5 Fundamental Financial Planning Tips

Consider These Easy Steps Can Boost Your Year-End Performance

Many people share concerns about the economy, especially with ongoing challenges such as high inflation rates, continued high interest rates, and an upcoming presidential election. Despite these economic uncertainties, over half of Americans express optimism about their personal financial situations.

To enhance your confidence in your financial outlook, follow these 5 tips. Implementing fundamental financial planning strategies can better equip you to navigate various market conditions and economic environments.

1. Review Your Spending: Strive to Spend Less Than Your Income

Inflation has moderated considerably since its peak in 2022, but prices may still appear high due to the significant increases observed over a short period. For instance, food costs rose by 9.9% in 2022 and 5.8% in 2023, with forecasts indicating a more modest increase of 2.2% in 2024.

Over time, spending and debt may have gradually increased, making it important to assess your financial situation. Understanding your essential expenses versus discretionary spending can enable you to identify areas where you can potentially reduce costs and manage your finances more effectively.

2. Establish or Preserve Your Emergency Savings

It is advisable to save enough to cover 3 to 6 months’ worth of essential expenses, including food, housing, and medical care, in an emergency fund. For those beginning or restarting their savings, a good starting point is to aim for an initial buffer of $1,000. Continuously contribute to your fund until you reach your target savings goal. If you need to use some of the funds, it’s important to replenish them to maintain the 3 to 6 month safety net.

If you haven’t established an emergency fund yet, automating your savings can simplify the process. This involves setting up automatic transfers from your checking account to your savings account. Direct deposit can be utilized to route a portion of your paycheck directly into savings, or you can schedule recurring transfers to move money from your checking account to savings on payday. This approach ensures that you consistently build your savings without needing to actively manage each deposit.

3. Reduce High-Interest Credit Card Debt

Credit card debt has become costlier due to rising interest rates. As of May, the average interest rate for existing credit card accounts was around 22%, while new offers averaged over 23%.

If you’re carrying a balance on your credit cards from month to month, now is a good opportunity to explore ways to pay off that debt. Start by reviewing your credit card statements to identify your current interest rates. Prioritize paying off debts starting with the highest interest rate to the lowest.

• Choose a method for debt repayment. If you have multiple credit card debts or loans, it’s beneficial to prioritize paying off one debt aggressively while making minimum payments on others. Beginning with the debt that carries the highest interest rate allows you to efficiently manage and reduce your overall debt burden over time.
• Evaluate the possibility of refinancing your debt for potential savings. If you hold multiple credit cards or loans, consolidating them into a single loan with a lower interest rate could be advantageous. While balance transfers typically incur fees, transferring balances to a zero-interest rate card can aid in reducing your debt faster, as interest charges won’t accrue during the promotional period.
• If you own a home, one option to consolidate high-cost credit card debt is to use a home equity loan or line of credit. This allows you to leverage the equity in your home to secure a loan with potentially lower interest rates compared to credit cards.

4. Assess Your Retirement Savings

If you’re actively saving for retirement, it’s a significant move toward securing your financial future. As the year progresses, it’s prudent to review your contributions to your employer-sponsored retirement savings plan, if applicable, to ensure you’re meeting your savings goals. A good recommendation is to save at least 15% of your pre-tax income, which includes any employer matching contributions, towards your retirement fund.

If competing financial obligations have hindered your ability to save for retirement as desired, it’s a common challenge. When circumstances allow, increasing your retirement contributions by even 1% can begin to enhance your savings. Additionally, strive to contribute enough to maximize any employer match available to you. Employer matches represent additional funds towards your retirement that you shouldn’t overlook, as they essentially amount to free money.

5. Assess Your Investment Allocation

Significant fluctuations in the value of stocks or bonds within your investment portfolio can disrupt your intended asset allocation. For instance, an investor who originally planned to allocate 60% of their portfolio to stocks may find that due to market movements, their stock holdings now constitute 70% of the portfolio. This deviation from the intended allocation can impact risk exposure and overall portfolio performance.

It’s advisable to assess your investment portfolio, considering the mix of assets such as stocks, bonds, and short-term investments. This review ensures that your investment strategy matches your time horizon, financial objectives, and risk tolerance.

If your current asset allocation doesn’t align with your desired risk level, it might be necessary to rebalance your portfolio. Rebalancing involves adjusting your mix of investments to realign it with your intended risk tolerance and investment goals. This could involve shifting towards more conservative options such as bonds and cash to lower risk, or increasing exposure to stocks and stock funds to regain your target asset allocation.

Investing in a diversified portfolio that suits your risk tolerance and long-term goals is crucial for achieving financial success, regardless of market conditions. This approach not only provides growth potential but also ensures stability during both favorable and challenging market environments. If you’re unsure about selecting an appropriate mix of investments opting for a managed account can provide additional support in maintaining a balanced investment strategy aligned with your financial goals.

It’s always beneficial to enhance your financial stability by managing your spending, saving, and investing effectively. If you’re looking to boost your financial confidence, following these five steps can pave the way.