How does having minimal financial stress in 2013 sound? If you’re like most people, the reduction of financial stress and worry should sound pretty darn good. In fact, given the conditions of the current economy it should sound really good. So, how exactly does one take the first step in moving towards, and more importantly—achieving, a healthy financial New Year?
Here is some advice to help jumpstart your planning. As you start to map out how you can realize financial serenity this next year, keep in mind that it will be no easy feat. Some days will be easier than others, and there might be unexpected obstacles that could set you off track, if you allow them. Don’t get discouraged. You’re stronger than you think, and with the right support, discipline and patience you will achieve financial well-being.
Tips to a healthy financial New Year:
#1: Set Goals
When we clearly define and articulate the financial accomplishments we would like to achieve, we are more focused and motivated to achieve them. When setting goals:
• Keep the list short, three to five goals maximum. More than this and you’ll give up before you start.
• Be specific. Don’t say “I want to save more money,” say “I want to save $XYZ a month.”
• Communicate your goals. Write them down and share them with others to increase accountability.
• Review goals regularly to stay on track.
#2: Develop a Budget
This will help you determine how much money you need to set aside each month to cover expenses and other necessities. Establish your budget by:
• Mapping out expenses to income to get a clear picture of what you’re spending each month, and the type of things you’re buying.
• Reviewing past statements. Online banking makes this simple and easy.
#3: Devise a Plan to Reduce Debt
Based on your budget and financial goals, determine how much additional money you can realistically put toward your debt each month. Don’t have extra income? Look for ways to cut back on monthly spending. When planning, consider:
• Taking care of unhealthy debt first (credit cards!) – Pay down cards with the highest interest rate first.
• Consolidating student loans, refinancing your mortgage to a low fixed rate if appropriate, and/or transferring credit card balances to a card with a lower rate. Such strategies can lower your monthly payment and help you reduce interest charges.
• Earning some extra cash by selling no longer used items on Ebay or Craigslist.
#4: Cut Monthly Expenses and Spending
Knowing where your money is going can help identify where you can cut back. Remember, every little bit adds up. Here are a few suggestions:
• Cancel subscriptions to magazines you never read
• Bring lunch to work
• Ditch the daily Starbucks –make your own coffee
• Take public transportation, if available
• Buy store brands, instead of name brands
#5: Build-Up Your Reserves
If you don’t have a financial emergency fund (savings), or haven’t started thinking about your retirement nest egg, this is your time! You can begin by:
• Contributing to your 401(k). If you already contribute, increase by 1%, or more, a year.
• Automating transfers to your savings every pay period. If you already do, increase the amount transferred. A good rule of thumb is to have enough for 6-9 months of living expenses.
#6: Check your Credit Regularly
With the holiday season, it’s likely that you’ve been using your credit card all over the place. Start the New Year by ensuring that your credit is in good standing. Here’s what you should do:
• Keep an eye on your statements! Check for purchases that you didn’t make. Check for purchases that you didn’t need to make; or for transactions that cleared for incorrect amounts. If you see anything out of the ordinary, take care of it immediately.
• Order a free credit report online. Look for errors that might be hurting your credit and fix them! Use your smart phone or other calendar to remind you to check your free credit report at least once a year. And avoid applying for credit simply because an additional 10% is offered you. That credit inquiry could mean a credit score that gets lowered a few points.
#7: Make an Effort to Become Financially Educated
Staying up-to-date with your finances is important, but you should also know what’s going on in the financial environment. Doing so will make you financially savvy and help you meet any financial goals you make for the New Year. Stay educated by:
• Building relationships with your local banker and/or financial advisor. They have a wealth of knowledge that can help answer your financial questions.
• Establish a buddy system. Share information each week on what you are learning that is important. Because of technology, distance is not a challenge. Your buddy could be across town or across the country. Make this work for the both of you.
• Set a goal and reward for becoming financially savvy. Decide how often you empower yourself and your buddy, and issue each other “Financial Empowerment” certificate for excellent work. Each time you look at the certificate, it’s a reminder of the importance your financial empowerment has meant to you. It could also remind you to keep up the good habits you have developed.
• Commit to helping a younger person get financially savvy by this time next year. Here is a way to really have a meaningful legacy.
Gwen Cohen is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Chicago, IL. The information contained in this interview is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney LLC, Member SIPC.
By Gwen Cohen
Morgan Stanley Wealth Management