I can hardly believe that we have already crossed over into the month of November! The trees have changed color and are beginning to shed all of their leaves. The air is getting much colder as we have experienced in the last week. We even had our first snowfall of the year this past Tuesday. Some of us in the great state of Michigan got it worse than others, but I think it was an unwelcome surprise for most. As the trees turn, the weather cools, and we jump into the holiday season that means that the end of the year is fast approaching. 2024 will be here before you know it! I know a lot of us like to refocus heading into a new year. Goals need to be evaluated and budgets need to be audited. Maybe you are looking to turn over a new leaf this year and get your financial “house” in order. If so, there are a few things to do to make sure you are organized and neat when it comes to your finances.
Knowing what you own and what you owe is crucial to having a healthy understanding of your finances. When we talk about this, we often refer to assets and liabilities. Let’s start with your assets or “what you own”. These are the things that positively contribute to your finances. Things like your home or your 401(k) or a whole host of other things that have a positive financial value. Next, we need to add up our liabilities or “what you owe”. These are the things that negatively impact your overall finances. In general, your liabilities are going to be any debt that you might have which includes your mortgage, car loans, etc. Now here is where that information comes together. We can use that information to determine our current net worth. This is a pretty simple calculation; all you have to do is subtract your liabilities from your assets. Ideally, you will have a positive net worth but if its negative, don’t freak out! Younger people, especially those who studied for advanced degrees, often have a negative net worth when they first begin planning. What’s important right now is that we are aware of our present financial situation and that we begin taking steps to flip the script.
Many people cringe when they hear the word budget but if we come at it with the right mindset, having a budget can actually be quite liberating. Consider your monthly expenses and what % of those expenses are actually necessary and from that information we will determine your monthly cash flow. Consider Jack and Jill; they have income in the form of salaries, social security, and an annuity that they purchased many years ago. They also have several expenses including their mortgage, utilities and eating out and going to concerts. In looking at Jack and Jill’s income and expenses, we can determine their monthly cash flow. This is a pretty simple calculation; We simply take their total income and subtract their total monthly expenses j. This may seem like a simple, maybe even rudimentary exercise but when it comes to your daily financial behaviors, this makes a huge difference. When it comes to planning out your finances, re-calculating your budget for 2024 could be a great exercise!
Maybe as you head into the new year one of your major goals is to get out of debt. Nowadays, with mortgages, student loans, credit cards, and the like, debt can get out of control very fast. This makes it all the more important to have a handle on the different types of debt that you hold. When you look at your total debt, ideally it does not exceed your total assets but like we mentioned earlier, sometimes this is unavoidable especially if you are a young person. As a general rule however, you should shoot for your monthly debt payments to be below 40% of you before tax monthly income. Knowing the interest rates on the different types of debt that you carry can help us determine which debt to pay off first.. i.e. what the most expensive debt that you carry? Let’s knock that one out first! Then move on to the next highest interest rate and so on. This may take some time but don’t be discouraged; ultimately, this will help to relieve the burden of debt on your finances even if it is a slow.
These are just a few ideas to keep in mind as you prepare for a fresh new year next year. With all of this being said, we still have two months left to enjoy 2023 and reach the goals we have set out for ourselves!
Let’s get to it.
We will see you next week, and have a great weekend!
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.