Small steps can lead to big improvements in monetary habits. In this article we will share best practices regarding your finances that can be beneficial for both businesses and individuals.
Pay Yourself First
Financial advisors suggest that people should begin funding their retirement accounts as soon as they start working. The compounding effect will allow your balance to grow exponentially over time. Individuals that delay funding their retirement are always playing catch-up with those who began saving immediately. Many employers will match a percentage of employee deferrals to their retirement account. Employer matches should always be fully utilized.
Have a Reserve Fund
We all know that we need to set aside money as a reserve for any unexpected events. One rule of thumb is to have the equivalent of six months of expenses built-up as a cash reserve. Keep in mind that with today’s interest rates at a decades high level, money market accounts and certificates of deposit may allow you to earn significant interest on your cash reserve balance, so be sure to look at options to enhance your savings.
Budget and Track Expenses
To build up a six-month reserve fund, you first need to know what your expenses are. The easiest way to understand your expenses is to create a budget, both short-term (i.e., monthly) and long-term (i.e., six to twelve months). Tracking where your money is spent can be an eye-opening experience. You may find that you are incurring unnecessary expenses that can easily be eliminated with no detriment to your business or personal situation.
Manage Debt
As CPA’s, we see all types of financial situations. What has clearly stood out over my years of experience in public accounting is that the “ultra-successful” businesses and individuals are those that carry minimal to no debt. Being debt free offers tremendous financial flexibility. This includes the ability to take advantage of opportunities that may arise, such as purchasing a new piece of equipment to enhance business operations; or for an individual, such things as making a home improvement or replacing a worn-out vehicle. If you do carry debt, consider paying off high interest rate debt first and look to consolidate debts at a lower interest rate.
Plan for the Future
Throughout one’s work life, income is likely to fluctuate, so financial planning is a continuous process. Major life events, such as getting married, having children, funding college, and incurring unexpected health care costs could have a significant impact on your financial plan and can often be unpredictable. Therefore, your financial plan must be adaptable and monitored regularly.
A “habit” is defined as something done often in a regular and repeated way. Developing good monetary habits will make a significant difference in your finances and positively impact your life.
For more information, contact Rick Gilmartin, CPA, Principal, at rgilmartin@tsacpa.com or 716.633.1373.
