April is not only the month your income taxes are due, but it is also Financial Literacy Month. So before you file away all your financial information for another year, now is a good time to take a deeper look into your financial affairs.
Many people are either too busy or too intimidated by all the numbers to make sense of them on their own. There are still some basics you can implement to make you better prepared for life’s events. It is important to be aware your financial situation at all times. This can keep you from making mistakes and will also help you focus on your goals.
The basics may sound simple in principle but are not that easy to live by every day. It will take practice to get into good financial shape, just like an exercise routine or learning a new subject. You need to invest time to stay on top of both opportunities and pitfalls that can impact your financial future. Here is a refresher list to get you started.
Spend less than you make each month. This is the cardinal rule of finance. This sounds simple, yet millions of people cannot make ends meet. Start with a list of necessary expenses, such as food and housing. Match this up with your take-home pay or your fixed income such as Social Security. If there is not enough to cover the basics, then look to see where you can reduce expenses or increase income. Next look at your flexible expenses. These should be easier to control each month. This is the obvious place to make changes first. Major purchases should be budgeted for all year long or come out of flexible income, such as a bonus or savings, and only when those sources are available. When you set aside money before you make a purchase, then you will not incur debt and will exercise living within your means.
Get out of debt. Again, this sounds like a no-brainer but retiring debt takes time and discipline. Reflect on what you do when the credit card is nearly paid off. Does this entitle you to buy something and increase the balance? What about actually paying off the balance and keeping it that way? This is the practice run for financial independence. You have to pay your obligations before you can celebrate.
Save for the future. This is the number one way to build your net worth. College or retirement may seem far away, but saving for a goal is what makes funds available for future events. First, set aside your emergency reserves of at least three to six months’ living expenses. Then set your goals and fund those along the way. This is the one way to make sure you realize those dreams. You can do this. Your debt is being paid down, you are building emergency reserves and you are looking towards a time you can set aside funds for the future. This is how financial freedom begins.
Protect what is important. Most likely your family would be devastated without all or part of your income, so you should have the proper amount of life and disability insurance. Protect your house and other major assets through suitable insurance coverage. Protect your nest egg by building a prudent and well-diversified portfolio. You may not be current on every tax law or investment opportunity, so another good way to protect your assets is to seek qualified advice. A second opinion from a qualified professional can provide you with peace of mind.
Review and improve. Once your foundation is in place, it is important to review and rebuild as needed. You will need to re-evaluate your plan as taxes, investments, income and expenses change.
Patricia Kummer has been an independent Certified Financial Planner for 25 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800. Any material discussed is meant for informational purposes only and not a substitute for individual advice. Investing is subject to risks including loss of principal invested and diversification may or may not produce positive results.