- May 18, 2021
Ahhhh Spring is here! Don’t mind that in the Caribbean this can look and feel more like Summer. This is the season when the birds are out, the flowers are in bloom, and the breeze (when it blows) is sweet. Spring is also the season that we declutter our homes. World renowned tidying expert, Marie Kondo, says if something brings you joy, keep it, if not, toss it! But it’s not only our homes that need tidying up, but our finances do as well. Here are some steps to help you do that.
Take a Financial Inventory
Basically, you are taking stock of all the assets you own, and all the debts you owe. If someone were to ask you today, “How much do you need to be completely debt free?”, do you really know the answer? Take some time to write down every loan, credit card, and any other type of debt you have. This may be overwhelming to see all in one place, but knowledge is powerful. Now you know the exact amount of debt clutter you need to eliminate and can formulate a plan to attack it.
Then write down everything you own. List all your assets including savings, investments, insurances, value of your home and car. Once this is done, you have painted a picture of your entire financial life. If you minus the assets from the debt, you now know your net worth.
Meet with Creditors
Once you know what you owe, you can sit with your creditors to work out a new plan to pay off your debt. Many of us were working part-time or not at all during the Covid 19 lockdowns (and many still are), which means that our loans fell behind. Creditors use various tools to assist lenders that are in, or near default, such as extending your time to payback the debt. This makes your monthly payments smaller, and more manageable.
Pay Down Debt
After assessing your debt, and meeting with creditors, you need to construct a plan to pay down your debt. A popular method is to pay down debt based on the highest interest rates to the lowest, or from the smallest amount owed to the largest.
Tip*** To get motivated to continue the process of paying down debt, start by eliminating the smallest one first, then pay down the remaining balances based on interest rates. This gives you an immense feeling of satisfaction to have paid off a bill.
Consolidate Debts
Sometimes it’s not easy to just pay down debts. There is simply just not enough income to pay what you owe, let alone pay a little extra on one of them. If you are in this predicament, you may need to consolidate your debt. Banks will pay off all your loans and give you one lower monthly payment. The difficult part is to resist the temptation to take on more debt and instead, save a portion of the extra income, and/or use it to make principal payments to your consolidation loan.
Cut Back Spending
Here’s a tricky one. We all want to treat ourselves from time to time, but when does that treat turn into impulsive buying or excessive spending? The answer - when it is regularly hurting your budget. The problem is that many of us don’t have a monthly budget, and we’re not able to keep track of our spending. The next point will help with this.
Create a Budget
Write down your total income for next month. List every bill and how much you plan to pay on it for that month. Include expenses that aren’t necessarily bills, but still, something you will spend money on such as entertainment and dining. Keep a record of EVERY dime you spend. Have you heard of a food log? Well, this is a spending log.
At the end of the month, compare what you actually spent, to what you expected to spend. This is the easiest way to identify all the areas of your spending that needs to be polished up.
Automate Savings & Investment Contributions
Doing all the above, allows you to do this step. I live by the saying “Set it and forget it!”. When contributions come out automatically, you don’t have to remember to do it. You don’t have to wonder, “should I do it this month?’, it just happens. The idea is to forget it’s there, for at least 3-5 years, and let it grow. Allow it to bloom into an emergency savings, (bloom…Spring…get it?), grow into a retirement account, develop into the down payment for your mortgage, or the seed money for your business idea, or any other goal you have in sight.
So, why are we Spring cleaning your finances? What’s the point? Deep cleaning your finances allows you to save so that you can fund your goals. And will, hopefully, lead you to a place where you are debt free. Keep in mind that Rome wasn’t built in a day, and you’re bound to have slip ups and setbacks, but stay the course. Cleaning up your finances is a task of strategy and endurance.
By Tishrea Johnson, Securities Investment Advisor