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Personal Finance: How Is Your Financial Wellness?

February 27, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

Have you ever wondered why some people seem to manage well on their income while others struggle financially no matter how much they earn? The secret likely has much to do with what we might call “financial wellness.” By “financial wellness,” I don’t mean wealth; rather the term refers to a state of financial health. Financial wellness involves living within your means and making sound financial decisions that enable you to achieve the short- and long-term goals that are important to you.

Achieving financial wellness is an ongoing process. No matter the state of your financial wellness today, the important thing is to start where you are, do a thorough check-up of your financial tendencies, and put plans in place to move steadily toward wellness.

Take stock of how you spend money

Do you know with reasonable certainty where your money goes each month? Most of us can rattle off the amounts we spend on the big budget categories such as housing, transportation, utilities, grocery, loan/credit card payments, savings, and investments. But we often lose sight of many other expenditures that sometimes drain more of our money than we anticipate.

The first step toward financial wellness is to understand precisely how you spend money on a regular basis. Conduct your own spending review using your bank statement and credit card statements for the last one or two months. Make a list of your expenditures, paying close attention to the amounts you spend on daily living expenses (e.g., dining out, coffee, clothing, grooming, entertainment, impulse spending). Look for obvious places where you can eliminate or reduce spending.

Such a review can be eye-opening; it may be just what you need to pinpoint the gap between what you think you spend each month and what you actually spend. For most of us, this gap amounts to “spending leaks” in our finances, and these leaks can undermine the progress we hope to make toward our savings and investment goals.

Develop a budget: income, spending, and saving

With the insights gained from your spending review, create a workable, realistic budget for your monthly spending, saving, and investing. If your spending review revealed a shortfall in your monthly finances, you may need to take immediate steps to reduce spending, create additional income, or get out of debt. If debt reduction is a pressing need, consider the strategy described in our earlier post, “Saying Goodbye to Debt: A Simple Method That Works.”

If your income is adequate, the challenge may simply be a matter of committing to live within your means. Be sure your budget accounts for regular monthly expenses as well as larger expenses that occur quarterly or semi-annually (e.g., car insurance, homeowners/renters insurance, life insurance, etc.). An effective way to deal with these periodic expenses is to calculate the monthly average for these items and set up a special savings account where you can accumulate the monthly average amount until the payment is due. This lets you smooth out your budget and avoid spikes in your expenses.

Another potential budget-busting snafu is out-of-control discretionary spending. At the beginning of the month, consider setting a limit for discretionary spending each month and then create an “allowance,” which you take in cash for such spending.

Continue to track your spending and review how well your plan is working. Make adjustments as needed to stick to your budget, and resist using credit or making unnecessary purchases.

Set Long-Term and Short-Term Goals

Getting a handle on your monthly spending and saving is a significant step, which allows you to confidently set short- and long-term goals that are important to you. You may choose to set short-term goals (2-5 years) for any number of things such as paying off debt, traveling to special destinations, purchasing big-ticket items, and so on.

Money management experts recommend making emergency savings a top priority short-term goal. Having emergency savings to cover living expenses for three to four months is the best way to prepare for unexpected events such as a job loss, medical emergency, major car repairs, or similar events. To ensure that you reach your savings goal, pay yourself first with automatic transfers from your checking account to your saving account as you receive your paycheck(s).

You will no doubt set long-term financial goals for bigger items such as a home, college education for children, retirement, and assets you wish to pass to future generations. To address your long-term goals, consider working with a trusted financial advisor to develop the best strategies for your specific dreams and goals.

Financial wellness is achievable, but it takes commitment, time, and perseverance. The benefits of good financial management are many: improved cash flow, savings, peace of mind, and a strong sense of confidence as you make progress toward financial wellness. The benefits are clearly worth all the effort you put into the process.

True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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