Question: I want to prioritize my family’s financial habits and start making smarter choices. Do you have any tips or strategies for family finances?
ONE: The best advice we can give you is to start running your individual and family finances in the same way as a business. Most people do not consider themselves “businesses” – trying to make a profit. Looking at your financial situation from this perspective can be helpful in determining where you can cut expenses, increase cash flow and generally improve your personal financial situation. This can be especially beneficial if you anticipate a greater financial commitment in your future, such as buying a home or starting an actual business. Here are some tips.
Examine your financesWhere a director can search for accounts to get an overview of the company’s status, you can create or update a personal net worth statement. Essentially a monetary scorecard, a net worth statement showing where you stand financially and whether you are on track to reach your short-term and long-term goals.
You can calculate your net worth by summarizing the present value of all your assets, including cash and cash equivalents, brokerage accounts, pension funds, real estate and other fixed assets and personal assets. Then deduct your liabilities, including mortgages, personal loans, credit card balances and taxes due. The difference between the total value of your assets and your liabilities is your net worth.
Another very important calculation in business terms is your “cash flow statement”. Creating this statement is simply determining the monthly net cash flows you receive from net salary (after tax withholding), dividend and interest income, rental income, etc. minus your monthly cash flows such as loan payments, food expenses, clothing, education costs, taxes, etc. of a cash flow statement that compares your monthly cash flows with outgoing money provides important clues as to where your money is going and how you might be able to trim consumption and increase savings. Are you addicted to high-interest credit cards? Could you cut down on the cost of food or entertainment? These are just a few questions you need to answer to better understand how even small changes in your spending habits sometimes make a big difference. Wealth is not created as much by what you earn as what you keep.
Practice stronger risk management. To maintain the financial health of their companies, business leaders also practice risk management. You can do the same by first assessing compensation and benefit choices. A major life change – such as a marriage or a birth – may require an update of your W-4 withholding allowances from your employer.
Unexpected medical costs can be a financial disaster if you are not prepared. Review your health and disability insurance to ensure it provides the best value. If you have a health savings account or a flexible consumption account, make sure you use it to your full advantage.
Think about other insurance policies as well. Perhaps your home has increased in value, necessitating a corresponding increase in your homeowner’s coverage. Maybe you no longer have enough life insurance to protect your growing family. Your insurance professional should be able to help identify the right amount of coverage.
Finally, proactively check your credit report. If you wait until something is obviously wrong, it may be too late to prevent significant damage. Federal law requires the three major credit bureaus to provide you with a free annual report. Exploit.
Think of retirement. Business owners need to think about inheritance planning. But even if you do not own a business, you should think about life after hiring.
If your employer allows you to adjust your retirement plan contributions during the year, consider increasing them to take full advantage of tax-deferred composition and, if available, employer matching. Similarly, if you plan to make an IRA contribution this year, do so as early as possible to give your assets more time to grow.
Review your property plan and update it if necessary. Financial priorities change, so make sure the beneficiary names for your pension accounts and insurances still match your wishes. Check your will or living trust and change as needed.
Get started. It’s never too late to practice good financial habits and keep track of your current net worth so you can take proactive steps to make changes that will create wealth for you and your family. If this is too daunting to do yourself, contact a trusted CPA or certified financial planner with knowledge of these issues to help you get started.
Crystal Faulkner is a market leader in Cincinnati with MCM CPAs & Advisors, a CPA and consulting firm that offers expert guidance and beyond the bottom line thinking for today’s public and private companies, large and small, not-for-profit, government entities and individuals. Tom Cooney is with Wealth Dimensions, an investment advisory firm. For more information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise”, a morning and afternoon radio program that profiles highly successful people, companies, organizations and topics throughout our region.