We’re often tasked with having to take care of too many things. But the one thing you absolutely need to care about - your finances- often falls by the wayside. Not anymore. We’re exploring two crucial steps you can take towards getting your finances under control. Without further ado, let’s dive in.
Step 1: Take stock of your finances
Taking stock of your finances can seem like a daunting task. Many people avoid it, preferring to live in ignorant bliss instead. However, to be in control of your finances, you need to first know just where you stand. Once you get down to it, you will find that it is not as complicated as it may initially seem. Like anything challenging, starting is often the hardest part. To help you on your way to becoming financially savvy, here are a few main areas you can investigate:
Sources of income: First, make a list of all your sources of income. Gone are the days when a regular day job was the only way you could make any money. Today, most people have a side hustle to earn a little extra cash. It could be offering offline or online classes on skills you have picked up over the years. It could be by monetizing your hobbies through an online marketplace like Etsy or on social media. It could be returns from your investments. The idea is to make a list of all the varied sources of income you currently have, so you can further chart how you can direct that income into expenses, savings, and investments to meet all your financial goals. (Don’t have a side hustle or other sources of income apart from your regular job? No problem. Make a note of it and explore your options!)
Expenses: Once you have your source(s) of income mapped out, list all your expenses. Try to make this list as comprehensive as possible. Don’t leave anything out - not even that daily coffee or thrice-a-week take-out you spend money on - it all adds up. An easy way to make sure you cover everything is by breaking your expenses into sections, and then listing the expense items in each section. Start with the biggest, most obvious sections first - Rent, Utilities, Debt, Insurance and whittle it down to sections such as Travel, Entertainment (all those subscriptions add up too!), and so on.
Debt: Now, it’s time to get into the nitty-gritty of your debt. Make a list of all your debt from mortgage to student loans, credit card bills, and any other lines of credit you have. Make a note of how much you owe, what are the interest rates you are incurring, your payment due dates, the length of your repayment period and so on. Your list should be able to give you a very clear idea of all your debt with just a glance. Another tip is to not just look at your official debt but also consider any unofficial debt you have too, such as money borrowed from friends or family. This kind of debt usually gets pushed to the side as there’s no formal mechanism in place to repay them. However, once you take stock of them, you will be in a better position to plan how you can repay these.
Savings & Investments: The next main area to focus on while taking stock of your finances are your savings and investments. Like your debt, make a detailed list of just how much money you have in different savings accounts, money saved up in an emergency fund, and all your investments. While listing your investments, go one step further by noting the interest you earn on each type of investment (such as shares, bonds, GICs, etc.), the initial amount you invested, how much that amount has grown, and any other details you think are important. Like your debt, you should be able to get a good idea of your investments just by looking at your list, so make it as detailed as possible.
If you find taking stock of your finances hard, one way to look at it is as if you’re getting your affairs in order. If something were to happen to you, it would be an even more complicated task for your next of kin to sort your finances out in your stead. If you lack the motivation to do it for yourself, think of doing it as a way to save trouble for your loved ones in the distant future.
Step 2: Set (or review) your financial goals
Great! You took stock of your finances - what next? Now that you have a clear idea of how much you’re earning and spending, you can define your financial goals. If you already have your financial goals in place, then you may want to review them to check if they are aligned with your situation and what you actually want to achieve. Unsure of where to start? Here are four key areas to explore while setting your financial goals:
Short-Term Specific Goals
What do you want in the next year? Or even the next five years? Is it a new car? More international travel? Higher education for your kids or yourself? A home renovation? A wedding for you or a loved one? It’s time to stop wishing and start doing - by first making it a goal. Get as specific as you can about the goal. Instead of marking it as ‘Travel Fund’, try ‘Travel Fund for European Trip in Fall 2022’. Making it specific makes you more likely to achieve your goal. Remember, these are short-term goals so the amount shouldn’t be too large (you can judge this since you’ve mapped out your finances in the previous step). You don’t want to set yourself up for failure. Keep it realistic and specific, then work on saving towards it. You can choose to have multiple short-term specific goals or choose one to focus on. They say money can’t buy happiness, but there is great satisfaction in being able to buy the things or experiences you really want and have saved up for.
Emergency Fund:
Saving up for a rainy day is crucial. If the COVID-19 pandemic has taught us anything, it is that an emergency fund can be a lifesaver and tide you over even in the most troubling times. However, it’s not enough to set aside a vague amount each month hoping it will be enough. Set a goal for your emergency fund by looking at your monthly expenses that you mapped out in the previous step. Total that number and multiply it by twelve. You should have enough saved to last you a minimum of six months. A comfortable position would be to have an emergency fund that is equal to a year’s worth of expenses. Setting up and maintaining your emergency fund should be your primary savings goal. In case you lose your job, fall ill, or can’t earn for whatever reason, your emergency fund will give you the confidence and security to stay afloat without losing your peace of mind. The issue most people face with emergency funds is dipping into it even during non-emergencies or not maintaining the fund after using it up. As you chalk out your emergency fund amount, also set a few ground rules for yourself to avoid these pitfalls.
Wealth Creation & Growth
Making your money work for you rather than working to make money should always be one of your financial goals. The easiest way to do this is through investing. How do you define a wealth creation or growth goal? One of the key factors to think about while creating wealth creation goals is your appetite for risk. Are you risk-tolerant or risk-averse? Would you be willing to take a chance with your investments to possibly earn more? Or would you rather make prudent investments that don’t earn you as much, but are more dependable? Your attitude towards risk will greatly influence your investment strategy and your wealth creation goals. There are multiple approaches you can take, but since you’ve mapped out your investments, you can do some research and set a benchmark for how much they can realistically earn for you and strategize accordingly.
Planning for Retirement
No matter your age, it’s never too early to plan for retirement. If anything, most people find that they start too late and don’t have the means to enjoy the same lifestyle as they do before retirement. Some even find that they cannot afford to retire at all and must continue working to support themselves. Avoid this situation by planning for your retirement with the right financial goals. How do you set a goal for your retirement? Like an emergency fund, your financial goals for retirement should take into account your current expenses. Think about how many of these will be relevant in the long term. Perhaps some debt will be paid off, so that will reduce some of your expenses. At the same time, inflation will mean the same things that you spend on today will cost much more. Arrive at an amount that you will need to live comfortably for twenty or thirty years. Don’t worry, it won’t all have to come from your savings. Instead, you can chalk out how much you will need each year and plan investments that will continue generating you an income even when you retire. Having a clear retirement goal makes it that much easier to think about all your other financial goals in the long-term too. For example, you may find that you don’t really need that lavish wedding and would rather invest extra funds to create more wealth or add to your retirement fund. Remember though, that you should also make sure to enjoy your hard-earned money while you can, so do spend on experiences and things you like, but not at the cost of leaving your future-self penniless. As with everything in life, moderation is key.
So, there you have it. Taking stock of your finances and setting financial goals are two steps you can take today to set yourself up for financial success in the future. We’re always here to help you achieve your goals, not only with savings options, but solid advice to help you reach your goals faster. Contact us if you need a hand today!