Get These Decisions Right

The sheer number of financial decisions required to manage our finances can seem overwhelming.  But often we spend an inordinate amount of time on small stuff — getting the bills paid on time, reconciling bank accounts, and calling to have a late charge waived.  While those things need to get done, how do we judge whether we’re headed on the right course?  There are six basic financial decisions that can determine the course of your financial life:

1. How You Earn a Living

We all want to enjoy our work. But why not choose a job that will pay more than another?  Your income is going to drive all your other decisions, so investigate your options:

• Are you sure you’re being paid a competitive wage with competitive benefits?  Pay attention to what is going on in your field.
• Do you have an outside interest or hobby that can be turned into a paying job?  This could be a good way to supplement your current salary.
• Can you get some additional training to help secure a promotion or qualify for another job?

2. How You Spend Your Income

The amount of money left over for saving is a direct result of your lifestyle choices, so learn to live within your means. To control spending, consider these tips:

• Analyze your spending for a month.  In which categories do you spend more than you expected?  Give serious thought to your purchasing patterns, trying to find ways to reduce spending.
• One of the most significant spending decisions will be your home.  Purchasing a smaller home will reduce your mortgage payment as well as other associated costs.
• Prepare a budget to guide your spending.  Few people enjoy setting or sticking to a budget, but inefficient and wasted expenditures can be major impediments to accomplishing your financial goals.

3. How Much You Save

Make a goal to save a minimum of 10% of your gross income. But don’t just rely on that rule of thumb.  Calculate how much you’ll need to meet your financial goals and how much you should be saving on an annual basis.

4. How You Invest

The ultimate size of your portfolio is a function of two factors — how much you save and how much you earn on those savings. Even small differences in returns can significantly impact your investment portfolio.  Typically, investments with potentially higher rates of return have more volatility than those with lower rates of return.  Your portfolio should contain a diversified mix of investment categories based on your return expectations, risk tolerance, and time horizon for investing.

5. How You Manage Debt

Before you take on debt, consider the effect it will have on your long-term goals. To keep your debt in check, consider these tips:

• Mortgage debt is acceptable as long as you can easily afford the home.
• Be careful about taking equity out of your home in the form of a home-equity loan.  You might want to set up a home-equity line of credit for emergency use, but make sure it is only used for emergencies.
• Never purchase items on credit that decrease in value, such as clothing, vacations, food, and entertainment.  If you can’t pay cash, don’t buy them.
• If you must incur debt, borrow wisely.  Make as large a down payment as you can.  Consider a shorter loan period, even though your payment will be higher.  Since interest rates can vary widely, compare loan terms with several lenders.  Review all your debt periodically to see if less-expensive options are available.

6. How You Prepare for Financial Emergencies

Proactively making arrangements to handle financial emergencies will help prevent them from adversely affecting your financial goals.  Make sure to have:

• An emergency fund covering several months’ worth of living expenses.  Besides cash, that fund can include readily accessible investments or a line of credit.
• Insurance to cover catastrophes.  At a minimum, review your coverage for life, medical, homeowners, auto, disability, and personal liability.
• A power of attorney so someone can step in and take over your finances if you become incapacitated.

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Copyright © 2019 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Summer 2019, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers.