When setting your financial goals, you first need to know your starting point. Thats why Denise Winston, a financial expert and author of Money Starts Here: Your Practical Guide to Survive and Thrive in Any Economy, recommends that people take the time for a 360-degree review of their finances. It can be scary to sit down and take an honest look at your finances, but at the end of that process you will have information that ultimately should help you improve your situation, Winston says.
A self-audit will help you determine whether your goals are realistic and reveal what areas of your financial life need to be tightened up. Winston suggests asking yourself the following six questions to get a complete picture of your financial health.
1. Are you maximizing your income? Before you turn to moonlighting for extra money, consider whether youre working to your full earnings potential. Have you really positioned yourself with the right certifications or training to make the most that you can? Winston asks. And are you on track to get the best raise at your current full-time position?
If not, consider enrolling in classes that are likely to give you a reasonable chance of boosting your income on the job. (Of course, you need to weigh the cost of continuing education and perhaps licensing fees against the eventual benefit.) You might also try to raise your profile in your field, which can lead to more lucrative opportunities outside your company, such as speaking engagements or even a completely new position.
2. Are you saving enough? Review your retirement savings first. Make sure youre saving enough in your companys retirement plan to qualify for any available matching contribution from your employer. A retirement planning calculator can help you determine whether youre saving enough to live comfortably in that phase of your life.
Winston also recommends having an emergency reserve equal to roughly six months expenses. That much saving can feel intimidating, but Winston says a few strategic moves, such as stashing your tax refund or dedicating a raise to your emergency fund, can make a big difference in how soon you have that cushion.
3. Are you managing your spending? Half of managing your money is evaluating your outlook on spending. We get into a cycle of earn and spend, when it should be earn, save, spend, Winston says. Online tools such as Wells Fargos My Money Map help you visualize your income and expenses so you can make informed decisions about where and how to adjust.
Winston points out that youll particularly want to examine fixed expenses such as your mortgage, not just variable expenses such as travel, movies and dining out. Keep watch for new habits, too. Maybe youve started shopping online and are paying more for shipping or buying extra unneeded items to qualify for free shipping. Even just hitting happy hour more regularly with your colleagues in the name of networking can send spending out of control, she cautions.
Use budget tools to create a personalized budget and help you see how changes to one part of your finances affect other areas. 4. Are you using credit wisely?
Financing tools have become deeply embedded in American life witness tap-to-pay credit cards and merchants everywhere extending pay-over-time deals for goods large and small. This proliferation of credit can make it hard to understand your true debt load.
A rule of thumb can help you keep it in perspective: Overall, your debt-to-income ratio should be 36 percent or less.* In particular, the ratio of your housing costs such as your mortgage or rent, including property taxes and homeowners or renters insurance to your income should be 28 percent or less. And Winston notes that while every lender uses different criteria and will examine other factors as well when determining your creditworthiness (read: your ability to obtain a loan or a favorable borrowing rate), exceeding these ratios should indicate to you that too much of your income may already be committed for you to comfortably take on more debt.
5. Are you watching your credit score? Speaking of credit: Before lenders determine whether to extend a loan or other financing to you, they look at your credit score. FICO, the most popular model, uses a range between 300 and 850. Consumers with a rating closer to 850 can expect lower interest rates on loans, credit cards and lines of credit. Monitoring your FICO score will help you understand how lenders are likely to view your credit application, Winston says.
The three main credit reporting agencies Equifax, Experian and TransUnion are required to provide consumers with free access to their credit reports each year. (You can access those reports at AnnualCreditReport.com.) The reports include information about whether you pay your bills on time, the amount of debt you carry and the lenders from whom youve borrowed. Review your credit reports annually (as the site name suggests) to make sure theyre accurate.
If you spot errors that could adversely affect your score, contact the creditor immediately to address them. And in the age of identity theft, this can be a critical step in identifying fraudulent use of your personal information.
6. Are you planning for your estate needs? A financial self-audit wouldnt be complete without a review of your will and beneficiaries named on retirement accounts and insurance policies. This is always on peoples to-do list, Winston says. Its especially important to update these documents if youve added or lost a family member, whether through marriage, adoption, divorce or incapacity.
Taking a deep dive into your finances requires you to invest time in the process. But the results are invaluable even if theyre not ideal. Whether you finally pinpoint trouble spots or discover that youre doing better than you thought, having a clear picture in mind will help you move forward with confidence. Its an incredible feeling to know that youve got your financial life together, Winston says.
* Wells Fargo, How to Calculate Your Ratio, www.wellsfargo.com/mortgage/learning/calculate-ratios-layer.
This article was written by Wells Fargo Advisors and provided courtesy of Kendall Turnage, vice president investment officer in Gulfport at 228-864-5577. Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences. Investments in securities and insurance products are not FDIC-insured/not bank-guaranteed/may lose value. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. ©2013 Wells Fargo Advisors, LLC. All rights reserved.