Today, many people are concerned about saving for retirement or paying for a large ticket item, such as a child’s college education. If you belong to this group, now may be the time to organize your finances. It is never too early to begin, and the sooner you start, the better. Consider the following steps to building a strong financial foundation:
- Get organized. Smart money management begins with organizing your financial paperwork. By grouping documents according to categories (e.g., insurance papers, account statements, bank statements, and tax returns), you will be able to find what you need quickly.
- Determine your financial status. Once your files are organized, construct a net worth statement and a cash flow statement. Your net worth is the difference between your assets (what you own) and your liabilities (what you owe). A cash flow statement itemizes all your sources of income (e.g., salary, interest, and rental income) and all your expenses (e.g., mortgage payments, food, clothing, etc.).
A firm financial foundation includes having a positive net worth (meaning you own more than you owe) and positive cash flow (meaning you have more money coming in than going out). Even small steps toward improved money management can help you create a positive outcome. Look for areas where you can curb your expenses, and put that money toward savings.
- Set financial goals. Once you become aware of your financial status, make the most of your money by establishing financial goals to direct your saving and spending patterns. Because your specific goals may change over time, be sure to re-evaluate your financial priorities on a regular basis.
- Control your credit card spending. Although it is convenient to say “charge it,” buying on credit tends to cater to more impulsive shopping urges. Credit cards also can create an illusion of wealth, tempting you to buy things you cannot afford. If you carry large balances and make only the minimum monthly payments, the interest charges alone may exceed whatever amount you saved buying at bargain prices, and will take a long time to pay off. A practical guideline for controlling credit card spending is to have enough cash available (for example, in your checking or money market account) to pay off your credit card balances immediately to avoid interest charges.
- Develop a tax strategy. Many people start thinking about taxes only when the time comes to file their tax return. However, if you wait until tax season, it may be too late to benefit from some tax-saving strategies. Developing some strategies beforehand with the help of a qualified tax professional may pay off in the long run.
Sound money management starts with organization—knowing where your hard-earned dollars are going. If you follow the steps outlined above, you will be on the path to building a strong financial foundation.