It's Time for Some Spring Cleaning -- But Not For Your House
April 08, 2016
You're house isn't the only thing that needs cleaning this spring.
It’s the time of year when we all go through our closets and get rid of the t-shirts we haven’t seen in a year, spray out the garage from a season’s worth of snow removal gunk, and get everything shined up and ready to come out of hibernation. While doing your Tasmanian devil tornado around your house, make sure you take some time to clean out the finances as well.
We have found that springtime is a perfect time to clean out the proverbial financial closet. Tax season is a distant memory, and last year is in the books. Now we can look forward and start fresh. The best place to start is creating a list of everything you have. First, List out all of your assets. Some of those assets will be bank accounts, 401k accounts, investment accounts, as well as home values from Zillow or another resource. We will also include the values of cars or other assets if they have a loan against them.
Next list all of your debts. You will want to make sure to list the total amount of the debt as well as the interest rates and minimum payments. There are a few different schools of thought on how to rank your debt, but I like ranking by interest rate. Some advisors will rank their client’s debt by total debt amount, and that can work too. Once you have the list, you can create a debt reduction plan to follow after we take a look at cash flow.
With cash flow, you want to take into account both income and expenses. First, take a look at all of your paystubs and make sure to account for all deductions. If you see something on the stub you are paying for, and you don’t know what it is, ask HR or an appropriate person to help. Note what your gross income is before all the deductions, and your net income or what you take home after deductions. How much is going to savings in company retirement plans? If you received a big tax refund or owed money this year, consider changing your W-4 exemptions to get your net income in line.
Expenses may take a bit more digging to figure out, but there are resources to help. You can use a pile of bills and credit card statements, or you can try an online tool like mint.com or quicken online. For the first time through, I like the pile of statements method, because you can get more information than just what you owed and paid. You can see if it makes sense to request monthly averaging for your utilities (if you have lived in the same place for a few years, many companies will do this for you). You can check to see if you should call your TV, internet, cellphone, or other contract providers who will give you a discount to sign up again for a new contract. Most people forget to call every year or two in order to get the new deal, often a big savings. Once you have some categories for your expenses, you can see if your spending is in line with your priorities.
Now you can determine your net cash flow by subtracting your expenses from your income. If positive, where will that money be put to good use? If negative, where can we make adjustments by using a monthly budget to get you back in the black?
Now that you have accounted for everything, you can make decisions just as you would while going through your closet. If you haven’t seen a shirt come out for a year, most likely it is worth donating. Same thing here. If you need to reduce debt, you have the information to create a debt reduction strategy. If you need to save more, you can determine where those assets should go. Without the information, you will have a cluttered financial picture, so take the time to clean your financial life this spring and start fresh.