Managing personal finances is overwhelming for many, a minor consideration for some, and a methodical and straightforward process for others.
Why is it so easy for some people to manage their personal finances and yet so difficult for others? The answer to this question may be complex and often depends on the money lessons each person learned in childhood.
Regardless of their age, lessons learned, or wealth accumulated, people who successfully manage their finances understand the following points.
Live beneath your means
When you spend less than you are earning, you are living beneath your means. This will help you meet your financial goals. Whether you are saving for a downpayment on a home, a new car or retirement, this simple practice is one that will help you meet your financial responsibilities without becoming dependent on additional debt to cover your expenses.
Learn to identify your needs, prioritize them over your wants, and say no when spending money is not in your best interest. As you acquire wealth, saying no to frivolous spending and being aware of where you stand financially will put you in a better position to manage unexpected expenses and accumulate wealth for your future.
Save for your future
Unless you are independently wealthy, setting aside money each month for future needs and goals is key to successful fiscal management. When you need cash immediately, it is much less costly to use money from your savings account than to rely on credit, thereby incurring additional debt. The purpose of cash is that it is available for unexpected expenses, large or small, helping you avoid additional debt when you are not seeking it and often cannot afford it. Knowing that you you’re your cash savings available to use when needed can help reduce emotional and financial stress, providing additional flexibility and freedom.
However, delaying saving for retirement often means you will be working well into your later years. If you already find yourself in this situation, there are no simple solutions. If you are over fifty and have not established a retirement account or have one that is severely underfunded, take the time now to meet with a financial advisor to implement a retirement savings strategy.
Manage your credit
Credit is borrowing money to purchase goods and services with the promise that you will pay the money back by a specific date. This may be in the form of a mortgage, line of credit, auto loan, personal loan, or credit card.
Credit can be a useful tool in helping you to obtain your personal goals over your lifetime. It has many uses, such as helping you finance the purchase of a new home or vehicle. But often there is a slippery slope between using credit wisely and relying on it too heavily to meet your perceived needs.
It is extremely easy to let your credit dictate your life because you over-committed or have overspent and cannot afford to pay off your debt.
Depending on the type of credit you apply for, fees and interest rates may not always be clear or transparent. Before you sign the dotted line, know what the interest rate and terms are on your new credit.
It is quite easy to accept new credit, placing yourself in a position with debt that becomes a burden to pay off. You may be surprised to learn that the new credit card you applied for has a 30% interest rate and could take many years to pay back, if not effectively managed.
When you apply for a mortgage, credit card, or even insurance, a file is created to hold information about you. This file is managed by credit reporting companies, and the information is called your credit report. Your payment history and the amount of credit that you have are tracked throughout your lifetime.
Credit history is important. Without a relatively high credit score, it is difficult to finance the purchase of a home. Credit reporting agencies such as TransUnion, Equifax, and Experian know that when a consumer carries high balances or pays their bills late, their default risk increases. These agencies will penalize the consumer by lowering their credit score, thereby notifying others that you are not managing your debt at the optimal level.
If your credit history is poor, it can take up to seven years for the data to be removed from your credit report. Some negative credit issues, such as bankruptcy, can last up to ten years on your credit report. This may prevent you from qualifying for new credit, or if you are offered credit, your interest rates will be higher than rates for someone who manages their credit wisely.
Plan for taxes
Filing a tax return and paying taxes is not anyone’s favorite task. Gathering data to submit to the tax preparer is a chore, and the time you spend waiting for results can be laden with anxiety.
During the year, when your income changes due to a new job, a bonus, or a retirement account distribution, keep in mind that you may owe additional income tax. If you think you might owe additional tax amounts, it’s a good idea to contact your tax preparer to discuss the ramifications and make plans to pay your taxes before the filing deadline.
When your tax preparer calls and provides your update, good or bad, make sure you spend time reviewing the data. Does the information on the tax returns look accurate?
If reading your tax returns is completely foreign to you, ask the tax preparer to explain the information you are reviewing. You may not prepare your state and federal tax returns yourself, but you will sign the documents and are accountable for accurately reporting the information to the tax reporting agencies.
Beneficiary designations and titling
Beneficiary designations are a simple method to transfer ownership of an account or asset at your death.
Designating a beneficiary is as easy as listing the name of the intended recipient on your retirement account, life insurance policy, or at your bank or brokerage account. Accounts with beneficiary designations pass to the recipient outside of trusts and avoid probate.
Probate is a lengthy and expensive legal process of distributing the estate of a deceased person to the proper heirs. When estates are probated, distribution of the estate will follow state law, which may not align with your intentions.
Coordinating the titling of your real estate, bank accounts, and brokerage accounts with your estate planning is another critical step to make sure your assets go to the people you intended on your death without passing through probate.
Often, after a major life event such as a marriage, divorce, or death, updating a beneficiary designation or titling is not top of mind. A good habit is to annually review your assets and confirm with your attorney or financial advisor that the titling is correct and the beneficiary designations align with your intentions.
Managing your finances is not always easy, but by committing to good financial habits, you will reap the long-term benefits.
Retirement may seem like a lifetime away, but it will happen. When it does, you will likely need income sources beyond your Social Security benefits to maintain your standard of living. If you are not living beneath your means and saving for your future, today is a good day to change your habits so that tomorrow can be better.
Teri Parker CFP® is a vice president for the Riverside office of CAPTRUST Financial Advisors and has practiced in the field of financial planning and investment management since 2000. Contact her at Teri.parker@captrust.com.