent, 12 percent, or 20 percent? The higher the number the better, but the idea is to gain a sense of how you are doing in terms of saving for future financial independence.
- Debt to Income (Total monthly debt payments / Total income payments)
Most of us first learn about this ratio when buying a home, but I also think it is critical to know how much of your income is going toward debt payments so that you can work on eliminating it or keeping that number manageable. High debt payments limit your flexibility. Keep an eye on this number.
- My Lifestyle Ratio (Total Income – Taxes – Long-Term Savings – Debt Payments
This is the percentage of your income that you are actually living on, your lifestyle. It is a useful number when you get a raise or additional income of any kind. You can look at your growth of income, say a 6% raise, and allocate easily to your goals – 2 percent to long-term savings, 2 percent to pay down debt, and 2 percent to lifestyle.
- Pull a credit report – it is good to pull a credit report and score periodically (you can get a free copy of your report every 12 months) and review it for any new information and discrepancies.
As they say, spring is a time for new beginnings. Don’t be discouraged if the numbers you uncover are not where you’d like them to be. Information is power, and a good scrubbing of your finances is a great way to give you the facts you need to make changes.
For help getting started with your own personal financial plan, schedule a meeting by clicking below, contact Patrick Amey –firstname.lastname@example.org, or call (913) 345-1881.