Get These Financial Decisions Right

Decisions, decisions and more decisions. Will you ever get our finances right?

Of course, you need to constantly deal with the details: paying bills on time, reconciling bank accounts or getting a late charge waived.

While those things need to be done, you also need to pay attention to your overall financial picture to ensure you are travelling a sound course. There are five basic decisions that determine the course of your financial life. In addition, you must take steps to prepare for a financial emergency (see right-hand box).

Prepare for EmergenciesMaking arrangements to handle financial emergencies will prevent them from adversely affecting your financial goals. Make sure to have: An emergency fund covering several months of living expenses. Besides cash, that fund can include readily accessible investments or a line of credit. Insurance to cover catastrophes. Someone who can step in and take over your finances if you become incapacitated.

1. How you earn a living

We all want to enjoy our work, but within those parameters you can also choose jobs that pay more than others. Your income drives all your other financial decisions, so investigate your options.

• Are you being paid a competitive wage with competitive benefits? Even if you aren’t interested in changing jobs now, pay attention to what is going on in your field.
• Do you have an outside interest or hobby that can be turned into a paying job? This could be a good way to supplement your current salary. It may also turn into a part-time job or business after retirement.
• Can you get some additional training to help secure a promotion or qualify for another job? Read up on what jobs are expected to have the highest job growth rates and/or highest salaries over the next few years.

If you don’t enjoy your current job, you have even more incentive to implement these suggestions.

2. How you spend

The amount of money left over for saving is a direct result of your lifestyle choices, so learn to live within your means. To get a grip on your spending, analyze your expenditures and set a budget:

• Prepare a budget to guide your spending. Few people enjoy setting or sticking to a budget, but inefficient or wasted expenditures can be major impediments to accomplishing your financial goals. A budget gives you a road map for spending your income. Start by setting a budget for a couple of months, tracking your expenses closely over that time. You can then fine tune your budget for an annual period.
• Look for ways to reduce your spending. Take a hard look at all your spending and cut out items that aren’t really necessary.

3. How you save

You should be saving a minimum of 10 per cent of your gross income. But don’t just rely on that rule of thumb. Calculate how much you need to meet your financial goals and then determine how much you should be saving on an annual basis. If you can’t seem to save that much, go back to your spending analysis and cut your spending.

4. How you invest

The ultimate size of your investment portfolio is basically a function of two factors – how much you save and how much you earn on those savings.

Even small differences in return can significantly impact your investment portfolio. Typically, investments with potentially higher rates of return have more volatility than investments with lower rates of return.

While you don’t want to take on excessive risk, you also don’t want to leave all your savings in investments with little growth potential. Your portfolio should contain a diversified balance of investment categories, based on your return expectations, risk tolerance, and time horizon for investing.

5. How you manage debt

Before you take on debt, think about what affect it will have on your long-term goals. If you are already having trouble finding money to save, how will it get any easier with more debt and interest to pay? To keep your debt in check, make some strict rules:

• Mortgage debt is fine as long as you can easily afford that home.
• Be careful about taking equity out of your home in the form of a loan. You might want to set up a home-equity line of credit for emergency use, but then make sure it is only used for emergencies.
• Never purchase items with debt that decrease in value, such as clothing, vacations, food, and entertainment. If you can’t pay cash, don’t buy them.
• If you must incur debt, borrow wisely. Make as large a down payment as you can. Consider a shorter term for loans. Since interest rates can vary widely, compare loan terms with several lenders. Review all your debt periodically, to see if less expensive options are available.

Making the right choices for these basic financial decisions can help put you and keep you on the right financial course.