Financial Health

(photo by Micheile Henderson on Unsplash)

The pandemic has caused financial hardship for many individuals, and financial success for others. Those who lost jobs due to business closures have seen a drop in income, while those fully invested in the stock market have seen their valuations skyrocket.

And while there are claims that the economy is ready to rebound strongly due to business re-openings, the prices for many goods and services have gone up considerably. A dollar does not go a long way.

Where can we invest our money right now? With the huge stock market uptick, many companies are overvalued, at least in my opinion. But what do I really know, because I thought we were overbought three years ago. And the stock market has gone straight up for those three years (except for the initial Covid-19 drop), until a recent sideways trend.

The interest rate earned on cash sitting in a bank account is literally nothing. And the bond interest rate, although it has up ticked a bit recently, is still extremely low. Same for CDs. Thus, it is a challenge to put our money to work in investments.

And, for many workers, salaries have not kept up with inflation. So, it’s important to spend our hard earned dollars wisely.

Regardless of where you are on the financial spectrum, it is important to be or become financially literate. Whether you handle your finances and taxes on your own, or with the help of a paid professional, understanding your financial situation, your long-term goals and how to reach them is imperative.

Many years ago, when I had a small side business preparing tax returns for individual clients, my favorite part was sitting down with my clients to explain the details of their tax return. It was exciting for me when my clients learned something new that they could use to better their financial situation going forward.

A good starting point is to identify what you currently spend your money on. Once you see where your money is going, you can begin to assess your situation and subsequently make decisions to re-allocate where you spend your money. The best way to gather this information is to track your transactions as you make them.

Another step that may help you along is to create a budget. Once you have identified your transactions as described in the previous paragraph, make a list of all the income you make on a monthly basis. Then list out all the expenses you have on a monthly basis. Don’t forget those times you took cash out of the ATM. What did you spend that cash on? Which total is higher: your monthly income, or your monthly expenses? If you are in the red, take a cold hard look at your expenses and make some cuts. If you are in the green, congratulations. And look to put some of that extra green into your savings.

A step that not everyone does is reconcile bank and credit card accounts each month. Yet, this is crucial to uncover errors, or even worse, fraud. We have a limited amount of time to report errors or fraudulent activity to our financial institutions. And once the reconciliations are complete, you know exactly how much money is left in your bank account, or how much credit is still available on your credit card.

Paying bills on time consistently is a big factor in achieving a higher credit score. So be sure to keep track of due dates. And while paying by the due date is necessary, paying too early allows the vendor to hold onto the funds for a longer period of time, giving them the added interest income benefit. Yes, interest rates are low. But why not hold onto your money as long as possible before writing that check.

Another potential benefit to consider is credit card points. How many of your bills can you pay by credit card? Do not pay by credit card if the vendor charges extra for this service. But if the vendor is credit card friendly, why not pay this way. You will receive a natural payment grace period until the credit card payment due date, sometimes a month into the future. Make sure you have enough funds in your checking account before making that credit card purchase.

Also, if your employer offers a retirement plan (401K or 403B) match, take advantage of this program as it is free money that you can add to your retirement. For example, if your employer offers to give you three percent extra for the first three percent of your salary that you put into your company sponsored retirement plan, then do it. That’s six percent of your wages socked away at the cost of only three percent of your wages.

If you currently have credit card debt, try to pay it off as soon as possible before putting extra money into savings. That’s because the interest expense that your credit card company charges you is much higher than the interest income you would collect if you held your extra money in a bank savings account.

Ask questions. Read articles or books. Do what it takes to get financially literate. And understand your financial situation. Get clear on your long-term financial goals, and take actions that will get you there. Break down these tasks into tiny steps over time. You can do it.

You are the President and Chief Financial Officer of your personal finances. Take ownership, and you will be rewarded. Good luck!