As you mature, life changes. Your priorities and your goals change. As you approach retirement age, you may consider a move to part-time work, or quitting paid work altogether. You may want to start enjoying the enjoyable things in life more, like travel or taking up a hobby. You may want to spend more time with your children and grandchildren (and/or more money on them). Or, you may start considering what kind of legacy you are going to build and leave behind.
No matter what your later life plans are, the key to success is getting your financial house in order so that you can meet these changing goals.
Here are four key steps to take to ensure that you are cleaning up your financial life to make room for what matters now and in your future:
1. Set goals.
Cleaning up your finances starts with setting goals. Like a road trip, you need a destination and a map (or a GPS), or you will end up wandering and getting lost. Whether your goal is to travel more or spend more time with the grandchildren, you need to set SMART goals to better afford a new direction your life may take.
Goals should be:
Specific. Be clear on what you want to accomplish and how this will put you in a better financial situation (Example: pay off the balance on your credit card)
Measurable. Express your goals in clear numbers so you can measure your success (Example: Pay off $1,200 of your credit card balance)
Achievable. Take achievable steps to meet your goal (Pay off your $1,200 credit card balance by saving $100 a month)
Realistic. Your goals have to be realistic or you will be disappointed and you may give up. (Pay off your $1,200 credit card balance by saving $100 a month by cutting one night out a week for dinner and daily visits to the local coffee shop)
Time-bound. Your goals have to have a timeframe in order to encourage you to be successful. (Pay off your $1,200 credit card balance in 12 months by saving $100 a month by cutting out one night out for dinner and daily visits to the local coffee shop)
2. Track income and expenses
It’s important for you to know what your money flow is. What is coming in (employment income, government benefits, pensions etc.) and what is going out (fixed and variable expenses). There are lots of online resources that can help you keep track of your money ins and outs so that you have a better idea of what exactly you are spending your money on. Or, you can simply use an excel spreadsheet and do it yourself. Either way it’s important to do some tracking for at least four months to see the ebb and flow of your funds.
3. Set a budget
Once you track your money flow for four months, you will have a much better idea of where you spend your money and where you can make some changes. Do you go out for dinner a few times a week? Can you cut that out once a week to save money to pay off your credit card – freeing up money for other purposes? Fixed expenses are ones that are set and don’t change much, like a car or mortgage payment, rent, property taxes etc. Variable expenses change depending on your behaviour – like buying new clothes, going out for dinner, grocery shopping. Once you know what you are spending your money on you can set a budget. For example, move $100 a month into savings by reducing your dining out budget so you can pay off your credit card bill.
4. Save automatically.
No matter what your budget looks like, you should pay yourself first. Always have a column that is for savings. And, arrange with your bank to have the money come right out of your day-to-day banking account and moved into savings account. Out of sight, out of mind.
5. Monitor.
At least every six months, evaluate your finances to see if you are on track to meet your SMART goals. If not, see where you can adjust some areas to get back on track.
