Good financial habits are helpful to your financial success and there are five habits you can start today that will help you reach the financial future you are looking to achieve. It is always a good time to start new habits, but depending on the person, habits may take 21 to 60 days to become a part of your daily life. Once they are implemented, they tend to stick around for the long term.
Here are five habits that will help you attain both your short-term and long-term goals.
1. Create a Budget
Take stock of how much income you have coming into your household each month and what expenses your income is paying each month. You can do this by simply putting pen to paper or utilizing an online tool that will track this for you. Each month, review the expenses and see if there are items that can be reduced or eliminated. For instance, you may have forgotten about automatic monthly payments set up for services you no longer use. This will put you in a position to review each expense and make sure it is a necessary one for your household. In addition, you will have an excellent view of whether or not you are cash flow positive (having more income than expenses each month) or cash flow negative (having more expenses than income each month).
2. Start and Maintain an Emergency Fund
Years ago, our parents and grandparents frequently spoke about saving money for a rainy day. The modern day term is an emergency fund. Your employment status, whether you are an employee or own your own business, and your level of comfort will dictate what size emergency fund you should maintain. Each person is different, and we have recommended anywhere between a six month to 18 month emergency fund for clients.
This is money that should be kept in a separate account from the account by which you pay your monthly bills. This account should be liquid, meaning you can use the money on a moment’s notice if needed. A savings or money market account will work well for these monies. You will want to determine what size your emergency fund should be and begin to accumulate funds until you reach that amount.
Once you reach the desired amount you should only use these monies for an emergency. Things that may warrant you tapping into these funds may be the loss of a job or income, unexpected home or car repair, or simply any unexpected expense. After the emergency is paid for, you will want to replenish this account at your earliest convenience.
3. Pay Yourself First
Ideally you want to pay yourself first each time you get paid, and then learn to live on the monies that are left. There are a few ways to pay yourself first depending on your type of employment. As an employee, you will want to take part in your company’s retirement plan. A small business owner or independent contractor may want to consider setting up a retirement plan if they do not have one.
The last option would be for those that do not have or cannot set up a retirement plan.. A good target would be to try and pay yourself 10% of your pre-tax earnings if you are deferring to a retirement account, which is preferred. You may need to adjust this a bit if you are contributing after tax.
4. Review Beneficiary Designations Annually
We all face critical financial and life events that will impact us during the course of a given year. You certainly would not want your assets to end up going to beneficiaries which you did not intend them to go. Beneficiary designations should be reviewed at least annually or if you experience a major life event or change. Examples of times that you would want to review these designations would be: the birth of a child or grandchild, marriage, divorce, death, disability or job change. Whether you are digital or analog, place a reminder on your calendar to review this each year.
5. Rebalance Portfolio Annually
Rebalancing is something you will want to make sure you review at least annually – whether you manage your portfolio yourself or use an advisor. Typically rebalancing has a tendency to get forgotten when markets are going up because people tend to get complacent and think there may be no risk in waiting. Rebalancing will help you maintain your portfolio allocation and risk with its intended targets.
You may recall back in the late 1990s, when technology investments were booming, the technology bust. There were many investors that saw their portfolio’s asset allocation change from 10% allocation to technology stocks to 70% in a relatively short period of time. In many cases this large allocation to technology was a huge overweight, meaning more money was allocated to that sector than you initially intended. This was great while those securities were doing well, but what these investors did not realize was the risk they were imposing on their assets. When the technology sector busted they had 70% of their portfolio at risk instead of the original 10%. Had they rebalanced along the way, a good deal for this risk could have been avoided.
Implementing these five simple habits will help you reach both short and long-term financial goals.
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