Simplify and Organize Your Finances: Part 1
This stage of life can be a strain on a family’s finances. Kids are expensive. Childcare alone can easily cost more than your mortgage. You might be living on a reduced income, due to maternity leave(s) or a modified schedule at work. You may be overwhelmed with your competing financial priorities – debt repayment, retirement, kids’ education – and feel like you’re not meeting any of them as well as you’d like. This two-part series is designed for those of us who want to organize our finances intentionally, and set up a straightforward, easy-to-maintain system.
The goal here is to simplify. I am not a financial adviser – you are not going to find technical financial advice here. Instead, I’m going to help you simplify your finances to meet your goals. We’re going to identify our priorities, and put a plan in place to meet them. Then, we’re going to make it as easy as possible to stick to that plan.
Part 1 starts with four steps – the big picture. The key is to identify where we’re at and where we want to be, before we delve into the specifics. In Part 2, we’ll iron out the details, and make sticking to the plan as foolproof as possible. Let’s dive in!
1. Examine where you’re at
The first step in organizing and simplifying your finances is to look at where you’re at. List all of your assets, and all of your liabilities. Make sure you get everything – all bank accounts, retirement accounts, investment accounts, education funds, credit cards, store cards, lines of credit, loans, etc. List each asset and it’s current value. For all debt, list the current balance, interest rate, and the minimum monthly payment. You want to have an accurate snapshot of where you’re at right now.
2. Look at where your money is going
This step can be incredibly eye-opening. I’m willing to bet that when you sit down and add it up you will be shocked by the amount of money you spend each month in at least one category. I keep a fairly close watch on our spending, and yet when I sit down and add it up, I’m astounded by the amount of money we spend each month on food.
Take a look through previous months’ expenses. You can do this the old-fashioned way, by sitting down with your bank statements and pen and paper or a spreadsheet, or use an app.
You want to go back far enough to give yourself an accurate idea of where your money is going. Ideally, you’d look at an entire year, to make sure all annual expenses are accounted for. Realistically, a few months is probably sufficient (after all, our goal is to make this process as simple as possible!).
Track your expenses by category, using categories that fit your life. Notice any surprises or room for improvement? Good – we’ll tackle that in Part 2.
3. Identify your priorities
This step is the most important, because it’s going to guide your actions going forward. You have an accurate idea of your current financial picture, and you know where your money is going each month. Now it’s time to identify where you want to go from here.
You likely have competing priorities for where you should be spending your money. You may have debt. You might want to build an emergency fund. Perhaps you’re saving for a down payment, or a car, or a wedding, or a trip to Europe. Of course, you need to save for retirement. Then there’s the kids’ educations, and if you’re lucky enough to have money leftover, investments outside of retirement.
I’m not going to tell you what your priorities should be, because even the financial experts can’t seem to agree on that. Some say you should prioritize debt repayment before you begin saving for retirement, as your rate of return is guaranteed. Others argue that you should be putting away a small amount while paying down debt, to take advantage of compounding interest and get yourself in the habit of saving. One of the few things they do agree on is that you need to fund your own retirement before worrying about your kids education. Your kids can borrow money for school, but you can’t borrow money for retirement.
You want to finish this step with a solid idea of what your priorities are. Your list of priorities might look something like this:
- increase loan payment to $ x per month, to pay off student loan by December 2019
- increase retirement savings to $ x per month or x % of income
- contribute $ x (per month/per year) to each of the kids’ education funds
You should have a rough idea of the amount available for each of your priorities based on the work you did in Step 2. Your goals should be realistic and attainable, but they can be ambitious too. You may have to make some changes to your spending habits in order to reach them.
By clearly identifying and prioritizing your financial goals, you will be in a much better position to meet them. Clearly defined financial goals enable you to allocate your money intentionally. Instead of trying to meet competing financial goals with money that might be leftover at the end of each month your priorities will become the starting point.
4. Are you protected?
This is another important piece of the financial puzzle that is often neglected – insurance and estate planning.
Gather your life and disability insurance documents. Do you have coverage through your employer? What about through your spouse’s employer? Do you have any additional insurance? What about mortgage insurance?
This is a good easy-to-read guide to insurance for Canadians. Consider whether your current insurance is adequate or whether any changes are required.
Do you have a will and incapacity planning documents (such as a power of attorney) in place? This is particularly important if you have kids. If you don’t, consider making an appointment with a lawyer to discuss your estate planning needs. If you do have a will, review it and consider whether any updates are required.
Once you’ve worked your way through these four steps, you should have a high-level view of where your finances are at and what your goals are. Next, we’ll be getting down to the nitty-gritty and simplifying and organizing the details. Click here for Part 2!
This post, like everything on this site, is for informational purposes only. This post does not constitute legal advice.