To plan your life financially, you must be actively engaged and fully aware of your money decision. Sound financial planning typically entails a lifestyle where you keep an eye constantly on your spending and savings while planning your future needs. It doesn’t have to be time consuming, however. All you need to do is to be conscious of the major areas that typically control your financial life: credit, savings, insurance, etc.
To be able to assess how sound your financial knowledge and planning are now, try to ask yourself a few questions, which are just examples of how you can stay in touch with your money situation, without stressing about it. The more you keep track of these areas — and others, the more likely you will be able to handle any emergency and quickly recover from any financial shock. In addition, keeping track of these areas should become a second nature that enables you to make better financial decisions.
Here are the five questions:
What are your interest rates?
You probably have one credit card or more, a personal loan or car financing. For each item that you use bank financing or credit for, are you aware of what interest rate you’re paying? Second, do you know if the rate is fixed, what are the penalties for early payment and missed payments, etc.? Even though it may look like it is too late for this knowledge to help you in any way, your tracking of these items should direct you to decisions such as an early settlement on a debt, a possibility of refinance, etc.
How much debt do you have?
You probably know your net worth, now do you have an idea of how much debt you owe? Putting down the numbers may add up to a frightening total. Remember, however, you may not need to ever pay off that amount at once. The purpose of this exercise is to be realistic about your exist plan for each and every debt item. Do you have a house that can be sold in case of an emergency or relocation? How much loss you will take if you end your car financing and sell it? Again, get yourself oriented as to where you stand financially and ensure that you’re not biting more credit than your chew.
Do you have a budget?
If your answer is “yes,” take a good look at how you have been reviewing and updating this budget. Having a budget can help you keep track of your money and ensure that savings are maximised. If your budget is a piece of paper on your desk, it really does not serve its purpose.
Many people who go one pay cheque to the other feel that developing a budget is unnecessary. That is a big mistake. In fact, when money is tight, it is even more crucial that you know exactly where your money is being spent.
What’s your contingency plan?
In case of a job loss, health crisis, or any other situation you might have and require an immediate injection of cash, do you have a plan? If your have insurance policies in place, savings that are put aside for a rainy day, or a family that is able and willing to help, you may be in a good shape. If not, you need to start now on putting together a plan for emergencies.
Do you’ve a long-term view?
Do you have plans of big expenditure coming down the road such as marriage, children’s tuition or retirement? If your approach to managing your money is to just getting through the month and pay the bills that won’t work on the long run. You need to adjust your savings to ensure that big spending tickets will be fully or partially covered when they come that way. How? That is the first step that should motivate you to manage your money more efficiently, enter in some sort of reasonable investment, explore savings options, etc. Without having your eye on the end goal, your money can be spent right and left aimlessly.
Rania Oteify, a former Gulf News Business Features Editor, is a Seattle-based editor.
