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April showers bring May flowers, but what do May flowers bring?
Spring cleaning! If your answer was “pilgrims,” you get bonus points. While you’re embracing your inner Cinderella, why not do a good spring-cleaning of your finances, too?
Personal finances evolve over time. Debts increase and decrease, budgets need adjusting, jobs change, and goals are met or revised. When you spring-clean your finances, you shed outdated strategies and update your methods to move forward financially.
To perform a thorough cleaning of your finances, first, take a good look at all aspects of your finances and see where you can make any necessary changes to clean things up.
Look at Your Goals
The first step involves analyzing your goals. Consider some questions and use the answers to guide your next steps.
- Do you want to buy a house?
- Are you planning on buying a newer car soon?
- Do you have excessive credit card debt you want to pay off?
- Do your kids need help paying for college?
- Or are you just trying to save for retirement?
Goals can change depending upon circumstances, or be achieved and crossed off the list so you can put up new ones. It’s good to have them written down, and it’s even better to have both short- and long-term goals. Shorter, achievable goals will give you a feeling of accomplishment while you work on those long-range goals.
Calculate Your Income
Take the time to look at how much you take home each month to pay your bills. Do you have a side job or another income stream besides your main job? Even if you haven’t received a raise recently, the 2018 tax changes left many people with more money in their paychecks, so there may be more money to pay down debt. Of course, the tax changes also accounted for many people having to pay more in taxes at the end of the year, so if this was the case for you, make sure you make appropriate changes so you’re not left with a big tax bill next year.
Look at Your Emergency Fund
Without an emergency fund, when the unexpected happens, such as a big auto repair bill or missing work due to an injury or illness, you may be forced to rely upon credit to cover your bills, creating a hole that’s difficult to dig out from. Even if you have debt that you’re trying to pay off, put aside some money from each paycheck to build an emergency fund. If you’ve been doing this already and you have six months’ worth of income saved, redirect that money you’ve been setting aside to your debt and don’t touch your emergency fund unless there’s an actual emergency.
Determine Your Debt
Presumably, you’ve been working to pay down your debt. What’s left? What is the interest on each credit card? It may be worth calling your credit card company and asking for a lower rate. They may lower it if you’ve been paying it down, or the company may even offer 0% for a period on balance transfers. If you go this route, however, be sure to calculate your savings carefully. Balance transfer offers sometimes come with a fee that may or may not be capped, and you may end up with a much higher rate if it’s not paid off by the time the offer expires.
Assess Your Net Worth
To calculate your net worth, you subtract all of your liabilities (debts) from all of your assets (home equity, vehicles, savings, investments, etc.). Your net worth is always changing as your assets grow or you acquire more or less debt.
Consider Your Budget
Have you been sticking to your budget? Or, do you find yourself overspending each month? An effective budget is one that cuts waste but is also realistic. Being on a strict budget may work for some, but most people need a little breathing room for entertainment or recreation; otherwise, they won’t stick to the budget.
Now, Look at the Big Picture
Evaluate all the branches of your finances as a whole. Are you spending more each month than you have in take-home pay? If so, what changes can you make to your budget? Are you paying off your debt as quickly as you’d planned? If not, what adjustments can you make? If you keep a written record of all your finances, you can compare it with previous years to make sure you’re moving in the right direction.
When it comes to your finances, there’s no “set it and forget it.” Everything is constantly changing: your income, taxes, and costs for necessities. As you get older, you spend more on healthcare and your family situation may change due to divorce or children leaving the nest, which could save money or cost money if you’re helping them with college. By doing a little spring-cleaning of your finances, you can make adjustments that’ll keep you on track for meeting your goals and achieving a more stable financial future.