When you think “New Year’s Resolution,” what comes to mind? Most people think of things like diet and exercise plans, relational commitments and career goals. But what about your finances? In the same way that you need to make an effort to keep your body healthy, healthy finances require work, too. Here are five steps to help you plan for good financial health in the coming year.
1. Take An Assessment
When it comes to finances, a surprising number of people have no real idea how they’re doing. They have a general understanding about their debt, but most people’s knowledge stops at their monthly expenses-to-income ratio. They know they take in enough income each month to pay their bills and save a little, but that’s about it
Every good plan starts with an honest and accurate assessment of current conditions. Look beyond your monthly budget to your overall financial state. Find out how much you owe on your mortgage, credit cards and student loans. Get information about your investments: how have they been performing, and what are they worth? Once you’ve gathered and analyzed this information, you’re ready to move forward.
2. Set Some Goals, Starting with Your Debt
Now that you have an understanding of your current financial situation, you can begin setting some goals. Most financial planners will tell you the first thing you should focus on is debt. Set goals to pay down or pay off credit cards and reduce the principal on your mortgage. Opinions vary regarding the best method for doing this – some believe it’s best to work your way from the lowest to highest balances, while others suggest starting with the credit card that has the highest interest rate. Either method is great. You and your family can decide what’s best for you.
To create a debt repayment plan that works, you need to start with an overall budget that works. This can be tough, but take a good, hard look at how you and your family spend money. Are there extras that you can sacrifice in order to pay down your debt faster? Can you reduce utility bills? The more you can reduce your spending, the more quickly you can pay off your debt.
Other goals you may want to consider setting include saving for retirement, saving for a child’s college education, giving to charity, and maintaining an emergency fund. How you prioritize these will depend on your family’s current life stage.
3. Talk to a Financial Planner about Your Investments
If you have money invested in mutual funds, IRAs or individual stocks, sit down with a financial planner and talk about both your short- and long-term goals. Financial consultants are nearly unanimous in their expectation that 2012 will be another rocky year for investments. You’ll need to decide how much risk you’re willing to take and with what.
4. Assess Your Insurance Coverage
This step is especially important for those who earn most or all of a family’s income. You want to be sure you’re family will be adequately taken care of if something happens to you. Talk with an insurance professional about your current level of coverage and do some price comparisons. You may be able to find a similar policy for a little less money.
Review other insurances, as well. For example, if you put less than 20 percent down when you bought your home, you had to get mortgage insurance. However, once the equity in your home rises above 20 percent, you’re no longer required to pay the insurance. Review your mortgage documents and see if you’re able to get rid of this expense.
5. Take Time to Educate Yourself
Managing your finances isn’t as complicated as rocket science, but it can feel like it if you don’t have a lot of finance-related education. Set a goal for 2012 to improve your knowledge of money management tools and methods. Read a couple of books, attend a seminar, listen to a podcast. The more knowledge you have, the more comfortable you’ll feel making decisions and setting goals.
The coming year can be a great one for your family! Spend some time this holiday season creating a financial plan for 2012 and then spend 2012 watching your financial picture get better and better and better.
Related articles:
- Save Money Winterizing Your Car
- Want to Save Money? Live like a College Student
- Leave It to the Pros: Q&A with Financial Editor Erica Sandberg
- 5 Things to Do with Your Money before the New Year
- Gifts of Charity: Thoughtful Gifts that Give Back
