by Alicia Rose Hudnett, Business of Your Life, LLC
Financial stability for your household means being able to meet your current, immediate financial needs and obligations while also saving for future financial goals and protecting your assets from financial risks. The first step to taking control of your finances begins with creating a financial plan. Here are six steps you can take right now to get started.
Step One: Automate Your Monthly Savings
A financial plan begins with an analysis of household cash flow, both inflows and outflows. Once you cover your essential monthly living expenses, determine a monthly savings amount and automate it. Do this before paying for non-essential purchases. Too often, people wait until the end of the month in order to set aside savings. This can lead to uneven saving and no saving at all. Instead, build your savings target into your budget and automate the transfer from your checking account to your savings account, just as you would pay any other regular monthly bill.
Step Two: Establish an Emergency Cash Reserve
While you can tackle various financial goals at the same time, everyone’s first priority should be to accumulate at least six months’ worth of living expenses in a cash savings account. These funds are to be used in case of a job loss. This not only allows you to pay your bills while looking for another job, it prevents you from having to take on debt or take early distributions from retirement savings.
Step Three: Minimize Your Debt
Pay off credit cards every month, and if you have student loans, make those the next priority. If you are carrying various types of debt and have multiple outstanding credit card balances, try paying off the smallest balance first, while always continuing to make the minimum payments on the other balances. Once you’ve paid off one debt, redirect all of the funds you had been sending to that one debt to the next debt in line.
Step Four: Check Your Credit Reports
Every 12 months you are entitled to check your credit reports from each of the three main credit bureaus for free at annualcreditreport.com. Your creditworthiness determines your ability to secure credit and the interest rates you are offered on credit cards and loans, including a mortgage or car loan. Your credit history is an important piece of your overall financial health and something you should monitor.
Step Five: Open an IRA
Everyone with earned income should have an IRA, or Individual Retirement Arrangement, and contribute something to this account every single year. If you miss a year, you miss contributing for that year forever, as the government sets annual contribution limits. Not only can you contribute directly to an IRA but you can also use an IRA to accumulate the various and multiple workplace retirement accounts that you may contribute to over your working years.
Step Six: Start Estate Planning
While it’s a good idea for everyone to have some estate planning documents in place, like a Will, one easy first step you can take to make sure your assets transfer to the individuals you want to receive them is to check the beneficiaries listed on all of your retirement accounts, as these supersede what you may have stated in a Will. Also, pay close attention to how you title accounts and assets that you own, perhaps by yourself or jointly.
Alicia Rose Hudnett is a personal finance expert and financial planner with a Certificate in Financial Planning, and she is currently a candidate for CFP® certification. With a strong passion for personal finance and financial literacy, Alicia believes money management skills are important life skills. The core of what she does is teach Best Practices in Personal Financial Planning to individuals looking for guidance on how to become financially stable and build their personal wealth.
You can reach her at Alicia@businessofyourlife.com or by calling 703-278-2266. Follow her on Twitter @AliciaRHudnett.
