Create a Budget

The first step towards managing your finances is creating a budget. A budget helps you understand your income, expenses, and savings. It allows you to track where your money is going and identify areas where you can cut costs. When creating a budget, make sure to include all your sources of income and list out all your expenses, including fixed and variable costs. Once you have a budget in place, stick to it and make adjustments as needed.

Set Financial Goals

Setting realistic financial goals is crucial for effectively managing your finances. It provides a clear direction and motivates you to save and invest wisely. Your financial goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Whether it’s saving for a down payment on a house, paying off debt, or building an emergency fund, setting goals can help you stay focused and make better financial decisions.

Track Your Expenses

It’s essential to keep track of your expenses regularly. Many people don’t realize how small purchases like eating out or buying coffee every day can add up over time. By tracking your expenses, you can identify where you’re overspending and make necessary adjustments to stay within your budget. There are various apps and tools available that can help you track your expenses effortlessly.

Prioritize Saving

Saving money is a crucial aspect of managing finances, yet many people struggle to save regularly. One of the best practices for saving is to prioritize it, just like any other expense. You can automate your savings by setting up automatic transfers from your checking account to a savings account. This ensures that you save a specific amount each month without fail.

Invest Wisely

Investing is an excellent way to grow your money and achieve long-term financial goals. However, it’s essential to invest wisely and do thorough research before making any investment decisions. Consider diversifying your investments and seeking professional advice to ensure your investments align with your financial goals and risk tolerance.

Stay on Top of Your Debt

Debt can be a significant obstacle in managing finances. It’s crucial to pay off high-interest debts as soon as possible and avoid taking on more debt than you can handle. Consolidating your debt or negotiating for lower interest rates can also help in managing your debt effectively.

Review and Adjust Regularly

It’s essential to review your financial plan regularly and make necessary adjustments. Life circumstances can change, and so can your financial goals. Make sure to adjust your budget, savings, and investments as needed to stay on track towards achieving your goals.

Managing finances is a continuous process that requires discipline, patience, and consistent efforts. By following these best practices, you can effectively manage your finances and work towards a financially secure future. Remember to start small, stay focused, and be open to making necessary adjustments along the way. So, keeping these practices in mind will help you achieve financial stability and success.

About Matt

Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals. 

Matt’s Corner

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By Matt Ward, CFP^®, CRPC^®

Planning ahead is crucial when it comes to investing. When investing, you want to ask questions like, what’s my time horizon, what is my risk tolerance level, how much do I need to accumulate, am I on track, what are my goals? The list can continue, these are just some ideas to begin with. Assessing your risk tolerance before a stock market crash is crucial. Don’t wait until the market crashes to think about your risk tolerance. That’s how lasting mistakes are made.

Questions To Ask

Here are some things to ask yourself when you first contemplate your risk tolerance. Before investing, it’s a good idea to make sure that you’ve met some of the financial essentials, such as building an emergency fund and paid off high-interest credit card debt. After you’ve met the financial essentials, all of the following questions will guide you to determine the allocation for your portfolio and the amount of risk that you need to take to achieve your goals.

What’s my time horizon and what’s my investment objective?

When it comes to investing, you should ask yourself 2 initial questions, what is my investment objective for this, and how long do I anticipate holding this investment? For example, is this money for your retirement? If so, you will want to look at your time horizon until retirement and how much you need to save to reach your goal. Another example, Do you want to take income from the investments at a future date? Or will you need the funds for additional educational expenses or perhaps to buy a home in the future? Depending on how will you use the funds and when your expected time horizon is will determine the overall foundation to your portfolio.

How much money do I need to live on?

The other initial question that you also need to ask yourself is how much money do you need to live on? What are your monthly expenses and how much are you able to pay from your salary? If your expenses are greater than your income, then you will need to find ways to cut costs or increase your income. For example, you can look at your spending habits and see if you are spending too much on unessential things.

Do I have any sort of insurance that may protect me such as disability or life insurance?

