Spring has Sprung: Time to Clean up your Finances
By Stephen Stribling ~
Spring has sprung and along with clearing the dust in our homes, the season also provides a good time to get your financial house in order. One of the most important things to evaluate is our finances to determine whether we’re maintaining healthy money management habits.
When it comes to examining your personal finances, consider these four overarching actions to help you establish a financial strategy:
1. Spending: Before you start putting together a budget, it’s a good idea to track your spending habits over several months to get an accurate look at where your money is going. Use a simple spreadsheet or a personal finance app to calculate what you spend and where. Group your expenditures into categories such as reoccurring bills, groceries, eating out, entertainment, etc. After you monitor your spending habits over a period of time, you can determine where you might be able to cut back, if need be. This will also give you a monthly budget to work with moving ahead. Continue to track your spending so you can see if you’re on course with your budget.2
2. Saving: Creating an emergency fund for unexpected life expenses is one of the most important reasons to save. Another reason to put money aside is to fund short-term projects or purchases. For example, you might want to remodel your kitchen or save up for a vacation. Start by determining how much you need to save and then create a schedule for how much you will put away each week or each month and track your progress. Do whatever works best for you to keep this money separate from your spending change. You might consider putting the funds in a separate bank account or keeping the cash tucked away in an envelope. Implementing a regular saving schedule will prevent the need for financing options later.
3. Borrowing: The purposeful use of debt is undoubtedly one of the more controversial financial planning topics. Most of us use debt to buy a home, which is generally recommended as long as the amount is reasonable. Beyond that, try avoiding debt whenever possible. It is far too easy for debt to get out of control and that can have disastrous effects on the lives of families who have too much of it.
4. Investing: Investing is a powerful tool used to build wealth and save for the future, yet nearly half of all American families have nothing saved for retirement.3 Whether you’re making $50,000 a year or $200,000 a year, putting money away is a challenge. The sooner you start saving for retirement, the better. Time is on your side when you start early, thanks to the power of compound interest. Even if you’re well on your way to retirement age, there’s no time like the present. The most important thing is to start somewhere.
There are several types of investment accounts that can help you save for retirement. The most common are 401(k)s and IRAs. Here’s a quick overview:
• A 401(k) is a tax-deferred, employer-sponsored account. Meaning, you will pay taxes on the money only when you withdraw it. You can contribute up to $18,500 each year to your 401(k), with catch-up contributions allowed for those over 50.5
• IRAs are also tax-deferred, but are not offered through your employer, and you have full choice of where your investments are made. You can contribute up to $5,500 each year to IRAs ($6500 if you are over 50). If your employer doesn’t offer retirement benefits or if you are self-employed, you might consider an IRA to save for retirement. Note that there are several different types of IRAs – including a traditional or Roth IRA. Each plan has different rules regarding taxation and withdrawals. Speak to your financial advisor to determine which plans work for your situation and always consult a tax advisor to understand all the associated tax benefits and implications.
• Remember that you will have to pay taxes on any withdrawals made before the age of 59 ½ and you may have to pay a 10 percent penalty.
Successful money management will not only make you feel good about having your finances under control, it will also ensure both your short-term and long-term financial wellbeing.
Stephen Stribling is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Denver.