4 Steps to Help You Take Charge of Your Financial Life
by Steph Wagner
One day, I had a happy family and a prosperous life. The next, I was alone, sobbing on a park bench and wondering how I would support my three kids. After 18 years of marriage, I had to start again.
And I did.
Despite a successful financial career earlier in life, at the time of my divorce I was not quite sure if my name was on the house or our checking accounts, let alone how our assets were invested or the specifics of our retirement plan. The demands of running a household, raising children and subsequent division of duties between my husband and I led to such blind spots. To successfully rebuild my life, my first step was to regain a comprehensive understanding of my finances.
What happened to me happens to millions (even those in the happiest of marriages). Life gets busy, and it is easy to become relatively uninvolved with your finances, particularly when much of the management seems to take place on autopilot. But to thrive in your next chapter — whether you are rebuilding after the end of a marriage, starting a business or redefining retirement — taking charge of your wealth now will help you make confident and informed decisions moving forward.
Where do you start?
Understanding the resources you have to work with is an essential step. First, take inventory of everything you own and its current value. Unfortunately, not all of your possessions are monetary assets. For example, your furniture and clothing do not count. But personal assets do, including your home, car(s), art and jewelry, as well as financial assets such as cash, bank accounts, investment accounts, retirement accounts, interests in private businesses and other holdings that have a cash value.
Next, create a list of everything you owe. This list should include all of your outstanding commitments. In addition to the balances, be sure to note the interest rate and duration of each loan. This will come in handy if you need to develop a plan to pay off your debt.
While I am not an advocate of tracking every dollar you spend (keeping all of your receipts seems unrealistic), creating a framework to help you be more intentional with your spending is a good idea. I suggest a 45-20-35 plan. I put at least 20% of my take-home pay toward my future; it is a nonnegotiable expense. To do this, I limit my fixed overhead to no more than 45%. Allocating at least 35% to variable costs (food, entertainment, clothing, vacations) enables me to control my expenses and consistently meet my savings goal. It also prevents me from having to dip into my savings or investment accounts if my income changes. But keep in mind that it is possible to save too much. Doing so could, for example, cause you to rely on credit cards to meet your monthly needs. Given that the average card charges 16.33% interest, this will undermine any return you have generated through your rigid savings plan.
Put Money to Work, Wisely
As you work to develop a plan to grow (or, as in my case, rebuild) your wealth, consider the following:
- Do you have an emergency fund (i.e., access to at least six months worth of expenses)?
- Do you have (bad) debt to pay off (i.e., with interest over 7%)?
- Do you have a good mix of assets, and can they be easily sold? In other words, is all of your money in your house, retirement accounts, a business or other type of private investment?
- Do you have sufficient assets to fund how you want to live when you retire? A good rule of thumb: It takes $1M for every $40,000 of desired annual income to avoid outliving your money.
The fact is, not all assets are the same — they do not grow the same, or even serve the same purpose. The equity in your home might be a significant asset, but it is currently being used to put a roof over your head, and that is its only benefit until you sell it (something you may have no intention of doing). A robust retirement account is important, but you will also pay a significant price if you use it to access cash in an emergency.
The same is true for credit. Not all credit is the same, and not all credit should be treated the same. It comes down to the interest rate and how you use the money you borrow. If the terms are right (e.g., a mortgage at 2.75% vs. a credit card with an APR of 16%), leverage can be a great way to put otherwise illiquid cash to work to build your net worth.
The bottom line is that, as you develop a plan for your wealth, it is important to think strategically about how to use your assets and credit to maximize your money’s earning power.
Build the Right Team
Managing wealth is generally not a do-it-yourself job. To do so successfully, you need a team. Often, this includes a CPA, estate-planning attorney and wealth advisor. Each of these experts should talk with you, not at you. They should speak in plain language and encourage you to answer and ask questions so you can work together to understand your goals and objectives, and what it will take to turn your vision into a reality.
Taking charge of your finances does not happen overnight, but your commitment to do it can. With a few key steps and an unwavering belief that you can handle whatever comes your way — the good, the bad and the ugly — you can ensure you are positioned to make the most of your next chapter.
TAKE CHARGE OF YOUR FUTURE
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This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.