Just like cleaning out a crowded storage closet, confronting your personal finances can be intimidating—especially if you’ve been avoiding doing so for a while. But experts Rachel Cruze, bestselling author and personal finance expert of Ramsey Solutions, and Laurie Adams, certified financial planner of Country Financial, share simple ways to clean up three significant aspects of your financial life: budgets, savings goals, and insurance coverage. Follow the steps below to tidy up your finances and create an approachable plan that works for you.
Stick to a Budget
Knowing your current financial position is the first step to organizing your finances. Cruze says making a budget (if you don’t already have one) is the best place to start. “Think of a budget like spring cleaning: It’s a great way to get things organized around the house, and you will feel a huge sense of relief once you do,” she explains. “I know a lot of people think of the word ‘budget’ as a negative thing, but it’s not. A budget doesn’t limit your freedom. It gives you the freedom to do more of what you want to do.” Start tracking your money to identify where it is coming from (income) and where it is going (expenses). Try free budgeting and money tracking apps that simplify this process. Many have features that link to your bank account or credit card, quickly categorizing what you’ve spent, due dates for repayment, and upcoming deposits. To create a realistic budget, use the following steps:
Create a plan: The most common rule of thumb is the 50/30/20 rule: 50 percent of your net income goes to needs, 30 percent goes to wants, and 20 percent goes to savings, investments, or debt repayment. Other popular budget plans are the zero-based budget or the 70/20/20 budget. The best budget is the one you can stick to, so pick the one that works for you and commit to using it. Choose a budgeting tool: Don’t go at it alone. Managing every dollar in and out can be cumbersome. Instead, use an app, a simple spreadsheet, or cash envelopes to organize your allocations and track actual spending over the month. Track the budget and the actuals: This part requires defining categories and assigning figures. For example, rent is $1500, groceries are $500, etc. But it’s not enough to write down what you intend to spend. At the end of the month, you’ll have to write down what you actually did spend. These actuals should form the basis of your next month’s budget. If you underspend, you could roll over those savings. And if you overspent, then you may have to find another expense to trim. Find an accountability partner: How do you hold yourself accountable? Share your budget with a friend or family member who will, from time to time, follow up on your progress. Automating savings and bill payments are also another way to stay on track.
When it comes to budgeting for debt payments, Cruze recommends making goals to pay off one debt at a time using the debt snowball method. “By paying off the smallest debt first, you will get more confident with each win, and use that motivation to keep the momentum going,” she explains. No matter what budgeting method you choose now, it’s important to remember that your financial situation is not static. It will keep changing as you achieve goals, pay off debt, or get additional sources of income. At least once every season, prepare to review your goals and make sure your budget reflects those changes.
Set a Savings Goal
Savings allow you to meet your financial obligations and build wealth. Whether you are saving towards retirement, an emergency fund, or investing in a mortgage, stocks, and mutual funds, it’s best to build your savings plan around SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) goals.
Establish SMART goals: For example, if you want to save $50,000 in the next two years to put a down payment on an investment property, you will need to put away about $2,083 per month. This amount can be built into your budget so that you know how to channel any extra savings or income that comes along over that time. If you stay focused, you might even reach your goal much faster than expected. To help calculate how much you need to save for your specific goals, you can use a savings goal calculator, like this one from NerdWallet, which factors in how much money you want to save, how much you already have saved, how much time you have to save, and the annual interest rate. Pick the right tools: Consistent saving is difficult if you don’t use the right tools. Automated savings is helpful. Look for interest-bearing savings accounts, fee-free accounts, mutual funds, certificates of deposit, and even investment accounts that reward you for saving and safeguard your buying power.
Revisit Your Insurance Coverage
Insurance helps protect your assets, but very few people revisit their policies to make sure that the coverage is appropriate for their current situation. According to Adams, spring is a great time to review insurance policies. Start by rereading the prior terms and updating your policy and beneficiaries to meet your current needs. Then, Adams says to notify your agent or financial representative to report changes, including:
New purchases or gifts: Notify your agent if you have received valuable gifts, such as jewelry, or made purchases of significant value, such as jewelry, computers, or even artwork. You might need to get an appraisal to assess their full replacement value.Property improvements: Many home policies require you to notify your agent if you make changes or improvements valued at more than $5,000. Change of beneficiaries: Life happens. Marriages, divorces, deaths, and births could all mean that you’d like to see beneficiaries change. Look at existing policies to increase or decrease coverage, and make sure that any future payouts will go to the right person or bank accounts.Change of address or contact info: Similarly, phone numbers, email addresses, employment locations, and even home addresses change periodically. Ensure your banks and insurance companies have the most up-to-date way to reach you.
Amidst busy lives, it’s easy to lose sight of finances that aren’t immediately pressing, but taking the time to reassess your budget, goals, and coverage can help you live with more clarity in the present and more security in the future.
