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Ways to organize your finances!

 “If you fail to plan, you’re planning to fail” quote is accredited to Ben Franklin, one of America’s Founding Fathers. It has stood the test of time, and yet again, many people do just that, fail to plan or fail to organize their financial affairs in order to plan accordingly. While some of the below ideas seem to be simple, they’re definitely not easy – as many people typically associate simple with easy, which they most often is not. So, what to do to organize your finances and get your money on track? Follow along…

Sit down, think and write it down. As simple as it sounds it is key to write this down, after taking some time to relax and think about all of the financial accounts, decisions and questions that bother your mind on almost daily basis. As a fact, most people think about money or work (money related / income) even more than sex, according to this survey. While the survey doesn’t mention, I would bet that majority of that thinking is mostly negative and not positive, and most likely increases anxiety and fear, shame, regret or greed about money, getting us tired, exhausted and with no real solution in sight.

The best remedy is to face our fears, and as much as we don’t want to face our own finances, deep down we all know is best to know the truth than pretend it’s not there. So, we write or find all that we can about our finances and that is a very good start to be proud of – many have already given up before this phase.

Balance sheet. All of those accounts that you’re now writing down go neatly on two columns, one to be your “assets” (what you own) and the other column your “debts” (what you owe). This is known as the balance sheet, as it ‘balances’ your assets with your debts and the difference between the two is known as the “net worth”. The point for this is to get to know in real terms all that you own and all that you owe, the terms of them, where the money is (bank account, investment account or 401K, etc.). It’s like an inventory of your money, where is it, who has it and what is it doing for you. Below is a sample balance sheet with assets being your cash, you checking/savings accounts, your investments, your 401K, your home & car(s), personal property etc. On the debt side are all the debts you have, your credit cards, your mortgage, your car loans, student loans, and friends/family loan or 401K /other loans. Feels good to know where your money is, eh? Next is to know or find out how to increase your assets via increasing income and investing as well as how to reduce your debts, how to prioritize payoff based on interest rates and terms of your loans. As a quick rule of thumb, make all the minimum payments on your debts and pay extra (if possible) to the debts with the highest interest rate (typically credit cards).

Cash flow is where your money is coming from and where it is going, but most importantly what it is doing for you. You start with your income after tax then look at your spending & saving. We divide them in 3 categories, 1) Necessities 2) Savings & 3) Discretionary Spending. Under the ‘Necessities’ category are all the bills and spending that has to happen, your needs, like rent/mortgage, debt payments, living expenses, utilities, insurance, transportation and alike, taking about 65-70% of your income. Under the ‘Savings’ category we plan on what to save for, where and how much. Depending on different goals we aim to save at least 20% of income. Lastly, ‘Discretionary Spending’ are the wants, fun stuff we like to do, like shopping, going out etc. taking about 10-15% of the income.

There are two important items to point out here. First is that you get to see where your money is going, hopefully you have some good data or good approximations on what you’re spending/saving. Check your spending for the last 3-months and average it to find an appropriate monthly spending for the category. Secondly, and most important, is it gives you an opportunity to see if you’d like to make changes to where your money is going. You could decide and ‘budget’ for changes in your cash-flow, it’s your money. It is best to do this exercise and decide if money is working for you, is it giving you any satisfaction or would you like to make changes to it. Your money – your call, while still aiming to increase the ‘savings’ category.

 An Emergency Fund is key to sleeping well at night. Everyone needs one, but one size doesn’t fit all. An emergency fund covers from the small emergencies like an unexpected expense to something big like loss of a job or income. Most financial planners recommend at least enough to cover 3-6 months of your expenses, but you could have a bit more if your income is unpredictable (like self-employed or freelance) or even a bit less if you have significant investments that you can pull out at any time and not worry about what the market is doing. For most people, this money should be kept liquid at a savings or short-term CD or similar to be accessible at any time if needed. An emergency fund is key to getting your finances in order as well as your money anxiety under control. Recommended to keep this at a separate account from where your monthly spending & bills come from, this way it won’t be spent ‘accidentally’.

 Goals, Investments, Retirement. Many have goals that are vague, not well articulated and some don’t even know what the goals are. Have financial goals that are well articulated, specific in time to achieve and what amount of money would be needed to accomplish them. Write them down, and if possible, discuss them with a financial advisor that can act as a sounding board, check if they’re reasonable & achievable or if something needs changing, either the goal(s) or your expectations. Most likely for long-term goals there are no better ways to achieve them than through investing. Investing comes with risks and ups/downs (known as volatility) but over the long run well-compensate a disciplined investor. Set up your goals and then a saving or investing strategy to achieve them. Retirement, as one of your largest and longest-term one will mostly require most of your time, efforts and money.

 Insurances protect one from a catastrophic financial loss and are key to a proper financial management. Make sure you have the proper needed insurances as well as the right coverages. For a small premium, such insurances protect you from dipping into your savings or investments, and it’s a small peace of mind from the unknowns out there. Some insurances are mandated by law, like car or homeowner insurances and some are just smart to have like health insurance, life insurance, renter’s insurance or even disability insurance if your job has such risks. Think about risks and what risks you want to “outsource” to an insurance company (for a fee) and what risks you’d like to keep.

 Get your legal docs in order. Lastly, one of the important parts of getting your finances organized is to have the right legal docs for the ‘what ifs’ of life. A Last will, a Living Will, a Power of Attorney for Finances or even a simple Revocable Trust are documents for everyone, not just the rich. Mostly they have instructions for who’s left behind, your wishes, desires and also names the people who will handle those decisions. Being organized in those times is a big help and very thoughtful for the people you care. With new technology and digital offerings such documents are ever more accessible and affordable for all.

Being financially organized starts with sitting down and writing it all, while thinking about your goals, needs, cash flow and risks, but it requires continuity to be of help. You need to be able to track your finances, via software like mint.com or similar, in order to continue to be helpful as well as auto-pilot your savings and investments, and create and save the right documents for your insurances and estate planning, or otherwise will be just a night you thought/wrote about money and then forgot.

Think, act, put most on auto-pilot and then review periodically. Only then you’ll be able to say you organized your finances and they’re still organized and on-track. Get help from a financial planner like us to get you started and keep you going.