Understanding the essentials of managing your finances is one of the most beneficial steps you can take for yourself and your loved ones. Many people believe that financial confidence only comes with wealth or pursuing financial independence. However, the truth is that financial anxiety spans all income levels, and true confidence is addressed through effective money management.
While skillfully handling your money won’t prevent all money challenges, it can provide some financial independence, mitigate the effects of financial blows, and promote a sense of financial well-being in your household.
Given the strong emotions often linked to money, it can be difficult to remember that it is simply a resource. It's a tool that, if managed wisely, can be used to help accomplish your goals. Focusing on your financial literacy and identifying opportunities for growth are initial steps toward taking control of your financial journey.
Budget to Your Advantage
Navigating financial paths without a clear plan, i.e., spending without a budget, is a common hurdle to financial stability. Although the word “budget” may seem restrictive, setting a budget is about understanding your spending capability and preferences to make informed plans.
Determining your cash flow is foundational. You should know exactly how much money you have coming in, how much money must go out to cover necessities such as basic living expenses and savings, and what’s left over for discretionary spending. This knowledge allows you to prioritize and budget effectively, balancing enjoyment with financial responsibility.
Surprisingly, everyday expenditures often get in the way of what we really want. Eliminating those daily deliveries and subscription fees could help you make serious headway in saving for your next-level forever home that seems out of reach now.
Maintain an Emergency Fund
The stark reality that over half of Americans don’t have enough savings to cover a $1,000 unexpected expense, and approximately a quarter of all Americans are living paycheck-to-paycheck with no savings at all highlights the importance of having an emergency fund. [1]
The criteria for setting aside the right amount for an emergency fund vary, taking into account factors such as your lifestyle, risk tolerance, income level, and overall financial health. A practical starting point is to ensure you have at least $1,000 saved for unplanned expenses.
For families with steady income streams, saving an amount equivalent to at least three months of expenses is advisable. Single-income households, individuals with fluctuating earnings, or those who earn primarily from commissions should consider saving at least six months’ worth of expenses. While managing debt, you might initially aim for a more modest emergency fund, but beginning is what matters most.
Automate Your Finances
Money management has become significantly more efficient than it was in previous generations. Today, we have the ability to automate and streamline our financial tasks, which not only saves us time but also opens up new avenues for becoming more financially literate and savvy.
The convenience of automating routine financial tasks such as bill payments, contributions to savings, and investment transfers cannot be overstated. Not only can it help you avoid missed payments and penalties, but automatic investment plans (AIPs) offer a pathway to regular and disciplined investment, fostering more advantageous financial outcomes over time.
However, embracing automation doesn't mean neglecting your finances. It’s still important to review your automated transactions regularly to stay informed and make adjustments as needed. But automation does take a lot of the headache out of managing your finances, allowing you to participate more actively in financial planning, make better-informed decisions, and focus on the bigger picture.
Manage Your Credit
Embracing credit management is essential for your financial health, even if you prefer using cash for transactions. Having good credit unlocks numerous opportunities, from enjoying rewards and bonuses offered by credit cards to securing favorable terms on mortgages and personal loans. Moreover, a strong credit score can be the difference in not just securing loans, but also in achieving milestones such as landing your dream job.
A less-than-favorable credit score can lead to loan denials, higher interest rates, increased insurance premiums, and even missed job opportunities. Your credit score reflects your reliability and financial responsibility to lenders, insurance companies, and employers.
To manage your credit, pay bills on time, keep your credit usage low compared to your available credit, limit new account inquiries, and maintain a mix of credit types. Strive to clear your revolving credit balances monthly and keep a healthy balance between your debt and income.
Regularly monitoring your financial statements, keeping an eye on your credit score, and conducting an annual credit report check are important steps. These practices help identify errors, prevent significant issues, and thwart identity theft, ensuring your credit remains a tool that works in your favor.
Prepare for Big Purchases and Life Events
Anticipating and planning for big-ticket items and life's significant events can make navigating these financial waters smoother. Whether it's funding a college education, buying a vacation property, or undertaking a home renovation, being proactive about these large investments is key. Regardless of whether you finance the expense through a loan, set funds aside over time, or pull money from savings, it's essential to approach each significant purchase with a strategic mindset, aligning your decisions with your financial goals and long-term plans.
How We Can Help
As a dedicated financial services firm, we're here to help you master the essentials of money management. We encourage you to speak with us regularly to discuss any changes in your financial situation, goals, or concerns. This open dialogue allows us to provide personalized guidance and make necessary adjustments to your financial plan, ensuring it remains aligned with your evolving needs.
Sources:
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.