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Financial tips

Budgeting

6 Steps to Renew Your Finances

2022-06-20

Spring cleaning season is in the air! As you tidy up your home and yard, take time to “houseclean” your approach to personal finance. With inflation growing wildly and the price of food, gas and shelter rising, now is a terrific time to take a deeper look into your personal savings and solvency plan.

The annual U.S. inflation rate accelerated to 8.5% in March 2022, the highest since December 1981. Conserving your resources and reviewing your budget will go a long way toward keeping your head above water this spring.

Here are 6 surefire spring financial tips to refresh your economic picture.

1. Review your financial goals

This is pretty much the most important item on the list of things to do. Financial goals act as the foundation upon which you build your budget. If your goals aren't solid, plans could fall through before you get very far. Unfortunately, many Americans still find it hard to work out their financial goals. According to research from Lincoln Financial Group, in 2020 only 38% of adults in the U.S. had specific financial goals.

To break it down, financial goals are the long-term, short-term and intermediate goals that align with your values and personal objectives. Your goals should follow the SMART plan: they should be Specific, Measurable, Attainable, Realistic and Timely. For instance, don't set a goal to pay off $20,000 in debt in six months when your income during that time will only be $10,000.

Furthermore, creating a list of financial goals is not a set-it-and-forget-it act. To achieve your goals, you need to calculate how well you’re doing on a regular basis. Monitoring your progress helps you adjust to the reality of the current financial times. Are you an impulse buyer? If so, you may need to work hard to create new habits and self-discipline. Be thorough when reviewing your goals, and mindful of every opportunity to save or invest.

2. Review your budget and adjust for new inflation

Even as wages rise, Americans may still find it hard to avoid a financial hit because inflation is rocking the country. While you might not be able to completely avoid the storm, you can use it to sail towards your goals.

Calculate where inflation hurts your household the most, then look for substitutes to keep afloat. Analyze how your annual spending can be divided into eight categories: housing, apparel, food, medical care, transportation, education, communication, and recreation. Remember, having a budget for these groups gives your money direction, and gives you more control.

3. Review your debts

Now that your purchasing power has shrunk thanks to inflation, review your existing debts to see where you can consolidate and save. What cuts can you make, even temporarily? Taking into account the above eight annual spending categories, examine your debt obligations to each, paying close attention in particular to housing and transportation costs. Reigning in these two categories has the potential to make a huge impact on your overall debt-to-income ratio. Can you add a roommate (or two!) to help offset rent? Scale down to a smaller unit? Drive an older car, or one that’s more fuel-efficient? These may sound like big changes, but they bring with them the opportunity for big debt reduction.

4. Savings

Commit wholeheartedly to saving on a regular basis. It’s one of the most efficient routes to financial freedom. Add to that the bonus of compounding (earning interest on top of interest) and you have a real shot at attaining your financial goals. Check out Investor.gov for a super simple tool that shows you the power of compounding interest. For example, an initial $1000 lump-sum investment and adding just $500 per month for 20 years nets you $201,049 at 5% interest compounded annually, even though you will have only put in $121,000 over that 20-year period.

5. Eliminate expenses

Financial discipline is the first step to financial freedom. What better way to embrace financial discipline than by eliminating money-guzzling expenses? Cancel unused auto-renewing subscriptions, cook at home, skip the coffee shop, and buy second-hand instead of new. Challenge yourself to go one month without buying anything but essentials. Celebrate your success with a special (thrifty!) splurge. Then do it again for two months.

6. Consider investing

As mentioned earlier, even a small amount can have a huge impact if invested consistently over time. It’s difficult to achieve financial freedom without investing, and the best investment is often investing in oneself. For example, investing a small amount in learning lucrative job skills could have a far-reaching effect on your lifelong finances.

A strong financial plan starts with you

The road to financial freedom is paved with self-discipline. Do you really need a latte every day? That coffee may only be $4.00, but if it was $3.50 last month that’s about a 14% increase. Conserve resources wherever possible and learn to stretch your dollars to help offset high inflationary times like the ones we’re in now. Review your financial needs and goals, make a plan you can commit to, and save a little bit every month.

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