It's Time to Clean up Your Finances

Spring is a perfect time to highlight the importance of financial literacy and recognize the need to establish and maintain healthy financial habits.

When it comes to learning about personal finances, there are four overarching “buckets” to consider: spending, saving, borrowing and investing. Here are some tips that should help you become more literate with respect to your wallet:

Spending: An important first step to get ahold of your spending is to find out exactly where your money is going. Use a simple spreadsheet to start tracking your spending habits over several months. This should give you a good look at where your money is going. Group each expenditure into categories such as groceries, eating out and recurring bills.

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. Your financial adviser should be willing to help you put a budget together to review and make short-term recommendations on your monthly spending, which can help get you closer to keep on track with your long-term goals.

Saving: One of the most important reasons to put money aside is to create an emergency fund for the unexpected, an amount equal to at least three months of monthly expenses. Another reason to save is to fund short-term projects or purchases. For example, let’s say you 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.

Track your progress on a spreadsheet. Do whatever you have to in order to keep this money separate from your other money. Put the funds in a separate bank account or even keep the cash in an envelope. Using this type of “project fund” system will prevent the need for debt financing. Also, set it up so the amount you are trying to save is transferred automatically from your paycheck to the savings account. This way, you won’t miss what you don’t have. There are also programs you can use where each time you use your debit card, a certain dollar amount is automatically transferred to savings. This can really add up over time.

Borrowing: Borrowing a reasonable amount of money to buy a home is usually unavoidable. But beyond that, avoid debt whenever possible. It is far too easy for debt to get out of control and lead to disastrous effects on your life. If you find yourself currently in debt, make a plan to get control and eliminate it. If you have multiple loans, start by paying down the loan with the highest interest rate, or any loans that have depreciating assets. If you’re not sure how much debt is too much, the below guidelines may be helpful:

• Housing debt (including principal, interest, taxes, and insurance, known as ‘PITI’) should be less than 28 percent of your gross income.
• Consumer debt should be less than 20 percent of your net income.
• Total debt should be less than 36 percent of your gross income.

Investing: Investing is a powerful tool used to build wealth and save for retirement. Nearly half of all American families have nothing saved for retirement. The sooner you start saving for retirement, the better. Time is on your side when you're young, thanks to the power of compound interest. The most important thing is to start somewhere, whether you make $50,000 a year or $200,000, start investing something each month. First, take advantage of any investment retirement accounts offered at your place of employment, especially if you are offered a match on any funds contributed. If you still have additional income, reach out to a financial adviser who can help guide you to the next best place and way to begin investing.

With a little financial know-how, you will be on your way to creating true, lasting wealth in no time.

Sara Hemmings is Financial Advisor with Morgan Stanley Wealth Management in Loveland. She can be reached at 970.776.5506 or [email protected].