Increase Your Financial Health

Increase your financial health:

Some time ago I wrote a 5-day series of money saving tips. I want to help readers who want to achieve financial independence, become independently wealthy and increase their overall financial health by providing some simple strategies they may employ. Below is a summary of the 5 tips I had provided, revised for easier reading. These tips are small but important pieces of the simple things you can do to enhance your financial lifestyle.

Strategy 1 – Controlling  purchases induced by sales.

I was headed to the cash register of a local store. I had the one item in my hands that I actually needed. Like the sun peeking through the clouds on a rainy day, I saw the glimmer of a Taylormade R9 Driver, screaming at me from half-way down the aisle, “I am only $189 dollars, you need me!”. My stomach turned and I left my sandals behind as I raced down the aisle. I wanted it, normally $299, I had yet to see such a deal! After 20 minutes of sweating it out, I put it back and I left. The result; increased personal satisfaction without guilt.

Your first money saving tip : Buying just to take advantage of a sale STILL costs you money. Don’t turn a potential cost into a sunk cost. Don’t let “sales” induce purchases that are not needed.

You have a budget, you know what you need and you know what you can spend. You even have an allowance for indulgences. That is great, stick to that and do not let the red-sticker price throw you off your goals. Ask yourself, “Do I need this? Was this part of my budget?”. Can I wait?

This mentality and level of restraint will empower you. Further down the line your financial health will produce dividends as well. You control money, money doesn’t control you!

Strategy 2 – Eliminating unsecured debt.

Are you in Debt? Have you ever sat down to analyze the cost of your debt? It might shock you.

The Federal Reserve reported in March that the total U.S. revolving debt (98 percent of which is made up of credit card debt) was $852.6 billion. That is about $835.5 billion dollars of total credit card debt held by U.S. consumers and businesses.

Let’s take a fictitious example and illustrate the cost of unsecured debt. Consumer A has $8k in credit card debt with an APR of 12%. For simple calculations we assume $8k is the monthly average after payments and charges.

Using a future value calculation with a monthly interest factor, the total cost is about $1,015 dollars for the year. In reality the interest cost may very slightly because each month the balance would fluctuate. If consumer A’s tax rate is 28%, that eats up $1,410 dollars of gross income.

That is a lot of extra money to spend on non-asset backed items throughout the year. At a $3 dollar cost-per-gallon of gas, that is 338 gallons worth of gas.

If you would have deferred that $1,410 dollars into a retirement account every year for 25 years, with an average rate of return of 5%, it would be worth $67,295 dollars (before tax). That is simply by not using credit cards!

Make it simple for yourself, stop using them. Keep what credit is necessary to handle emergency situations, but you may find you don’t need it for that either with the amount of cash you are able to save.

Consider also, I did not mention loans, home equity lines or other forms of debt. Cash flow is imperative to your financial health, with unsecured debt your climbing a mountain that just gets taller the closer you get to the top.

Strategy 3 –Track your financial activity to create financial visibility.

You make a good living, you feel like you should be saving more money, but for some reason you always have more to pay for than you expect, or maybe you just end up with less money then expected.

What should you do?

Your days are full, your active and sometimes your days even blur together. That is the American lifestyle. How do you expect to remember every cost you incur every day, then look back and know where your really spending your money?

Anyone with a computer can easily setup personal finance software like Quicken or Microsoft money. You could even go big and use QuickBooks. Easily Orangize All Your Finances in One Place with QuickBooks – Save up to 20% + Free Shipping. If you install one of these programs, and setup your appropriate financial accounts, you can download your transactions right into the program. If you don’t want to do it that way, spend some time once a week manually entering in your expenses. Tracking your expenses will give you a historical overview of where your money was spent, and is being spent. I promise you will say “wow, I spent that much on…”.

It is like having a compass when your lost in the desert. Unveiling the financial picture of yourself will allow you to more accurately fine-tune your personal budgets and spending. The natural feedback will help you adjust your habits.

Would you expect a company to make financial decisions without the proper financial reports? You probably wouldn’t invest in them if they ran their business that way. It should be no different for your personal finances if you want to become financially healthy.

Strategy 4 – Creating a budget.

I don’t want you to just save money, I want you to “become solvent and debt free”. I want you to create habits that allow you to some day be financially independent. Some of these tips may take some work, and not unlike strategy 3, strategy 4 rolls right off the concept of using financial software to create a financial map for yourself.

Naturally, the next step is to take that information and create a budget. You can create a budget, either manually or with the current software to track expenses. The budget should fit your unique picture.

Don’t let a budget intimidate you. Once you start building it, you may find you are much more capable then you thought. Take a look at your expenses, budget out what they should be going forward. Budget out your income and expenses. This will create a financial picture that usually results in you saving money.  Don’t forget to budget for “contingencies” or unknown expenses like medical or car repairs. Also, your budget should be flexible. We are not predictable beings, if circumstances change and your budget doesn’t reflect that, it becomes useless.

Your budget may be weekly or monthly. You will need to show your projected cash inflow (income) and outflow (expenses). You then calculate the net difference, which you may use for your savings, retirement or investments. Create it to fit your lifestyle and try to build in some flexibility. This does not have to be an activity you fear. If your still not comfortable with a budget, don’t be afraid to ask a savvy friend or your CPA / CFP buddy for friendly advice and help either. A budget has no limits. You are creating the last part of your financial map, good luck and happy saving!

Strategy 5 – Save for retirement while becoming more tax efficient.

It is important to know that tax planning in conjunction with retirement planning could save you thousands of dollars over your lifetime. Due to the complexity of this topic, I am going to illustrate some simple points to influence the underlying point.

A Roth conversion:

You decide to utilize your Roth 401k and Roth IRA, contributing about $100,000 during a period of time (we assume 20 years) while in a 25% tax bracket. This account grows to $150,000 when you start to take free distributions. You decide not take advantage of the tax deferral today for the benefit of tomorrow, but assuming your tax rate stays the same, you effectively paid $25,000 in tax on $150,000.  That is an effective tax rate of 16.7%. This is an example of utilizing a retirement vehicle in a “tax planning” approach to save money later. *Please note, Roth conversions create tax efficiency for circumstantial situations, not for everybody.

The two examples above represent way to save money through efficient tax planning with retirement vehicles.

Conclusion:

The tips are very general. Increasing your financial health and becoming independently wealthy is something individuals have been studying for hundreds of years. Everyone is capable of following these 5 simple tips.