Making Your Personal Finances a Priority
For many women, thinking about finances just isn’t a priority. Why? Maybe we think a spouse or partner is watching out for us. Maybe we’re busy trying to balance work and family. Or maybe we’re afraid we don’t know enough. There are too many options and too many risks-and so much riding on each decision. What’s the cure for this disease? Conquer your concern and take control of your financial health.
Step 1: Know what you have and where you have it
Consider yourself a "company" for a moment, and develop an income statement and balance sheet. For the income statement, add salaries, average interest received on savings, and any other incoming money. Then, subtract out fixed and variable expenses. Don’t forget to subtract out money for savings. Pay yourself first; put money into savings every month.
After determining your net income, develop a balance sheet. Add your assets, such as cash, investments, and the value of your home, and subtract out liabilities. These may include what you owe on your home, credit card debt, and loans. The result is your net worth.
As you go, record where you have your money and other assets. Also note where you keep other important documents. Then, share that information with someone you trust.
Step 2: Understand debt
Debt sometimes gets a bad rap, which is unfortunate. Most of us couldn’t afford a home without incurring debt; that mortgage helps us achieve our goal.
However, debt can be costly, as anyone who’s ever run up credit card bills and paid the interest knows. To keep debt under control, your mortgage should be 30 percent or less of your gross pay. No more than 10 percent of your take-home pay should go to cover your other debts.
Step 3: Invest
Even in today’s economic environment, the wise woman is investing. To make sound investment decisions, consider your financial goals, assess the risks and rewards of various investment options, and evaluate the effects of diversification and time on your expected investment returns. Asset allocation-diversifying your portfolio among stocks, bonds, and cash-is the key to successful investment planning. Studies have shown that as much as 90 percent of your portfolio’s return comes from the asset allocation decision you make-not from the selection of an individual stock or bond.
Generally, the higher the possible return on an investment, the higher the risk you take. Consider the types of risk that can affect your investment choices, and don’t forget the risk of inflation. If your portfolio doesn’t provide you with a return that beats inflation, your purchasing power will erode over time.
Step 4: Plan for retirement
OK, you’ve heard it before. The question is: Do you routinely save for retirement, and are you saving enough?
To determine how much you’ll need when you retire, estimate the amount needed for the lifestyle you desire; a rule of thumb is 75 percent of current income. Then, factor in the number of years until your retirement and how many years you expect to live in retirement. Finally, factor in inflation. Many free retirement calculators, available on financial Web sites, can help you perform these calculations.
Once you determine your goal, subtract what you’ll receive from Social Security and from any pension plan you have; this will clarify what you need to save. Put money away first in tax-exempt vehicles like your company’s 401(k) or an IRA. The earlier you start saving, the better. However, it’s never too late to start.
Step 5: Plan for the worst
Following the first four steps will put you on the way to financial wellbeing. However, there may be some crisis beyond your control. Don’t wait for the crisis to hit to take action. Start today. Set aside three to six months’ worth of living expenses. Review your life insurance and disability insurance, and make sure your will or trust is up to date.
It’s well worth the effort. Planning today will help ensure your financial health tomorrow. TPW