What does being in control of your finances mean? It’s a combination of understanding where you stand financially, spending less than you earn and having confidence in your ability to make financial decisions (with or without the help of a trusted financial professional). If you want to reduce stress and anxiety over your finances, following these five steps can help:
Spend less than you earn. This means knowing exactly what you have coming in (income) and what is going out (expenses). Not knowing these two numbers can lead to undue stress and anxiety and a lack of control over your money. A common mistake is not accounting for the quarterly or annual expenses (i.e. taxes and insurance). Plan ahead to ensure you have the cash to cover these expenses when they arise. A cash flow snapshot will help you with that process.
There are only three ways to fix a cash flow shortage: 1) earn more money, 2) spend less, or 3) a combination of 1 & 2.
Put together a list of all your assets (i.e., investment accounts, savings, real estate, etc.). Next put together a list of your liabilities (credit card balances, mortgage balance, line of credit balance, etc.). Don’t forget to make two lists: one for business and one for personal, if applicable. When listing your liabilities, you want to put down the total amount owing, not your monthly payments as that should be listed under cash flow. Subtract your total liabilities from your total assets to arrive at your net worth. This number is meaningless without knowing what you need it for, which takes us to step 3.
What do you want to accomplish? Think big! If you don't set a goal, you are unlikely to achieve it. Commonly, people want to pay off debt, save for the future, set aside funds for a child's education, retire at a certain age or take the family on a vacation. This is great but goals need to be more specific; if retirement savings is your goal, you need to decide at what age you want to retire and how much income per year you want. Work with a financial planner or advisor to help brainstorm goals and build a plan to achieve your specific goals.
Do you know what your investment options are? There is a big difference between GICs and stocks, mutual funds and ETFs. There are pros and cons to each type of investment, not to mention varying levels of risk and opportunity. Take the time to learn the basics so you can make better investment decisions and understand how those decisions impact your life goals. If you are a business owner, it is important to fully understand your options so you can evaluate whether it makes more sense to invest in a portfolio or invest in your business. Usually a combination of the two is best.
Have you planned for the unexpected? What would be the impact if you were unable to work? What if you were no longer here at all? Would there be a burden left behind or have you put a plan in place to take care of loved ones? Will CRA (Canada Revenue Agency) be the beneficiary of your estate? It’s important to look at the impact from potential scenarios to ensure you’ve got the coverage in place to protect your family. For more expert advice on preparing your will and estate, watch this episode segment: