New Year’s is a time for reflection and renewal. It is also a time for resolutions. Most people resolve to improve their physical health (lose weight, exercise more, quit smoking, etc). This year you should resolve to improve your “Fiscal” health. The purpose of Fiscal fitness is to improve your financial health. So, here are some easy steps to get you on the road to being Fiscally Fit.
Create a Budget
I know this sounds simple, but the vast majority of people do not budget. If you want to lose weight, you have to watch how many calories eat and spend. The same goes for your money. The only way to do this is to create a budget, stick to it and consistently monitor it. This budget has to be real and it has to be in writing. Use any form of budget you want (I have some links to various online budget resources at the end of this article), but it can’t just be “in your head”. Don’t laugh. I have a friend that truly believes he can keep his entire household budget “in his head.” This is actually nothing more than a cop out. If it’s not in writing, it’s not real. If it’s not in writing, then it is easy to change it whenever you feel like it.
Creating a budget, especially for the first time, is truly an eye opening experience. Most people are surprised at the amount of money they spend that they were not aware they were spending. Expect the budget to take three to four months in order to work through items you may have missed from your initial budget. Remember not all expenses are monthly; some are quarterly or even annually. It will take some time to get this right. Build some fun into your budget. It may be tempting to get overly strict with your budget in order to pay off your debts more quickly. However, just like with a diet, you need to blow it occasionally. My wife and I actually have a category called “blow”. The purpose of “blow” is to give us some money that we can use for whatever we want, no questions asked. Without this, you will inevitably grow frustrated and quit. Lastly, be patient and don’t give up. Creating a budget and living by it is not easy to do at first, however, the rewards are immense and life changing.
Pull Your Credit Report
One of the easiest things you can do each year to ensure your credit and identity are safe is to regularly check your credit report. The three credit bureaus are Equifax, Experian and Trans Union. I personally pull one from each bureau about every four months. Of note, you can get these reports online, but I prefer to have them mailed to me. There are some technical and legal reasons for having the credit reports mailed to you that I will not get into here. For information about obtaining your free credit reports, click here to see the wonderful article written by one of our attorneys. Once you have your credit reports, check inaccurate or erroneous information and dispute them with the credit bureaus. Click here to read a great article about disputing items on your credit report. Pulling your credit reports will also allow you to see all of the revolving and installment debt that you have. Make a list of all of these debts, as well as the balance owed and the interest. Once you have made your list, go to BankRate and calculate how long it will take to pay off the current balance on these debts. If possible, always pay more than the minimum balance. Lastly, contact the credit card company and request a lower interest rate. They may not lower your rate, but they definitely won’t if you don’t ask.
Using the debt information from your credit reports, create an amortization of when you will pay off your debts. Use the “snowball” effect to pay off your debts. The Snowball effect is paying off the smallest loan first and taking that payment and using it to pay off the next smallest loan, and so forth. This creates a “snowball” as each successive debt is paid more quickly because the amount you are paying continually increases. This is also great motivation because you can see results quickly.
Create an Emergency Fund
Life happens, Murphy’s Law or whatever you want to call it, but one thing is certain; you can always expect the unexpected. That is why you need an Emergency Fund. If you have done your monthly budget properly, it should account for all of “normal” expenses. The Emergency Fund is for everything else. Ideally your Emergency Fund would cover 3-6 months of your living expenses. This will obviously take some time to accumulate, so be patient. Every step is one step closer. Finally, your Emergency Fund should be as liquid as possible. Keep it in a separate checking or savings account. Don’t worry about not earning interest on the money. The purpose of an Emergency Fund is not to earn interest. The purpose is to get you through an emergency. You need instant access to this money and without any risk or penalties.
Stop Using Credit Cards
If you are carrying a balance each month on your credit cards, STOP using them. The only way to get out of debt is to stop borrowing more. The main purpose of being “Fiscally” fit is to put more in YOUR pocket, not the banks’. Even if you don’t carry a balance on your credit cards, stop using them for a while (say 6-months). You will be amazed at how much less you spend when you have to pay cash for everything you buy. Also, it is very (and I mean VERY) hard to stay on a budget and use credit cards. You have to be super disciplined in order to make it work. Believe me; I am talking from hard-core experience. I thought I was doing great. I have a credit card that pays me 3% cash back and I was using it to purchase everything I could. The problem was, I did not keep track of the purchases and completely blew up my budget. As far as credit cards go, do yourself and your finances a favor and “Leave Home Without Them”. Of note, if you find that you have to use credit cards, you need to revisit the budget. I revisit at least every three months to make sure I am still “on budget”.
Review Your Investment Portfolio
As you grow older, your invest strategy needs to change. Make sure that your investment portfolio matches your stage in life. As you grow older, you want less risk and greater safety. Consult with a Certified Financial Planner and have he or she advise you as to the best strategy to meet your goals.
Revisit Your Life Insurance
Just like your investment portfolio, your life insurance needs change over time. The main purpose of life insurance is to financially replace the person that died. As you grow older, you should need less life insurance as you should have less debt and you investment/retirement portfolio should cover your needs. Make sure your life insurance actually matches your life. Don’t trust your insurance agent to advise you as they get paid to sell insurance. Look at your situation and determine what it is that you are trying to accomplish with life insurance and make sure it matches.
Review Your Tax Withholding
I am actually torn about this subject. In an ideal world, you would want to have a $0.00 refund from the IRS every year. That would mean that you receive the extra money each pay period that would normally be refunded to you each year. This is certainly a smart way to view this. In theory, you would take that extra money each pay period and use it to pay down debt, increase your emergency fund or invest for your retirement. However, we live in the real world and more often than not the extra money each pay period is spent and never invested or used to pay down debt. Remember my friend that has his budget “in his head”? Well, he recently got remarried and found out that his wife not only received a tax refund every year, but she had $10.00 extra per pay period withheld so that she would receive a larger refund at the end of the year. My friend was furious. “How can she be so stupid?” he asked me one day. I thought for a moment and explained that what she was doing was probably better than having a zero or very small refund. I explained that for her (and most people, including me) she actually gets more bang for her buck by getting a large refund at one time, rather than 26 small “refunds” throughout the year. The extra money each pay period was wasted on Starbucks or Netflix or you name it, but it was not used to create wealth. However, by getting a large amount of money at one time, it was easier for her (and me) to pay down that credit card or put it in an IRA. My friend didn’t buy this and now thinks that both his wife and I are stupid. I’m ok with that though; remember he’s the guy that thinks he can keep a budget “in his head”.