Everybody wants to improve their money management habits. However, the path to achieving this goal is sometimes unclear.
Regardless, it is always an excellent idea to periodically evaluate your finances, especially when planning a major purchase like a home or a new vehicle or if you are undergoing significant changes in your income spending.
The good thing is that you need a lot of information at your fingertips. Are you looking to know finances or uplift your financial health to the next level? Use the steps below as a guide to figuring out your finances and gaining control of money and spending.
Determine Or Evaluate Your Net Worth
What better way to view your personal finances than first valuating your net worth? Taking your time to calculate your net worth can help you adjust your expenses or financial planning wherever necessary. Your net worth takes into consideration everything you owe and everything you own.
To calculate your net worth, draw a list of your asset and liabilities and subtract the liabilities from your investments. Your assets include retirement accounts, saving real estate, business stakes, and valuable personal things like art and jewelry.
On the other hand, the liabilities might include car debt, credit card balances, mortgages, or student loans. If the value of the assets is higher than that of your liabilities, you are in the clear with a positive net worth.
Otherwise, you have a negative net worth. Find a good company like Bills.com to go through your liabilities like mortgages, credit card debts or student loans to know your debt status. However, don’t feel embarrassed that your net worth leans to the negative. You only need to adjust your financial plans in a way that helps you to repay your debts and then work on building more assets.
Create a Budget
One way to improve your financial well-being is by strictly following a realistic budget that considers your financial goals. It helps you determine the amount of money you’ll spend every month. Through proper budgeting, you can save money every month to invest elsewhere or lay down a substantial financial objective, for instance, a down payment.
It indicates the amount of money you make and how you spend the income. To guide your spending, budgets can come in handy. Although some expenses like rent are fixed, others could be tempting to overspend on; for instance, eating out, daily lattes, or eating out.
When creating a budget, start by gathering all your pay stubs and bills.
Alternatively, and fortunately, there are various applications, both web-based and mobile-based, that can help you track your income and spending. These applications perform an analysis of your financial trends while remaining accessible with ease in your pocket. However, ensure you research the application’s security and safety features because they will be storing your personal information.
Deduct your expenses from income to determine the amount of room left in your budget. This makes it easy to determine the consistent costs to cut down on and the amount of money to spend on your variable expenses like travel. Ensure you include the less visible expenses like retirement savings, paying down debt, or establishing an emergency fund.
Evaluate Your Housing Costs
Housing costs are likely to be at the top of your mind after creating your budget because they usually are the largest monthly expenses. Take a hard look at how your mortgage payments or rent affect your monthly budget.
In personal finance, there is a rule of thumb that you should never spend over 30% of your income on costs related to housing. This ensures you can afford the other discretionary expenses. If your housing costs are more than that, you might want to consider looking for a more affordable option. This will ensure you budget to work towards your financial objectives or pay off your student loan.
Determining Your Debt-to-Income Ratio
Evaluating your debt-to-income ratio can help you know finances better or have a clear picture of your financial health. A debt-to-income ratio divides your monthly debt payments by your gross monthly income. Lenders typically use this ratio when determining whether you can make your monthly payments. If you plan to take out a car loan or buy a home, you want to have your debt-to-income ratio on the lower side. Work the debt payments into your monthly budget to stay on track towards lowering your debt-to-income ratio.
Refining Your Investment Plan
Investing might be intimidating. Therefore, you must have a solid understanding of how the investment will comfortably help you work towards financial goals. Investing carries some risks because there is a probability you can incur investment losses, unlike saving your money with an FDIC-insured savings account.
However, you should keep in mind that money stashed in savings accounts depreciates because of inflation, as the prices of items always tend to increase over time. Investments like mutual funds and securities aren’t federally insured, and you can lose the principal amount you’ve invested. You could also profit off these investments, and investment diversification helps mitigate such risks.
By spreading your investment over multiple assets, when there is a loss in one investment, it will not impact you because another more successful investment might make up for the loss. Although diversification cannot guarantee success, and your assets may suffer if there is an entire drop in the market, it enhances the chances that you won’t lose a lot of income or all at once.
Measure Your Risk Tolerance
To know the investment and saving products are good for you, you must determine your risk tolerance. For instance, if you are young and have over 30 working years left before you retire, you might be comfortable taking on a riskier investment like stocks that could earn you bigger gains in the future.
Those with advanced ages might not feel the same and want to work with safer bets like bonds. Generally, when pursuing short-term goals, you better choose investments that don’t carry a lot of risks because there are few chances of profiting within a short period.
Familiarize yourself with the available investment options to determine the ones that you are most comfortable with. There are multiple investment products that you can choose from, including annuities, mutual funds, and stocks, municipal and corporate bonds, U.S. treasury securities, money market funds, and exchange-traded funds (EFTs).
Before making any investment, you should also understand the associated fees of holding the investment and the selling or buying part of that investment strategy. It becomes easy to make your finances grow or save for college or retirement when you have a solid investment strategy.
Set Your Financial Goals
After knowing finances, you will get the insights to lay down some clear and sound financial goals. After considering whatever you want to achieve, like paying a credit card debt, you can develop a financial plan to reach the goals. To do this, list them in their order of importance. Then, draft a timeline that can help you meet the goals, for instance, a monthly savings plan.
From students’ loans, utility costs, and taxes to mortgages, modern life hurls all kinds of financial obligations to you, and you must juggle them. This makes figuring out your finances quite a challenging task. However, you can wrestle control of your financial future through tracking your spending habits, altering them where possible, and making realistic, thoughtful budgets.