Each year, as the weather turns from dark winter to bright spring, people everywhere use this time to go through the clutter that has piled up over the last year. While this is traditionally a practice that applies to your home, taking time each year to assess and clean up your finances is a great way to stay aware and plan for your financial future.
Declutter and Organize
From your wallet to the corner on your desk where your most recent utility bills reside, the physical location of financial documents can quickly become cluttered and messy, making it even more overwhelming to manage.
Start by cleaning out your wallet. This simple task is instantly gratifying. Smooth out any wrinkles in dollar bills and organize them facing the same way, this will allow you to accurately know how much cash you are carrying around. Any receipts that may be crumpled up or forgotten can be removed to make up space. Apps like Expensify allow you to snap a picture of your receipt and use the photo to categorize your spending. Also, shred any expired credit cards, rewards cards and empty gift cards, so only the most relevant and useful ones remain in your wallet.
In addition to having an organized wallet, clean out and centralize all bills and other financial documents. Start a filing system for your personal finances, whether in a folder or electronically, it is important to keep all paperwork together. Having a system that works well for you will help ensure ease and accessibility when it’s time to pay bills.
After organizing your financial space, dispose of documents that you don’t need anymore. The Internal Revenue Services (IRS) website offers guidelines for how long you should hold on to certain financial documents. Generally, you should store most tax documents for three years before disposing of them. When disposing of any documents with personal information, such as account numbers or your social security number, be sure to use a shredder to prevent identity theft.
Assess Your Current State
To get a thorough understanding of what steps you need to take to improve your financial health, it’s important to assess your financial standing and current spending habits. To understand your overall financial health, order your credit report.
Your annual credit report, which can run over 100 pages, compiles your history of managing credit and paying off debt. It also includes information about how you pay your bills and any financial problems in your history. Checking over your report is also a great way to verify the information and dispute any inaccuracies. By being aware of any potential problems on your credit report, you will be prepared when banks, businesses, landlords and even potential employers review it to determine your creditworthiness and assess your trustworthiness.
Once you have an understanding of your overall financial health, review the way you handle your finances on a day-to-day basis. A great way to do this is to begin with an audit of your credit and debit statements, going through them month by month, for the entire year. Evaluate which services you are using and which ones you don’t need anymore or could switch to a cheaper option. From the magazine subscription you never read, to the five different streaming services you forgot you had, these small, monthly costs add up. By removing unnecessary bills you could easily free up some money in your budget.
Evaluate and Own Control of Your Credit Cards
While reviewing your credit report, take note of any outstanding credit card debt you have. Having debt payments on top of other bills and necessities can quickly turn into an added financial strain. Start by evaluating how much you owe and how much you are paying in interest. Debt calculators can show you how much you’ll pay and how long it will take if you are only making the minimum payments.
After you have a thorough understanding of what you owe, create a plan that shows how you are going to pay off your cards and where the extra money is going to come from. If you have debt on more than one credit card, there are a couple of plans to consider.
First, you could take the avalanche approach, where you focus on paying off the debt with the highest interest rate. Once this balance is eliminated, you move on to the next highest and so on. Another option is the snowball approach. With this concept, you start by tackling your smallest credit card debt balance first. Once debt is paid, move to the next smallest until everything is paid off. Finally, consider consolidating your debts for one payment with a lower interest rate. Instead of having to worry about multiple bill payments each month, you’ll have one lump sum to pay.
If your credit card debt is not an issue, you may still want to review your credit cards to make sure you are benefitting as much as possible. Cashback cards are a great, easy way to earn money on any purchase. You can also look for cards that offer higher cashback for the bigger line items in your budget, like groceries, gas or dining out. Consider closing any cards with a steep annual fee that don’t provide benefit. While it’s likely you will see a short-term drop in your credit score for closing a card, assuming you have other lines of credit, it’ll quickly bounce back.
Dust Off Your Budget and Update Your Bills
While taking a look at your overall spending and financial performance for the year is important, so is evaluating your monthly budget. Your monthly spending varies as should your budget in order to ensure you are on track to reach your financial goals. Having a solid budget and plan can eliminate any unnecessary financial stress and help you evaluate spending across essential and nonessential purchases. If you are unsure of how to begin, check out a budget calculator.
Another great way to get a handle on your monthly expenses is to set up bill reminders or automatic payments. Make a checklist of all bills you are expecting and make a note of all payment dates. Most bills offer automatic payment options so you don’t have to worry about missing a payment due date. If you would rather handle paying your bills manually, set reminders in your calendar to remind yourself of any upcoming bill payments.
If, after looking over your bills and their due dates, you find that one payday seems to have more of a financial obligation than the other, try spacing out bill payments. You could do this simply by deciding to pay some bills at different times in the month, before their due dates, or by reaching out to credit card, utility and other billing companies to change your billing cycle. Having enough money between paydays is important because it will help prevent you from needing to turn to credit cards, and rack up debt, until your next paycheck.
Plan Ahead
Once you have taken a full audit of your spending history, financial standing and your daily spending habits, you’ll be able to start saving money. Saving money provides peace of mind in case something happens in the future and can help you reach goals like buying a house or retiring early.
Start by simply putting a set amount of money away each paycheck and stay consistent. Over time, you’ll see your account grow. Make a plan for how much you want to put away and a timeline to reach your goal. While this timeline can be adjusted as your life plan changes, having a plan will make it easier to navigate in the future.
While managing your finances may seem intimidating, it’s best to understand how you are handling your money. Taking the time to evaluate your financial health each year and clean out any clutter will clear the path as you grow and become more financially stable in your future.
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