A healthy approach to dealing with your money isn’t always about focusing on big, long-term goals. Some of the most important things you can do regarding your money are simple tricks that build the foundation for your long-term financial well-being.
- Build and maintain an emergency fund.
Building your cash reserves, including an emergency fund, should be your #1 savings priority. Unexpected expenses happen all the time, but if you have a cushion of savings, these unexpected expenses don’t have to derail you. Instead of draining your long-term savings account or falling into debt, you can simply use your cushion to stay on track, then rebuild your cushion for next time. How much should you set aside? Your cash reserves should cover six months’ worth of expenses. After you have this six-month cushion, you should also set aside a separate emergency fund, enough to cover 24 months’ of expenses for longer-term situations such as an extended illness. This may sound like a lot of work, but the small spending sacrifices you make as you build your cash reserves will be well worth what you gain in peace of mind.
- Know your number. Many of us have no idea what our expenses add up to every month. Find out your number. This will empower you to better align your spending with your priorities and zero in on ways to save. A simple spreadsheet can do the trick, or if you prefer, use an online money tracking service (like Mint or Quicken) to see all your financial accounts in one place and even create your first budget. Do this and you will always know where you stand financially. Some budget apps give you complete access to your data through a website and your mobile device, and even an eye on your money for you, sending you alerts to remind you to pay your bills or when you go over budget.
- Save 10% of your income, year after year – no matter how much you earn. If you develop the habit of saving 10%, no matter how much you earn, you will always have the confidence of knowing you are living within your means. This step is also what makes many other key steps possible: for example, saving the down payment for a house, setting aside a college fund for the kids, or saving for retirement. Think of saving 10% as the way you ensure that you will be able to make ongoing investments in your financial health, year after year. If it still seems too hard, set up automatic bank transfers for the beginning of every month. By doing this, the money you have earmarked to save is transferred from your checking to your savings account before you have a chance to spend it on something else.
- Build – and then regularly update – your financial plan. At least once a year, update your financial plan. If you don’t have one yet, create one. (A good financial adviser can help.) The simple exercise of creating a comprehensive financial plan will give you a clear sense of your financial situation. It will also give you an idea of how decisions you made (or didn’t make) throughout the year have affected your bottom line. Armed with this information, you’ll be in a stronger position to make adjustments in the coming year.
- Once a year, do an insurance check-up. Many people forget that “taking care of your finances” means more than growing your bank balance or investment accounts. It also means protecting the assets you already have from potentially catastrophic losses. Once a year, do an insurance checkup to make sure your assets and future are adequately protected from liability. Review your home, health, and auto insurance policies to make sure you have enough coverage to protect your savings and your family in case of medical, legal, or other emergencies. Other types of coverage to consider: identity theft coverage (which reimburses you for the costs of repairing your credit history if you become a victim), and umbrella liability coverage (which protects your assets beyond what your homeowners and auto policies already cover).