Identify your financial goals
Setting goals is an important part of life, particularly when it comes to your finances. Over time, your overall goals may change, which could impact your financial goals. Start by asking yourself the following questions:
- What are my short-term goals (e.g., new car, vacation)?
- What are my intermediate-term goals (e.g., buying a home)?
- What are my long-term goals (e.g., retirement, long-term care, paying for a child’s or grandchild’s education)?
- How important is it for me to achieve each goal?
- How much will I need to save for each goal?
Once you have a clear picture of your goals, consider establishing a budget that will help you meet them.
What is budgeting?
Budgeting is a process for tracking, planning, and controlling the inflow and outflow of income. The solution is to analyze your current situation, determine your goals, and develop a written plan against which you’ll measure your progress.
The budgeting process begins with gathering the data that makes up your financial history. Next, you use this information to do a cash flow analysis. You will calculate your net cash flow, which tells you whether cash is coming in faster than it’s going out, or vice versa. Then you will determine your net worth. Simply stated, this is the sum of everything you currently own less the sum of everything you currently owe. Having a snapshot of your present financial situation, you’ll then define your financial objectives and create a spending plan to achieve them. Finally, you will periodically check your progress against the plan and make adjustments as needed.
You may be familiar with the rule of thumb that you should have three to six months’ worth of living expenses in your cash reserve. In reality, though, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve.
How to maintain a budget
As with virtually all financial matters, the easiest way to be successful with budgeting is to develop a systematic and disciplined approach. Spending a few minutes each week to review and maintain your budget can help you keep track of how you spend your money and pursue your financial goals.
Any good budget revolves around the four A’s: Accounting, Analysis, Allocation, and Adjustment.
- Accounting involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as income and expenses — and listing it systematically will give you a clear picture of your overall financial situation.
- Analysis boils down to reviewing your financial situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. Ideally, you should be spending less than you earn.
- Allocation involves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. If you need to reduce your expenses, you may want to start out by cutting back on your discretionary spending. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.
- Adjustment involves reviewing your income and expenses periodically and making the changes when necessary. Above all, be flexible. Any budget that is too rigid is likely to fail.
Using the four As is an excellent way to help you monitor your financial situation and keep you on the right track to meet your financial goals.
One of the first steps in helping overcome financial challenges is to understand some basic financial concepts and begin to make a plan. For more assistance in developing a budget and considering how it can align with your long-term goals, make an appointment with an Arvest Wealth Management client advisor.
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