Have you ever wondered how you can take charge of your financial life, but don’t know where to start? It’s worse for new immigrants who have settled in to America but don’t really understand all the financial jargon they hear….things like 401K, Roth IRA, Term-life insurance, Annuities, Disability insurance, etc. Are you sick and tired of working very hard, making a decent income and yet always seem to have month than money? Well, you’re not alone. According to a recent report from CareerBuilder, 78% of US workers live paycheck to paycheck.
In that CNBC article, even 10% of those making over $100,000 annually said they usually or always live paycheck to paycheck. This problems affects almost everyone, across all income groups. But you can do something about it. Here are 5 quick and easy ways to take care of this.
1. Calculate Your Net Worth
To get a sense of where you are, you have to take stock. Calculating your net worth is very simple. It is equivalent to this formula: Assets minus Liabilities.
Assets include things you own and can include things like:
. Money in your bank accounts
. Value of your investment accounts
. Market value of your home
. Estimated value of your business (if you have one)
. Your car(s)
. Personal properties (jewelry, art, furniture, etc.)
. Cash value of insurance policies
Liabilities (what you owe) include things like:
. Mortgage balance
. Student loans (if any)
. Car loan(s)
. Credit card balance
. Any personal loans you may owe family/friends or banks
Substract the liabilities from the assets and what you have is your Net Worth statement. If you’ve never done this before, you may be shocked at what you see. Your new goal is to try and increase your net worth in the positive direction at the end of every year. Most personal finance nerds calculate their net worth every month, but you can do this once to know where you stand, and after that, do it once per year (New Year’s Day is a good time to do this)
2. Track Your Finances for One Month
If you’ve ever asked yourself at the end of every month, “where did all my money go?”, then this is a good exercise for you. There are some fancy online tools you can use to do this, but I’m old school and like to keep things simple. You can use a simple pad and pen and write down every single expenditure for that month: rent/mortgage payments, insurance bills, utility bills, food/groceries, gas/transportation, car repairs, childcare expenses, work-related expenses, charitable giving, eating out, shopping and miscellaneous expenses. Write every single dollar you spend out. You can bunch them in categories to make it easier for you.
Review this at the end of the month and see how you’ve spent your money. Does your spending align with your values? If not, then make the necessary changes by cutting back and saving the extra money. Then create a plan to use those savings to fund your goals. After doing this activity, you can then go ahead to create a monthly budget and tell your money what to do
3. Create a Plan to Pay off Your Non-Mortgage Debts
Majority of Americans have debt. Even as immigrants who emigrated from countries where the debt culture is not pervasive, once you’re integrated into the American society, you almost get suckered into debt at some point. I know this, because it happened to me (hello car notes, credit cards). But consumer debt is one of the greatest impediments to your financial life and to building wealth.
In North America, nobody gets you out of debt better than Dave Ramsey. His 7 Baby Steps are tested and trusted and if you work the plan and stay focused, you can easily get out of debt within 2 years on average, depending on the amount of debt you have. His debt elimination plan is called the debt snowball and is based on stating your debts smallest to largest (regardless of the interest rates on them) and tackle them from the smallest one to the largest one. It is a powerful process because it taps into behavioral finance: small wins (paying off the smallest debts) will give you the psychological boost to continue to pay off the larger debts.
4. Set Up Your Emergency Fund
According to Investopedia, an emergency fund is an account for funds set aside in case of the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major repair to your home. One of the best ways to do this is to open an online savings account because they have very competitive interest rates. You can find the best high-yield online savings accounts here.
This account should not be easily accessible. It should be sacrosanct for only real emergencies, so should rarely be touched. Most people in the financial world recommend anywhere from 3-6 months of your monthly expenses (not your income) which you could easily deduct from your monthly budget after you have tracked your expenses for a month.
5. Build Your Defenses
Here, I mean creating defenses to prevent you from having a financial catastrophe. You can easily get wiped out financially in America, regardless of how much you have. The commonest cause of bankruptcies in America is medical bills. The treatment of an unfortunate medical condition can easily run into hundreds of thousands of dollars or even millions when you don’t have any health insurance.
There are so many types of insurances available but for the average American, there are six basic insurances you should try to get as follows:
. Health (Medical/Dental/Vision)
A 7th insurance you might consider would be Malpractice insurance (like for those in the medical field) but this may not apply to everyone. As you can tell, this is a large topic and probably deserves a separate blog post. But if you can get these core insurances in place, you should be good to go.
Also included in building your defenses is getting your Estate plan in place. This includes setting up a Will and Power of Attorney. For most Americans, a simple online Will can do. So many places like LegalZoom.com, Nolo.com, Willing.com or Uslegalwills.com offer this service very cheaply.
When you’ve taken care of the above 5 things, your financial house is now in order. Next, you can begin to build wealth faster by investing. This is the most exciting part of your finances because savings can only get you so far. But investing early and often, consistently over decades is the only way to build wealth. The reason is because of compound interest. Albert Einstein called it the 8th wonder of the world
You begin investing, first from your work place retirement plans like 401k, 403b, 457b or from IRA or Roth IRA. After you’ve maxed out these, then you can open taxable investment accounts (where there are no limits to how much you can invest) and can even consider real estate investing. If these all sound like jargon, they will be explored further in other posts.
So get cracking at this and start to build your own financial power house. It’s not rocket science. Anyone, at any income level, can do this.
What do you think? Have you organized your financial life? Why or why not? Comments below.
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