The start of a new year is the ideal time to re-evaluate your financial situation. This should start with determining your net worth since this can help you see how well you’re progressing towards meeting your financial goals. Make a side-by-side list of your income and assets versus your debts and liabilities to determine your net worth. This will help you see where your spending is prioritized to develop a plan for modifying your money management plan.
Pay Down Debts
Your first step should be to create a realistic budget that you can follow throughout the year. It should allow you to meet your financial obligations each month, but it should also leave you with a modest amount of disposable income. That disposable cash should be used to pay off your debts. You can either pay off the lowest debt first or pay off the debt that charges the most interest. Either method will help you pay off your debts one at a time until you are debt-free.
Start Saving and Investing
Once your debts have been paid, you’ll have a larger amount of disposable income each month. This money should be divided up between a savings account and a retirement investment account. If your employer offers a 401k plan, be sure to join that plan first. Your savings account should be used for financial emergencies and big-ticket purchases, such as a new water heater.
Create an Estate Plan
An estate plan includes documents that will determine how your assets are allocated after your death, but it also involves your future care. This should involve creating powers of attorney documents. These documents allow you to choose individuals to manage your healthcare and finances if you become unable to act on your own behalf. You should also maintain life insurance and disability insurance policies. This will help you manage your financial concerns if you become permanently disabled, and it will help your family if you die unexpectedly.
As you follow these steps, periodically check your progress throughout the year. If you’re not meeting your goals, look for ways you can adjust your spending and savings pattern. A popular rule of thumb is the 50/20/30 rule. This dictates that 50% of your income should be spent on essentials, 20% should go towards savings and investments, and 30% should be allocated for entertainment and other non-essential expenses.