The Journey Of Fiscal Responsibility: When Young Becomes Old

Everyone experiences that moment in life when they realize they have officially grown up. Be it willingly or unwillingly, we either find ourselves seeking out help with our taxes, hosting the family for a holiday meal, or making three trips to Home Depot in the same week. As life shifts gears we learn how to prioritize the life around us between family, friends, work, and play. One thing that too often takes a backseat on the list of priorities is personal finance.

Whether money is plentiful or lacking, the approach to finances is the same. We see clients come to us with better financial health who earn half the salary as other clients. It is a certainty that life’s priorities will always be competing, but a systematic approach with personal finances can help ensure you are one step closer to achieving financial freedom.

1) Pay Bills On Time

This may sound a bit obvious but paying bills on time avoids late fees and improves credit scores, leaving more money in the bank and earning lower interest rates on future loans.

2) File and Pay Taxes On Time

Benjamin Franklin once said something about death and taxes being the only certainties in this world. For the most part he is right, and the IRS can be thanked for the latter and maybe even a bit if the former in some cases. Without much further digression, have a good handle on your personal tax situation and if you don’t, contact a tax professional. It may cost a little bit money, but the alternative may carry a much higher price tag. For simple 1040-EZ filings, either purchase TurboTax or go to H&R block for help. If your situation is a bit more complex, consider consulting a reputable CPA.

3) Minimize/Manage Debt

Having zero debt is a great goal but for most of us it is unrealistic. Debt such as student loans, car payments, and mortgages are common necessities but approaching them wisely can make a world of difference in cost. When it comes to down payments, it is best to put down at least 20% or more when financing either a home or car. The more money paid up front will reduce the amount you need to borrow, which may lower your interest rate and will certainly reduce your monthly payment.

Sometimes we make poor financial decisions early in our lives which linger with us for a while. Consolidating debt when possible is a great first step in managing debt in just a single payment. The same goes for student loans when a new loan may have been issued each school year, leaving us with multiple loans and payments. Reducing the amount of outstanding loans through consolidation helps to simplify how debt is managed and actually may improve your credit score.

4) Have an Emergency Fund

Though we may never be able to predict everything, we can certainly be prepared for everything. An emergency fund is an account held separately from retirement and investment accounts and covers life’s many possible uh-ohs. An adequate emergency fund is one that covers 3-6 months of expenses in a scenario where income is reduced to zero.

For example, if you spend on average $4,000 per month, an adequate emergency fund would have a value of $12,000-$24,000 to cover expenses in the event of lost income.

5) Proper Insurance Coverage

Insurance is an essential component in protecting yourself and/or family from financial catastrophe. Insurance takes priority over things like saving for a child’s college education because the consequences for not having insurance outweigh the alternatives to paying for education (loans, community college, etc). Same logic goes with your home burning down and not having insurance as it compares to having to work 3 extra years because you couldn’t save as much for retirement in your earlier years.

There are many types of insurance including health, home, auto, and life to name a few. Keep in mind, insurance, like a nice steak, can be overdone. It is important to understand that while insurance offers essential protection, there is a such a thing as being overprotected, leaving you with unnecessary expenses. There are many options to consider when it comes to insurance but the goal is to have adequate coverage, not more than you actually need.

6) Have an Estate Plan

At a minimum, hire an attorney to draft a trust and will so your financial affairs are in legal order. A trust and will help ensure your assets are protected from probate and are distributed in accordance with your wishes in the event of your death. Additionally, if you have children, you can appoint a legal guardian to take care of them should something happen. It is also a great move to have a power of attorney for financial and medical needs in the event you are unable to handle things on your own if you become injured or incapacitated.

7) Maximize Retirement Savings

When we start talking about retirement, we take the first step away from present needs and shift our focus future needs. Saving for retirement as early and as often as possible provides a considerable advantage in growing your retirement fund, thanks to the power of compound interest.

The example above is hypothetical in nature, provided for illustrative purposes only, and not indicative of previous client experience.

A consistent savings plan in accordance with this simple strategy may have you well on your way to a successful retirement plan.

8) Save for Child’s College Education

Putting a child through college should be every parent’s dream but bear in mind there are other financial priorities ahead of this one, seven if you ask us. The reason for that is because if something compromises your plan to fund this goal, your child can still go to college. It just means maybe you turn to student loans or two years of community college to help with the costs. On the other hand, there is no alternative to carrying insurance or paying taxes. If you choose not to do those things, you may be in store for a financial catastrophe at some future date.

9) Save for That New Car or Well-Deserved Vacation

No plan is complete without a nod to a frivolous purchase or two. What is life if you’re not doing what truly makes you happy? Sticking to a financial plan is hard work so remember to treat yourself from time to time to keep your emotional bank account up to speed with your actual bank account.

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Securities offered through Securities America, Inc., member FINRA/SIPC, Betsy Merritt & Tyler Aubrey Representatives. Advisory services offered through Securities America Advisors, Inc. New Break Financial and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice. It is important to coordinate with your tax or legal advisor regarding your specific situation. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.