Where are you going with your money? Whatever your goal, you’ll need a plan to reach it.
“A goal without a plan is just a wish,” Antoine de Saint-Exupery, the French pilot known as the author of The Little Prince, is credited with saying.
October is National Financial Planning Month, which is a good time to give your plan a yearly check or to start a plan if you don’t have any.
Has your situation changed in the past year, perhaps because of marriage, divorce, children or a profession? This is the time to check your progress and goals, and to set new ones.
Take the following steps to help bring your goals closer to reality.
Most of us have few sources of income – for example jobs, benefits, dividends, or support payments. But we have many ways to spend. This makes it difficult to keep track of your money.
You can use spreadsheets, apps, or pencil and paper to monitor incoming and outgoing money. To get started, create some categories. You can add more or subtract some later, so don’t feel like this has to be perfect.
Typical categories include spending on:
- Eating at home or eating out
- rent or mortgage
- health care
- Repayment of loans
- Credit Card Debt
At Money Talks News, one of our favorite tools is YNAB (You Need a Budget), an app that records and organizes your spending into categories that you create. It automatically measures the progress towards your goals. (Here’s how it works.)
2. Focus on the future
How well do you think about your financial situation: a week? Month? five years? Children’s college applications? your retirement?
One study says, the more you think about the future, the more money you are likely to save.
On average, people who earn $50,000 a year who look far ahead — to retirement, for example — save more than those who earn $100,000 who don’t think much about the future, says Sarah Newcomb, a behavioral economist at Morningstar, For Money Talks News.
Ask yourself, “What do I want my life to look like a month, a year, a decade or more from now?”
3. Pay yourself first
Financial planners say you can’t take care of others if you don’t take care of yourself.
That’s why a portion of your salary should go directly to a savings account. This is also why it is so important to participate in your employer’s 401(k) plan or other retirement savings plan, if offered.
If you wait until you pay your rent, your electric and cable bills, go to the supermarket – and then maybe help out your adult children or elderly parents, and splurge on eating out or clothes – you probably won’t have the money left to save.
4. Build your own emergency fund
If your car had a $400 breakdown tomorrow, would you have the money to fix it without borrowing? What if you lost your job? Can you live on savings while looking for a new job?
Many financial planners recommend building a cushion of three to six months of basic living expenses. This includes electricity, heating, water, rent or mortgage, car payments, food, insurance, debt payments, and possibly Internet access. But it does not include theater tickets, Netflix, gym memberships, or an evening at the local beer bar.
At the same time, make your emergency fund work for you. Instead of keeping that money in a savings account, where you earn so little that you lose ground to inflation, put it where you’ll earn at least somewhat more—a certificate of deposit, for example, or a mutual fund of stocks or bonds.
5. Review your insurance
Insurance against the unexpected, such as a disability or accident, doesn’t just protect your family’s finances. It may also help reduce the size of the emergency fund you need.
Check the cost of premiums for appropriate life, health, auto, homeowners, renters, and other insurance policies. Zebra is a good vehicle insurance comparison site. We have more advice in New Ways to Save Money on Insurance of Every Kind.
6. Check your credit
Credit reports affect our financial lives when we apply for mortgages, credit cards, rental housing, and even jobs. Monitoring your credit report also helps you spot signs of identity theft.
Your credit score is worth a look once in a while, too. In general, the better your score, the less interest you will pay for borrowing money.
The first step in improving your credit score is knowing where you stand by checking your report for free. Now through April 2022, consumers can access their free Equifax, Experian, and TransUnion credit reports once a week.
When you get your credit report, look for errors or inconsistencies between your records and the report. If you find errors, work to correct them. Look for instructions on opposing errors on the websites of the three credit reporting agencies listed above.
7. Review your investments
Learn more about the most popular investments: stocks, bonds, and cash.
Financial planners can help plan investments. When making your decisions, keep in mind:
- Take risks
- Your time horizon (how much time you have to achieve your goals)
- How would you like hands-on investment management
- Reduce investment fees
- Diversify your portfolio so that if one sector of the economy is deteriorating, you will have investments in areas that are still strong
Mutual funds and ETFs (exchange-traded funds) are safer and easier ways to own stocks. Stacey Johnson, founder of Money Talks News, prefers stock index funds, such as those that track the S&P 500, for higher long-term returns without the costs associated with managed funds.
If you are already an investor, check that your choices still accurately reflect your risk tolerance and time horizon.
Wondering how to diversify your investments? Stacy recommends this approach:
- Subtract your age from 100 and put the result as a percentage of your savings in an S&P 500 index fund. (If you’re 60, subtract 60 from 100 sheets of 40, so put 40% of your savings in index funds.)
- Take the rest – 60%, in this case – put the half (30%) into a cash fund, such as a money market fund.
- Put the remaining 30% into the bond fund.
8. Take a tax examination
See if you can reduce your tax burden with these year-end strategic moves.
- Take advantage of a traditional 401(k) or workplace retirement plan by December 31. The IRS says the base limit for optional deferrals in 2021 is $19,500. If you are 50 or older, you can contribute an additional $6,500 to certain plans, including 401(k)s, and less for others. The IRS has details on these catch-up contributions.
- No 401(k)? Use the IRA. In 2021, you can contribute up to $6,000 — or up to $7,000 if you’re over 50 — tax-deferred, to a traditional IRA.
- Check your deduction. Use the free IRS tax withholding estimator for a quick “salary check check”.
- Take advantage of Health Savings Accounts (HSAs) linked to high-deductible health insurance plans. Ensure that you contribute by 2021 max. That’s $3,600 for individuals and $7,200 for families, plus an additional $1,000 contribution if you’re 55 or older.
9. Paying off debts
Smart habits help reduce debt and improve your financial situation so you can reach goals.
If you’re having trouble making credit card payments, payday loans, pawnshops, auto loans, student loans, mortgages, or other debts, there’s help in our Solution Center.
Or choose to destroy the debt yourself: make a list of your debts and pay them according to one of these plans:
- List and repay debts by interest rate: Start with the highest debt and jot down your list. This method can save you the most money.
- List and repay debts by the outstanding balance: Start by paying off the smallest balance first, and work your way up from small to large. This allows you to see progress quickly and stay motivated.
Learn more: “7 great tools to help you get out of debt.”
10. Look to 2022 – and beyond
Review your legal documents and beneficiary designations. Update your will and any trust documents, retirement plan documents, life insurance documents, and living wills. It may seem inaccurate, with the holidays approaching, but family gatherings may be a good time to discuss what to do if you, your parents, or loved ones can no longer make decisions.
Consider appointing someone to make medical decisions and someone to have power of attorney for financial matters.
If you want to put these legal structures in place, consider the DIY approach: You can create many standard legal documents for free with Money Talks News partner Rocket Lawyer.
11. Get the right help
A professional financial advisor can help establish a path to achieving financial goals. Learn how to find a trusted advisor on the Money Talks news podcast. Some counselors specialize in retirement or estate planning. Others focus on niche financial matters – getting ready to buy a home, for example.
Some experts suggest choosing a consultant with a fee (they charge an hourly fee) to keep your interests first. Commission based advisors (they charge commissions to invest your money) may have an incentive to sell specific financial products.
Another key term to look for is “credit financial advisor.” These advisors are asked to put your financial interests first. Search for “Certified Financial Planners” and check their credentials here.
12. Educate yourself
Ask yourself at least once a year: What do I do to set and achieve my financial goals?
“Investing is not a blatant science,” says Stacey Johnson, founder of Money Talks News. You can read articles in Money Talks News to learn more about investing and managing your investments.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click on links in our Stories.