Question: New Year’s resolutions often have to do with improving one’s health. Is the beginning of a new year a good time to assess and try to improve one’s financial health?
Answer: Any time is a great time to work on your financial health. However, if thoughts about your finances are keeping you awake at night or creating friction with your spouse, the time to start doing things differently was yesterday.
Q: What’s a good way for someone to assess the condition of their personal finances?
A: It’s the one thing we don’t do and our greatest stumbling block: developing a personal budget or, if those words make you cringe, a spending plan.
On one sheet of paper, list total (after-tax) household income. Then pencil out a list of monthly expenses and be brutally honest about them. Account for the Xbox games, the meals out, gifts, car repairs. Subtract that from your income and what is left is discretionary income. This is what you have available to stash away for vacation, higher education, additional savings, etc. Hopefully there is something left over or you’ll need to make some deep cuts to those living expenses very quickly.
On the same paper, list everything you owe — credit cards, loans, dental bills and obligations to family. If the monthly payments due to creditors exceed the amount you have available after your living expenses budget, you should revisit your expenses and determine where you can cut back.
If after doing that you find there still isn’t enough, you may want to think about getting some help. If you find you’re using your credit cards for groceries or gas because you didn’t quite make it to payday, it’s a red flag you’re headed for trouble.
Q: Do you think most people size up their finances regularly enough?
A: In my 23 years as a counselor, my experience has been that for most people it’s the first time they’ve ever seen a snapshot of their entire financial picture, and they are invariably shocked at how much it costs to just keep the family housed, fed and healthy. Life is hectic, and it’s tempting and easier to just focus on getting through the day, the week, the month.
Q: What are some key items or areas people should review at least annually?
A: After you’ve developed your budget, track your spending against it. For a minimum of 90 days, write down daily where your money has gone and compare that figure against what you planned to do.
Pay attention to your debt obligations. Are you reducing what you owe? If not, why not? Determine why you’re not making progress and explore ways to increase your payments toward debt. If you have substantial savings, it may be smart for you to consider using some of those funds to pay down debt. It makes no sense to have savings earning little interest while your credit cards are charging you 18 percent or more.
Check your tax withholdings. We often see folks who overwithhold for taxes as they’re fearful of owing the IRS. Instead, they wait for a year and a half for an enormous refund — essentially their own money they’ve loaned to the government interest-free.
Checking your credit report for accuracy and signs of identification fraud is crucial and free once per year through annualcreditreport.com.
Revisit life insurance policies.
Q: Are there some good goals people can set to improve their finances?
A: The goal of building three months of living expenses as a safety net is very important. Aspiring to be just plain broke versus being in debt is a great goal. But keep your goals realistic. If you’re $25,000 in debt, don’t set yourself up to fail with a plan to become debt-free in a year.
Q: Is it hard for people to make changes or stick with a plan for financial improvement?
A: Getting financially fit is a lot like dieting. There’s no doubt life’s a lot more fun when we are eating as much as we’d like of everything we’d like. But there’s a price tag to be paid for that behavior. The results of overindulging ourselves or consistently operating in chaos mode with no real idea of where we’re headed can result in catastrophic consequences — something borne out by the fact that CCCS provided counseling to some 3,000 families in 2011. Most of these families suffered a loss of income that they were unprepared for. But for some, having a budget would have made an enormous difference in their lives and helped them avoid trouble.
Interviewed by Andrew Gomes. "Akamai Money" seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put "Akamai Money" in the subject line.
