As the end of the year draws near, most people are thinking about their finances over the next few months and budgeting for their remaining expenses of the year. Which is perfect timing because October is National Financial Planning Month! Here are some tips and tricks on how to get your financial planning in order.
Create a Budget
The first step in understanding and taking control of your finances is creating a budget and sticking to it. Everyone’s budget will look a little bit different, but the 50/30/20 rule is a good place to start.1
The 50/30/20 rule states that 50% of your budget should go to essentials, such as rent, food, and utilities; 30% should go to wants, such as entertainment or travel; and 20% should go to savings and paying off debt.
There are also a lot of helpful apps to help you stick to your budget, such as Mint, You Need a Budget (YNAB), and Honeydue for budgeting with a partner.
Be Smart With Your Debt
Not all debt is created equal, meaning debt isn’t always a “bad” thing if you are smart with it. For example, taking on a car loan and making all the payments on time can help you afford a car if you don’t have enough money to pay cash and can help you build up your credit score. But be wary of high-interest debt because that can get you into problems quickly.
Understand Interest Rates
Speaking of interest rates, it’s important to understand how they impact your finances and debt. Depending on the current market and your credit score, mortgage rates generally hover between 3% and 6%. In contrast, the average credit card interest rate as of March 2022 was nearly 20%. With that high of a rate, you can see how getting into credit card debt can quickly pile up and make it hard to take control of your finances.2,3
In addition, understanding interest rates can help you make strategic financial planning decisions. Rather than paying all cash for an asset (e.g., a car or a house), if you can get a low-interest loan, you can consider investing the cash you would have spent on an investment vehicle that could generate a higher return than you are paying in interest.
For example, if you have $10,000, you might consider putting $2,000 toward a car and financing the rest at a 2% interest rate while investing the other $8,000 in the S&P 500, which has delivered a compound average annual growth rate of 10.7% per year over the past 30 years.4 However, keep in mind that past performance is not am indicator or guarantee of future performance.
Get Covered by Insurance
Another thing you can do to celebrate Financial Planning Month is to ensure that you are properly covered with the right insurance. If you have dependents or people relying on your income, life insurance can help create security for loved one should something tragic happen. In addition, you should definitely consider renters or homeowners insurance, car insurance, disability insurance, and health insurance.
Goals
Lastly, you can't have a financial plan if you aren't planning for something. Everyone has things they want to accomplish in their lives over time. Whether it's buying a house, putting children through college, saving for a new car, saving for retirement, planning for a vacation, or any other multitude of things you might want to do now and in the future, you need a plan to reach your goals. The best thing to do is write your goals down, figure out how much money you need for them, prioritize them, and then create a roadmap for how to get there. This could be more difficult to do than thought, and that's why Escient Financial is here. To get assistance planning your financial future...
1 https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
2 https://www.fool.com/investing/how-to-invest/index-funds/average-return/
3 https://www.moneygeek.com/credit-cards/analysis/average-credit-card-interest-rates/
4 https://www.fool.com/investing/how-to-invest/index-funds/average-return/
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Digital assets and cryptocurrencies are highly volatile and could present an increased risk to an investors portfolio. The future of digital assets and cryptocurrencies is uncertain and highly speculative and should be considered only by investors willing and able to take on the risk and potentially endure substantial loss. Nothing in this content is to be considered advice to purchase or invest in digital assets or cryptocurrencies.
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