25 Strategies on Determining Your Current Financial Situation

12. Subtract your total expenses from your total income. If your income is more than your expenses, you will have a remainder that you can save, invest, or spend according to your financial goals. If your expenses are more than your income, then review your budget for expenses that you can reduce or cut.

• If you don’t yet know the exact amount of your income and/or expenses, keep track of them for a few months to get an idea.
• Review and update your budget frequently. Make sure to add any new expenses, and remove any that you no longer have.

13. Find savings. Regardless of your financial goal, saving will be a central component. Whether your objective is to purchase a house, retire early, or pay for a child’s education, saving will be the key means by which you accomplish the goal.

• Refer to your budget for this. Look at your monthly expenses, and find areas of non-essential spending that can be cut. For example, if you eat out three times a month, or buy lunch at work everyday, focus on eating out once a month, or bringing a lunch to work.
• Look at your budget and decide what is a “want” and what is a “need”. Look to the “wants” area for savings. Similarly, look at what you consider “needs”, and ask yourself if they are truly needs. For example, your cell-phone may be a need, but you may not need a 3GB data plan, and instead can get by on 1GB.

Asset protection

14. Learn to make saving a habit. Begin by opening insured account at a reputable bank. Experts recommend the method of “paying yourself first,” which means that each pay period, you commit to setting a certain amount aside for savings as part of your budget.You can make an arrangement with many banks to automatically withdraw a set amount of money from your paycheck for this purpose.

• Save an amount that you are comfortable with, given your needs and expenses. The amount you save can increase (or decrease) as time goes on. The important thing is to save something, even if it is just a small amount.
• Saving ten percent of your income is a good place to begin, but saving anything is better than nothing.
• Saving even a small amount in an interest-earning account (checking, savings, CD, etc.) will be beneficial because of the power of compounding. This means that the interest your money (principle) earns becomes added to the principle in time, which then earns more interest, and so on—causing the overall value of the account to grow.
• Practice makes perfect. By saving a set amount each month, or “paying yourself first”, it will become automatic and you will learn to live without the saved money as if it wasn’t there to begin with. View the saved money as an essential expense, just like rent or mortgage payments.

Read also: 11 Best Source of funding for a Business

15. Build an emergency fund. Experts recommend setting aside enough money to cover your needs for at least three months as an emergency fund in case of job loss, major illness, etc. Keep these funds in an insured bank account so they will be both protected and easily available when you need them.

• You can also protect yourself against financial problems by being properly insured. If you have questions about homeowner’s/renters, health, life, unemployment, disability, or car insurance, talk to your relevant agent.

16. Take advantage of any special savings benefits. If there are government- or employer-based savings incentives available (such as for education or retirement), consider taking advantage of them. If your government or employer is able to contribute to these savings plans or offer other kinds of benefits (such as tax relief), it may help you get closer to your financial goals.

• In the United States, for example, you may have access to a 401(k) retirement account through your employer, who may also match a certain amount of your contributions and increase the value of the account. Similarly, anyone can open an Individual Retirement Account (IRA), which can have tax benefits.

Asset protection

17. Consider making investments. Investing is an essential part of most financial plans, as it allows you to reach your financial goals quicker, and with less money saved by generating a return. It is important to note though that all investments do carry a degree of risk, and it is possible to lose money.

• Common areas of investments include stocks, mutual funds, bonds, real estate, and commodities.
• Each type of investment has a different earning potential, costs, and risks.
• You can purchase many types of investments (such bonds, stocks, and mutual funds) through banks, brokerages, and sometimes directly from companies, governments, or municipalities.
• Much investing can now be completed entirely online, but there are many investment brokers you can consult in person. Fees for face-to-face consultation, however, will likely be higher than transactions you complete on your own online.
  

  See also: 14 Tips to Start a Hair Dressing Business

18. Understand the different types of investments. Although there are too many to list in one location, three important types of investments are stocks, bonds, mutual funds.

• A stock refers to ownership in a company. By purchasing a stock, you are effectively buying a piece of a business, and the value of that piece will move up or down depending on how many people want to buy or sell it. For this reason, stocks can be incredibly volatile, and although they generally do better than any other type of investment (returning an average of 8% annually since 1929), they can also lose a tremendous amount in one year. For example, in 2008, U.S. stocks fell 50%. Stocks are a good choice for individuals holding for a long-term, such as those planning for retirement.
• Bonds refer to a debt investment. When you loan money to a government or company, you are purchasing a bond. In return for loaning the money, you will receive interest from the entity you loaned to, usually paid out annually or semi-annually. Bonds offer less risk than stocks traditionally.
• A mutual fund refers to a collection of investments (usually stocks), managed by a professional investor. When you purchase a fund, you are buying ownership in the basket of stocks, and you make or lose money depending on how the underlying basket does. Mutual Funds are a great choice for hands-off investors, as you benefit from plenty of diversification, and a professional manager who will buy, sell, and manage the portfolio depending on market conditions and their strategy. There are, however, fees associated.

