Finance Roll

Do you feel like the financial aspects of your life are out of your control or you would simply want to get a better understanding of your financial situation? You may currently be missing out on potential returns on your assets or you may just have that lingering sense of uncertainty that prevents you from having peace of mind. There are a few simple steps that will help you sleep at night AND better help you achieve your financial goals, but it will take some initiative on your part.

Step 1: Organize

The biggest challenge I come across with clients is their inability to understand their aggregate financial picture. Typically, they have many different accounts at a variety of financial institutions yet they only use one or two of them. So naturally, the fewer accounts you need to manage, the easier they are to manage.

Gather all your bank account statements, including savings accounts, checking accounts, certificates of deposit, money jar, and maybe even check under your mattress for any cash you stored away during the banking crisis scare when deposits were inappropriately thought to be at risk. Do the same thing with all of your retirement accounts. You may have 401K plans from a previous employer, an IRA, a rollover IRA, and/or a Roth IRA.

Evaluate all your bank statements and determine which ones you really need. You may only need a personal checking account, a business checking account, and a personal savings account. If you have accounts with very small balances or very little activity, they are prime suspects to be closed and rolled into one. And all of your accounts don't necessarily have to be maintained at the same bank but you may get extra perks for doing so.

As for your retirement accounts, if you have accounts that you are no longer contributing to such as 401Ks from a former employers, you can roll them into a rollover 401K and have all the assets in one place. TD Ameritrade, Fidelity, and Schwab all have fantastic platforms for IRA's. My preference is TD Ameritrade. If you haven't done this because you feel comfortable with the choice of mutual funds in your employer's 401K, think again. The funds in 401K plans are usually not the best of their kind and typically carry higher fees. Don't be intimidated by the vast number of choices available through a TD Ameritrade platform. Get advice if you have to. Once you set up the account, roll over as many accounts as possible. (Some accounts may not be eligible for rollover)

Once you've collected all the information regarding your investable assets, calculate all of your current income. This may include salary, bonuses, commissions, rental income, etc. I like to break down my income to a monthly figure. For example, for income received weekly, multiply by 52 and divide by 12. For bi-weekly income, multiply by 26 and divide by 12. You get the picture. If your income is not predictable from period to period, take a long term average and calculate a monthly figure. Got it? Now you know how much you can spend!

Next, jot down all of your expenses. I know I know, this is a painful process. This is when you realize how much you spend on all the little things that go unnoticed but add up to huge numbers. It would also help if you categorize them into groups such as food, clothing, mortgage/rent, automobile payment, insurance (auto, health, life), telephone, entertainment, personal care, gasoline, daycare, school, credit card payments, and any other expenses you may have. DON'T LEAVE ANYTHING OUT!

Step 2: Budget

Now that you know how much income you have and what your expenses are, set up a budget. First and foremost, pay yourself!!. I can't stress this enough. We already mentioned 401K's and IRA's. You should allocate a reasonable contribution to your own retirement. If you leave this item for last, by the time you are done budgeting for all other items, you won't have anything left. Pay yourself first!! If your employer has a 401K plan, you should contribute whether or not they match your contributions. If they do match, then you should at least contribute the amount that would maximize your employer's contribution. After all, this is free money!! What dollar amount should you contribute to your retirement account? Well, it will depend on how much you could afford, but you should also figure out how much you should contribute to increase the probability of retiring with enough in your account to live the life you want in retirement. An investment advisor can help you calculate the amount you may need to contribute and the amount you will need to have at retirement.

Once you figure out the monthly contribution to your retirement account, you could start filling in the other budget items. You may have to adjust the original retirement account contribution but try to adjust all other line items first. You don't know how much to allocate to each expense? Well, you just calculated all of your expenses in a previous step. Start there!! You may find it an eye-opening experience to see how much you spend on certain items. There is a good chance that your total expenses have exceeded your income in previous periods. That's why we are going to develop a budget. This is the hard part: To get your expenses in line with your income, you may have to make some tough choices on where to pare back spending. Finally, once you set your budget, STICK TO IT. It takes a bit of discipline and record-keeping but it will be well worth the effort.

There are a variety of software programs available that can help you track your budget. I actually found some very good ones that can be used on your iPhone. Go to Apple Apps and look up 'Budget'. There are also some programs available that can automatically download your bank account information. Quicken is a very popular one and Quickbooks also has a budget function. If you're not sure which one works best, ask your accountant to guide you. After all, they may ask you to provide them with some of these expenses when they prepare your taxes. If you prefer, you can even track your budget expenses the old-fashioned way..on paper. The key is to make sure you budget and track your expenses.

Step 3: Invest

There is nothing better than having your money work for you. But how do you do it? You finally have your expenses under control and you are making periodic contributions to a retirement and/or investment account. Now you have to think long and hard about what your goals are, how you feel about risk, and what your time horizon is. In other words, how much longer do you plan on working? How much longer do you plan on living? What kind of life do you want to lead after retiring? These are all questions that will directly impact your investment strategy.

If you don't follow the financial markets then you probably need some help figuring out exactly what that investment strategy should be. And not just today, but on an ongoing basis. The economic environment changes and your investments should change over time to reflect the opportunities and risks in the market at any given time. But with so many 'financial advisors' out there, how do you choose the right one? For starters, be wary of financial advisors that sell you mutual funds with front-end loads. With a front-end load, you invest approximately $95 for every $100 you put in. The other $5 goes to the financial advisor. Not exactly the best way to make your money work for you.

You should look for someone with a fiduciary responsibility to manage your account with your best interests in mind. Not their own! If you hear the words 'suitable', 'suitability', or anything similar to describe an investment, run for the door. More often than you would care to know, these investments are being recommended because they are beneficial to the person recommending them. Instead, find an investment advisor that is 'fee-based' only. That means they charge you a percentage of the assets they are managing. They are not paid by the mutual funds and they are not on commission. If the person has a CFA or CFP designation, there is a good chance you have found the right person. Someone with the CFA designation has taken an oath to do what is in the best interest of the client at all times. For more information about the CFA designation, go to https://www.cfainstitute.org/Pages/index.aspx The investment advisor should be asking you a detailed list of questions to understand your investment objectives and risk tolerances. They will then manage your account accordingly, checking in with you not less than once a year to understand any changes or updates to your situation.

Don't forget, however, that it is your money. Make sure you understand the strategy the investment manager is employing and that it is consistent with how you mutually agreed that your portfolio will be managed. If something doesn't make sense, ask the investment manager to explain their methodology and ideas in more detail. They should be able to clearly articulate why your portfolio is invested the way it is and they should be able to explain it in language you could understand. If they can't explain it or you can't understand it, you may want to consider moving your account to someone else. People who manage investments are smart people but your investment strategy should make sense. It's not rocket science.

With a sound investment strategy and regular contributions to your account, you will be well on your way to improving your financial situation. Continue to keep expenses within budget and make sure you pay yourself first.