Financially Speaking | Spring 2019
7 Ways to Spring Clean Your Personal Finances
It’s time to dust off your old money ideas and get your financial house in order.
Mark J. Gilbert, CPA/PFS, MBA
President, Reason Financial Advisors
We all know we should regularly perform a mix of cardiovascular and muscular strength
exercises to maintain our health. But does that mean we don’t hire personal trainers? No.
Many of us still must hire trainers to encourage (or force) us to do these things — despite
knowing it’s for our own good. Of course, a good personal trainer will also design a physical
fitness plan customized for you and correct your technique in performing the prescribed
exercises when necessary. Nevertheless, I contend that the most important role of the
trainer is to root you on, pushing you to complete the workout that you already know you
should be doing.
As a personal financial planner, I sometimes feel like a personal trainer. I design and develop
personal financial plans that are appropriate for each client, and I correct their technique
by identifying the things they should not be doing and replacing them with my
recommendations for the steps they should be taking to improve their chances of financial
success. But, largely, I encourage them to do the things they already know they should be
doing, like saving and investing, to improve their financial lives.
None of these concepts are revolutionary; you’ve likely heard most or all of them before.
Nevertheless, sometimes it’s good to hear them again, perhaps presented somewhat
differently, to push you into action. And since it’s spring, you might think of these ideas as
some “spring cleaning” for your personal finances.
1. Set aside an emergency fund.
The first step in improving your personal finances is making
sure you have an adequate reserve to meet unforeseen expenses and emergencies. How
much is enough? The rule of thumb of six-to-nine months of living expenses is a good first
cut, but I recommend you look at your employment situation. If you were laid off or
terminated by your employer, how many months would it take to find a new job? Multiply
that number by your average monthly expense amount and you’ll have a pretty good
estimate of an appropriate emergency fund balance to maintain.
2. Pay down and pay off debt.
Once you’ve set aside your emergency fund, tackle the
debt that acts like a financial noose around your neck — excess credit card balances,
student loans, car loans, mortgages, any consumer debt you may have. If you have
multiple outstanding debts and loans, try paying off the smallest debts first — you’ll find
it will motivate you to pay down the bigger loans. Depending on the balances and loan
lengths, you may also want to consider tackling the debts with the highest interest rates
first. The quicker you bring down these debts, the less interest you pay and the more
money you save, which could make a substantial difference in your ability to pay down
other debts or save and invest later.
3. Get adequately insured.
As a fee-only financial planner, I am never paid by an insurance
company to promote their products. Yet, I strongly recommend that clients have all their
bases covered by purchasing appropriate amounts of coverage, whether that be for
medical, life, long-term disability, long-term care, auto, renter’s or homeowner’s, or other
relevant insurance coverages. Why? Insurance serves to provide people with the financial resources to pay for major damages that occur to them
and their loved ones, or their property, which they cannot easily
cover on their own. I also strongly advocate for appropriate
long-term disability coverage for income earners as there’s a
greater likelihood of becoming disabled than of dying throughout
the duration of the average worker’s career. And I believe
that some form of long-term care insurance is appropriate for
most people for whom neither Medicaid nor self-financing of
elder care is realistic.
4. Save for your retirement.
The best way to build your retirement
savings is to automate it by having a portion of your salary
automatically deposited into your employer-sponsored 401(k),
403(b), or 457 plan account. If the tax-deferred or tax-free growth
on the income and appreciation of the funds in these accounts
isn’t incentive enough, don’t forget that your employer might
match your retirement account contribution. If so, this is free
money that should never be turned down. Now, if you happen to
be ineligible to participate in a plan like this, or your employer
does not offer one, then an individual traditional IRA or Roth IRA
is likely to be the next best bet for you. Younger professionals
and those who expect to be in higher income tax brackets later
in life should seriously consider using the Roth option in their
employer plan if available or establishing a personal Roth IRA first.
5. Give to your favorite charities.
Unless you’re donating enough
for a tax break, this won’t exactly help your financial status.
That said, I believe we have an ethical obligation to help those
less fortunate than us, so I encourage my clients to give financial
and other gifts to well-run charitable organizations and causes
they care about.
6. Set aside savings for a goal.
Everyone has long term goals in
addition to having a financially sound retirement. It might be
saving for a home, college for children or grandchildren, or a
bucket list vacation. Whatever the case may be, more than likely
you’ll need to spend several years saving and investing to make
that goal a reality. So, if there’s something important to you that’s
going to require a large sum of money, start setting aside funds
specifically to meet that goal — or goals — now (or at least as
early as you can afford to). How much and how soon you’ll need
this money will determine the savings and investment vehicles
it should be held in.
7. Invest appropriately for your financial position.
There is a world
of investments available to (hopefully) make your money grow
and meet your financial goals. It is important to understand the
significance of the timing of your goals when selecting the
appropriate investments. Whenever possible, I recommend that
stocks be used to largely fund goals that are five or more years
into the future. Investment-grade bonds can be used to fund
goals that are one-to-five years into the future. And cash and
short-term government bonds should be used for goals with less
than a one-year time frame. The general concept is that the
sooner you need your money, the less risk you can take with it.
There are other factors to consider as well, including your
investment risk tolerance and the resources you have available
to meet your goals, which may alter these decisions — that’s
what a good personal financial planner will help you figure out.
As with cleaning the winter cobwebs out of your residence, spring
is a great time to dust off these old money ideas and put them in
place in a shiny new personal financial plan — maybe you can even
use your tax refund to spruce up your savings.