The prospect of developing and adhering to a financial strategy can be overwhelming. However, it does not have to be so complicated. Consider these steps:
Here are some points to include in your financial strategy.
Understand how you spend your money. Prepare a household spending worksheet. It will enable you to prioritize your spending and identify areas of potential saving.
Borrowing can enable you to obtain things that are otherwise beyond your current reach, but borrowing costs money. Loans for things that provide lasting and ongoing value (such as an education, a home, or a car) are smarter than borrowing for short-term gratification (extravagant vacations or expensive jewelry).
Prudent borrowing also includes making sure the rates and terms of your loans are as attractive as possible. Before borrowing (whether it is a credit card, a car loan, a mortgage, or other loan), make sure you understand all the terms. The interest rate, length of loan, and method of calculating interest should be clearly understood.
Utilizing a payroll deduction or setting up an automatic recurring transfer to your savings account is more successful than trying to save on a less consistent basis.
Investments come with risks and, hopefully, higher returns to compensate for those risks. Understanding the risks of loss, price fluctuation, and inflation are necessary when creating a sound investment strategy. Diversification, asset allocation (dividing funds into stock, bond, and cash investments), and investment costs should all be considered part of a wise investment strategy.
Periodically, you should review all your insurance coverage. This includes homeowners/renters, health, disability, auto, and any umbrella policies you may have. For peace of mind, make sure you have the right combination of coverage and deductibles. If you use insurance primarily for catastrophic coverage, remember higher deductibles usually translate into lower premiums.
For life insurance, evaluate how much you really need. If your family would need significant funds to replace your income, a larger policy may make sense. If you are single, perhaps a smaller policy (and smaller premiums) will be sufficient. Also, compare the benefits and costs of term and whole life policies. For younger, healthy individuals without a need for permanent protection, a term policy may be a better choice.