It may not come as a surprise that financial stress is at an all-time high in America. After all, we’re well into the third COVID pandemic year, and although recent variants have been a bit more mild, the virus has weakened millions of Americans’ ability to work and pay their bills.
In 2021, 73% of Americans ranked their finances as the number one stress in their life, according to a 2021 Capital One CreditWise Survey. With inflation at an all-time high, financial stress could worsen.
The good news is that financial stress is manageable. Whether you choose to consult with a financial professional or do-it-yourself, completing the following six steps creates a foundation for mastering your money. By taking control of your financial future, and putting parameters in place to mitigate risk, you should feel less fear and anxiety. We’ve partnered with Bautis Financial, a Montclair-local financial advising firm, to share six financial steps you *must* take to master your money.
If at any time during the exercise you decide professional help would be beneficial, Bautis Financial, a Montclair-local financial advising firm, is offering complimentary consultations to all Hoboken Girl readers.
1. As a Baseline, Determine Your Net Worth
Some might associate net worth statements with the rich and famous, but anyone can calculate their net worth. Your net worth is important, as it acts like a “snapshot” of your financial health.
Net worth is the sum total of your assets (bank account balances, savings, investments, retirement accounts, etc.) minus your debts (loans, mortgage, credit card, etc.).
Assets – Debts = Net Worth
Your net worth is the easiest way to get a big-picture perspective on your finances, aiding you in determining if you’re making progress towards financial goals.
2. Assess Your Spending and Find Your Cash Flow AmountsFind Out If Your Money is Working for You
Next, it’s important to assess your spending. This gives you transparency into where your money is going.
Find your cash flow by subtracting expenses from your income. Typically, expenses can be categorized by “needs” (living expenses) and “wants” (everything else).
Income – Expenses = Cash Flow
If you’re unhappy with your current spending – maybe you’re spending too much, or maybe towards expenses that aren’t valuable to you – you can create a spending plan, or budget.
More importantly, getting a handle on your cash flow after expenses informs your savings.
3. Calculate and Abide By a Savings Ratio
The importance of saving money is rarely disputed. Saving can help you pay for large purchases, provide freedom and financial security, help you avoid debt, leave a financial legacy, and so on. That said, you may be saving – setting income-generated money aside for the future – but how consistently? And at what rate?
Your savings ratio is the amount of savings per year divided by your total income.
Example: $100,000 (income) / $10,000 (savings) = 10% (savings ratio).
Not only is it important to know your current savings ratio, but also to figure out how to improve it. Unfortunately, there’s no one-size-fits-all ratio, it will depend on your specific goals. For example, if two individuals of the same age have the exact same income and expenses, but individual A wants to save for a down payment on a home (approx. $10,500) by age 30, and individual B wants to save for a Master of Business Administration tuition (approx. $60,000) by age 30, individual B will have to save at a higher rate than individual A.
4. Determine If You Have the Right About of Risk in Your Investment Portfolio
When you invest in anything – stocks, bonds, mutual funds, and exchange-traded funds – you knowingly accept some degree of risk. That’s because all investments carry some degree of uncertainty and/or potential financial loss. For example, your investment value might rise or fall because of market conditions.
And, even if you have a majority of your money in cash, you are still taking on risk. Purchasing power risk is the risk that inflation will undermine the real value of your cash.
But portfolio risk isn’t all bad, as the level of risk associated with an investment typically correlates with the level of return the investment might achieve.
If you are invested in any capacity, even if it’s a company-provided 401(k) plan, it’s important to determine the following:
- The current risk demonstrated in the investments.
- Your individual capacity for risk.
- How much risk is necessary to achieve your individual goals.
The goal here is to maximize the return for the right amount of risk you’re comfortable taking.
Bautis Financial offers a free risk assessment for anyone to take here.
5. Create a Retirement Plan
It’s hard to put your current self into your future self’s shoes, but to answer the following question, try it. Do you plan on working for the rest of your life?
Unless you do (that would be a lot of Mondays), you’re going to have to prepare for retirement. Even if you’re unsure of when you’d like to retire, to ensure you have enough assets that can essentially “work for you” come the day, there’s no better time than now to begin saving.
There are tax-efficient ways of planning for retirement, using Roth IRAs, IRAs, 401(k)s, and other plans. Because of the benefits of compounding interest (the interest you earn on interest), the younger you open a retirement account, the better.
As you grow closer to 62, the average retirement age in the U.S., financial advisors can help adjust savings goals as changes occur. For example, if by age 55 you decide you’d rather retire early, by 58, advisors can specify how much more per month you should save.
6. Implement a Catastrophe Plan
The reality of personal finance is that you can put a perfect plan together, but anything can blow it up. From job loss to medical emergencies, catastrophes don’t take income levels into account – and these issues can affect us all. Although the cause may be unknown, it is possible to prepare for catastrophes, and also to stress-test your financial plan against possible outcomes.
Some ways to prepare a catastrophe plan can include:
- Building an emergency fund that can cover three to nine months of expenses.
- Considering various insurance options, such as life and disability insurance.
- Establishing a home equity line of credit, but not using it until needed.
The old adage “time is money” rings true. While this statement can be interpreted as a reflection of the hourly wage, from a financial standpoint, the longer your plan is in place – time – the more success you’ll see – money. And, after all, there’s only so much of either to go around… so take action.
If you’re interested in a complimentary consultation with Bautis Financial, please schedule a time below.
Bautis Financial’s in-depth, personal approach to financial advice and guidance empowers you to make smarter financial decisions and achieve your goals more confidently. It’s about anticipating needs, mitigating risks and eliminating distractions to keep you moving along the right path.