If you just look online or turn on the TV, you will find thousands of ways to save, invest, “how to get rich quick,” and a host of other ways to help or hurt your finances.
If you aim for nothing, you’ll hit it every time.
Focus on your situation and goals first
Whether you are in a deep hole or already three rungs up the ladder, put first things first and make a starting point. Make goals. Write them down and commit to a plan. Setting goals in intervals such as short-term achievable goals (< 1 year), midterm goals (1-3 years), and long-term goals (+3 years) can be very helpful and maintain motivation. Saving $500 in three months is much easier to visualize and keep the motivation going than just making a goal of saving $1 million in 20 years. Recognize your past and your failures but focus on the future and moving forward.
Spend less money than you make
While there are many ways to make money, there is one sure way to poverty and that is to consistently spend more than you make. There is no faster way into the chains of debt than this. Knowing how much you make and budgeting in a way that works for you can give you a level of freedom regardless of your income level. Consistency is key as most people do not go bankrupt because of one or two big purchases or mistakes but a combination of thousands of very small mistakes that add up to a mountain over time. Do not trade your future for what you can get today.
Save first spend last
As part of any budget, planning to save first and intention is key. Often if you save last, you will find that you have nothing left to save. Automation of savings can be helpful in achieving this. Automatic systems such as an auto-deduction savings from your paycheck, direct deposit of a fixed amount to a savings each paycheck, or an auto-transfer from your bank account each pay period can help keep saving consistent. If you do this and stay consistent, over time you will be amazed at what it can become.
Good judgment comes from experience and a lot of experience comes from bad judgment.
Save for emergencies and invest for the future
Even with the best planning and saving, an unexpected emergency or life event can quickly ruin any plan. A good rule of thumb is to keep three to six months of your monthly cost of living in a savings account. For example, if you need $2,000 per month to meet all your living expenses you want to have $6,000 to $12,000 in emergency savings. Do not forget to regularly review your insurance and protection such as life, health, disability, and liability to limit risk.
Avoid bad debt
While all debt takes away from cash flow, not all debt is equal. Using a credit card can come with many benefits and protections, but short-term revolving debt is usually a very bad idea and may lead to financial distress especially short-term or payday loans. A wise person once told me, “If you need a $500 loan to make ends meet, then you can’t afford to take a $500 loan.” Some debts such as car loans may be necessary but should be kept to a minimum and paid off as quickly as possible. Positive debt can be debt used to buy a primary home or an income property. While care should be taken, proper asset leverage can allow for creation of wealth over time. Making bi-weekly payments on your mortgage or adding a flat extra amount each month can save thousands in interest and cut years off any mortgage.
You can’t fix a mistake by making more mistakes.
Don’t forget taxes
Planning for taxes is very important as being in debt to the government is never a good idea. Reviewing and updating your w-4 tax form with your employer to insure property tax withholding is a must. Keep in mind that having too much withheld creates a nice refund each year, but you are giving an interest free loan to the government each year. The IRS has a good tool to help with tax withholding found on irs.gov. Do not discount the benefits of working with a CPA or tax professional. My grandfather, John Simons Jr. often said, “Don’t save a $1 to cause yourself $5 in hassle.”
www.irs.gov/individuals/tax-withholding-estimator
Most people do not plan to fail; they just fail to plan. A great resource on financial literacy and information provided by the American Institute of CPAs can be found online at www.360financialliteracy.org/Get-Started.
Chris Simons CPA, PFS, CGMA
Harvey & Simons CPAs, LLC
The best time to plant a tree was 20 years ago. The second-best time is now.
This content is meant to be generic in nature and for general informational purposes only. This article is not a recommendation or advice nor does it establish a client CPA or advisory relationship between the user and Chris Simons CPA or Harvey & Simons CPAs, LLC. All users should consult their own professional advisors for their specific situation prior to acting on anything contained in this content.
