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The Right Way to Evaluate Your Finances to Build Greater Wealth

Updated: Aug 21

Dreaming of retiring early or having the freedom to make purchase decisions without stressing over budgets? Financial independence requires discipline and an understanding of monetary strategies. Luckily you don't have to be a genius to master the most successful money strategies.


Minimizing the fear of financial scarcity and reaching financial independence is an attainable goal. With the right approach and dedication, it is possible to create a stable financial foundation for yourself and your family.


This article will provide an overview of factors that will guide your financial decision-making and some key strategies that anyone at any age can employ to start building greater wealth.

First, we will look at your current financial situation and your goals. Then we will discuss broad market indicators and their impact on your financial tactics. Last, we evaluate when and what to do with your money over time as your wealth grows and markets shift. There are a variety of paths to success and financial stability. We hope this article provided valuable insights and tips you can implement today.


Personal Financial Situation

Before you take any steps to improve your finances, it is important to understand where you're starting from.


There are several questions you need to ask yourself. What's your income, credit score, cash on hand, debts, and expenses?


What are your short-term and long-term goals? How knowledgeable and comfortable do you feel with your financial knowledge?


Answering these questions will help you create a realistic budget that works for you.


It will also help you prioritize aspects of your finances that need attention and determine realistic short and long-term goals. This section will discuss each of these items and how they impact your broader financial picture.


Income

Skilling up, job hunting, getting a promotion, taking a second job, or starting a side hustle. These are all well-known ways to increase your income, but each has its own demand on your time, energy, and sometimes money, like the cost of a class or the tools required to start a business.


Rather than take drastic measures to bring in more money, it's more prudent to know the value of your skills and wage for positions like yours with other companies. Unless you notice a discrepancy of 25% or more, it's best to assume your income as a constant figure and prioritize maximizing the next three elements on our list.


Credit Score


Your credit score is a three-digit number ranging from 540 poor, 704 average to 800+ excellent. Credit scores are calculated from data in credit reports that lenders use to gauge how much of a risk an individual is as a borrower.


It helps lenders decide whether to approve loan requests and determine the interest rate on loans, credit cards, or other financial products. A good credit score can open up many opportunities for you, including being approved for a mortgage and getting better loan terms with favorable interest rates.


Monitoring your credit score has become easier than ever before. Almost every credit card or bank provides you with your FICO credit score for free each month online or on your paper statement. Once you know your credit score, you can decide if it's healthy as is or if you need to take steps to improve it.


Cash On Hand

How much money is in the bank? Do you have a checking account and a separate savings account? What about any investment accounts? Cash on hand is all the low-risk, liquid money you can access immediately.


Typically, the goal is to have three forms of cash on hand. A checking account to cover monthly expenses and credit cards, a savings account for large purchases like a new car or mortgage downpayment, and an investment account with stocks or other investment products that can easily be sold with little to no penalty.


A tried and true rule of thumb is accumulating and maintaining at least six months of living expenses in your checking account before building savings and investment portfolios.


Debts

The next step is evaluating both debts and expenses. Debts include credit card balances, student loans, auto loans, mortgages, etc. Determine your outstanding balances and the interest rate associated with each.


A traditional rule of thumb is to prioritize paying off debts with the highest interest rates first, as they will be more costly in the long run. Depending on how aggressively you wish to reduce your debts, you might also want to look into making extra payments to reduce the principal as much as possible. Another way you could reduce your payments is by researching options for refinancing at a lower interest rate.


Expenses

Expenses refer to any non-debt-related expenses like rent, utilities, food, vacations, and entertainment. Identifying areas where you can cut back on spending and creating a budget that works for your financial goals is important.


It also helps you prioritize your daily spending and identify areas where you can save more money. Several free apps are available that help you track expenses and monitor budgets in real-time, making it easier to understand exactly where your money is going. Taking the time to assess your financial situation will allow you to make more informed decisions regarding investing and planning for retirement.


 
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Structure Your Money and Allocate Accordingly


Checking, Emergency Fund, Nest Egg Savings, Investments funds. Each one of these accounts serves a purpose and will help you gain momentum to build diversified wealth quickly.


When establishing your bank accounts, make sure to shop around for any special offers exclusive to new customers. This is a great way to earn a few extra hundred dollars if the bank meets your other service requirements.


As mentioned earlier, keeping six months of living expenses in your emergency fund is a good rule of thumb. This money is intended to cover any unexpected changes in income.


It would be great if the account in which you keep your emergency fund could accrue some interest, but typical savings interest rates are pretty low. However, it's worth looking around, especially now in 2023, when interest rates are rising.


It's possible to earn 4% or more APY on your money with CIT Savings builder account right now. That's without any restrictions on getting to that money if needed. This is a particularly great account to have your nest egg funds.


Investments like CD's, Money Market Accounts, EFT's, Mutual Funds and Stocks are usually where we see the greatest return on our money, but each product comes with its own set of disadvantages. At the very minimum, anyone aged 18 to 35 should have a Roth IRA set up. Beyond that, it may be best until you have more discretionary funds to put toward riskier investments.


Always Invest in Yourself

After you've found the banks and investment products that suit you, it is time to allocate funds. Once a month or every pay period set up an automatic deposit from your checking to your savings and investment accounts. How much you allocate will depend on your income level and savings priorities. The money left over is what should be allocated toward living expenses and entertainment.


For anyone just getting started with savings and investing, maximizing the annual contribution to your Roth IRA, roughly $6,500 or $541.66 a month, is a must. It may sound like a lot of money when you're just starting but there is a tax benefit to committing to making the contributions. By maxing out your Roth IRA contribution, you will reduce your taxable income by $6,500. When paired with other allowable deductions, you may be able to bump yourself into a lower tax bracket entirely and save even more.


Once you have effectively funded your emergency savings threshold, you can focus on building your nest egg fund for a large purchase like a downpayment on a home, new car, or well-earned vacation. A third option at this point would be to allocate more funds toward additional investment accounts.

Closing

Designing your specific road map to financial security is like creating a map. Once you're aware and familiar with your particular financial situation, you can start prioritizing and developing a plan to reach your short and long-term goals.


Starting out, you may focus on paying down debt and lifting your credit score. Next, it might be reaching your emergency fund threshold so you can start working on maximizing your Roth IRA contributions.


Wherever you are on the financial map, make sure always to keep your bearings and have a clear idea of your destination. Building wealth is possible with careful planning and discipline.

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