Asset protection

19. Determine how much risk you can take. Every type of investment carries a different level of risk, and before investing it is important to know the degree of risk you are willing to expose your hard-earned money to.

• Refer to your goals to determine your risk. For example, if you are saving for a vacation in 6 month, investing in stocks may be a poor decision, because stocks carry higher risk and can be very volatile over time. This means that while there is a chance you could reach your savings goal very quickly with less money saved, there is also a chance that you will need to postpone your vacation due to your investments dropping far below what you put in. A better bet would be bonds (which carry lower risk), or even just cash in a high interest savings account.
• A general rule of thumb is that the higher the potential return, the greater the risk—which also means that the lower the risk, the lower the potential return.
• Fairly “safe” investments include savings accounts, and U.S. Treasury bonds. Stocks have the potential for greater returns but also higher risks. Mutual funds help minimize risk by investing across a broad range of stocks and securities, and can be a good choice for long-term investments.
• Never invest money you need in the short-term, or for essential items like food, rent, or gas.

Read on: A Collection of Dresses for All Your Tea Party Needs!

20. Choose appropriate investments. Once you know your goals, understand the types of investments, and know your risk tolerance, you can select a type.

• Stocks work well if you have a medium to high level of risk tolerance, and are saving for medium to long-term goals. For example, if you are saving for retirement, having stocks is highly recommended. Keep in mind that not all stocks are high-risk. For example, investing in a small pharmaceutical company (which is not recommended) would be extremely high risk, whereas investing in a large, stable company with steady cash flow and competitive market share like Walmart, Wells Fargo, or Coca-Cola would be much lower risk.
• If you do not have the time, comfort-level, or risk tolerance for individual stocks, consider mutual funds. These are suitable for longer or medium term goals like retirement or saving for a child’s education, but are more “hands off”, and you can often just check on them annually or semi-annually to make sure they are performing as you want them to. You can research mutual funds on your own and purchase them through an online dealer, or visit your local bank or financial advisor for options.
• Bonds are suitable for individuals with lower risk tolerance, who are more concerned with preserving savings, while growing them at a low but steady rate. It is important to note that bonds have a place in any portfolio, and it is often advised that individuals who are in their 20’s to 40’s have a larger stock and mutual fund allocation, whereas individuals closer to retirement switch more to bonds to preserve savings. Bonds can be an effective way to balance your portfolio and lower your risk. A good rule is to subtract your age from 100, and that is the percentage you should hold in stocks.

Asset protection

21. Diversify your investments. Not all sectors of the economy perform equally well (or badly) at the same time. If you spread your financial portfolio across different kinds of investments, then you can minimize your risk of losing its overall value in the event that one or more parts of it “take a hit.” This method is called diversification.

• For example, a retirement plan might be spread across several types of investments, including mutual funds, stocks, and savings accounts. In this case, the mutual fund’s likelihood of long-term growth could make up the difference if an individual stock the retirement plan invests in loses value. The cash in a savings account, while it would earn relatively low interest, would be insured and easily accessible if needed.

22. Think carefully when making financial decisions. The SAVED (Stop, Ask, Verify, Estimate, Decide) method is a guideline to follow when making financial decisions:

• Stop and give yourself time to think before making any financial decision. Don’t be pressured by salespeople, brokers, etc. Tell them (and yourself) that you want time to consider.
• Ask about costs (taxes, fees, maintenance, etc.) and risks that would be part of the decision. Make sure you know what the worst-case scenario might be.
• Verify all information to make sure it is accurate and trustworthy.
• Estimate the costs of this decision, and how it would fit into your overall budget.
• Decide if the decision makes sense for you.

23. Be cautious when using credit. Sometimes, borrowing money can be a sound choice—for instance, buying a home, paying for education, or making a necessary purchase. However, keeping debt—especially high-interest debt like credit cards—reduces your net worth and can slow your progress toward achieving some financial goals.

• Don’t overuse credit cards. Try to make your spending within your means.
• Pay off high-interest debt as soon as possible. This can be the best strategy for financial growth in the long run, because even good investments usually can’t earn enough to make up for high-interest debt.
• If you have multiple credit accounts, try to pay off the one with the highest interest rate first.

24. Seek trusted advice when you need it. Financial planning can often be successfully self-directed. However, if you feel like you don’t have the time to do research and manage your finances, don’t know where to start planning, or if you are dealing with something unexpected (like an inheritance or illness), you should consider consulting with a certified financial planner.

• Be wary of untrusted sources of advice, investments, etc. If an offer sounds too good to be true, there is a good chance that it is.