Depending on your age and financial debt-to-net worth, you should also have some form of insurance. These can be very valuable when you meet some kind of catastrophic life event such as a serious illness or job loss. It is always smart to ensure that you are protected financially, so please make sure you are covered. You should also check that your policy has sufficient coverage which may be 50% to 90% of your income depending on the type of insurance.

What are my short-term and long-term goals?

You should have a clear idea of what you want to achieve from your investment portfolio. The goals you set should be specific and measurable so that you can monitor your progress along the way and ensure you are investing in the right asset class. Also, make sure that your goals are realistic and can be achieved within the next one to three years. For example, you might want to purchase a car in the next one year or continue to save for the down payment on your dream house in the next 5. Or maybe you want to travel to Greece. Either way, defining a goal comes down to being specific and measurable.

How much money do I need to reach my goals and what are my current savings?

Once you have set your goals, you need to work out how much money you will need to achieve them. It is important to know how much money you will require to meet your short-term and long-term goals. Remember that in the short term, you may need to make regular deposits into your savings account or investment portfolio. You should also consider the potential returns of the investment and whether you can maintain your investments once you reach your goals. For example, if you want to buy a car in the next one year, do you know how much you will need? If your short-term goal is to travel, how much do you need to save? Looking at your short-term and long-term goals, how much money do you need to accumulate and how long will it take?

You also need to know how much cash you have available to allocate to your investments. This may be a good time to use a free cash flow spreadsheet to track the money coming into and going out of your bank account. At least, you will know what your monthly income and expenses will be.

How much risk do I need to take to reach my goals?

Once you know how much money you need to meet your goals and how much cash you have in the bank, then you should assess how much risk you are willing to take to reach your goals. You may have a goal of having $3,000,000 in the bank after fifteen years. How much risk are you willing to take for that to happen?

Once you have decided on the goals and how much money you will need, it is time to consider the potential returns you need to reach your goals, as well as the time frame in which you need to accumulate the money. You should ask yourself, “How much risk can I take to reach my goals in the time I have?” Most people would prefer to take a very safe investment such as a savings account or corporate bonds and avoid the high risk of the stock market. While it is important to set long-term goals, you also need to be aware of how much risk you need to take. Investing in volatile markets can be risky, especially if you are an inexperienced investor or if you will need to take the money out in a short period of time. It is important to have a balanced portfolio to mitigate risk. If you go into the stock market expecting to make money, you have to be prepared to lose money. 

What will I do if I lose money?

Once you have decided how much risk you are willing to take, you need to consider what will happen if the market does not work out as planned. This could be especially true for young investors or those who are new to investing. If you are willing to take a lot of risks, then you should also be willing to lose a great deal of money if your investments turn south. One of the worst mistakes that people make is not having a plan for what to do if they lose money. If you have been a risk-taker, or have had some big losses in the past, then you need to seriously consider this question. Microsoft, a great company, was down for 15 years from 2000-2015. If you retired in 2000 with the expectation that holding Microsoft, which was growing enormously would pay off, you would have been wrong and possibly spent your money down. Mutual funds were up over 8% during that same time period.

What will I do if I make a lot of money?

This is the flip side of the previous question. If you are someone who makes a good living and it is possible that you could make a lot of money with your investments, then you should also consider what you will do if you make a lot of money. This is a much more pleasant thought to have, but it is still a good one to consider. If you do make a lot of money on an investment, will you take it out and spend it or will you keep it in cash or reinvest to keep it growing? How much money can you reasonably save or invest? Can you afford to spend the rest in order to meet your goals? These are questions you should consider.

What is my risk tolerance for my investments?

Your risk tolerance is a critical factor in determining how you can invest. Risk tolerance is your ability to handle volatile investments without getting nervous and making rash decisions. This can be tough to answer, but it is very important. If your risk tolerance is low, you should consider investing in safer investments that have lower potential returns. If your risk tolerance is high, you are more likely to have a higher potential return, but you have to be able to handle the potential losses that can accompany those gains along the way.

Looking at the numbers

Looking at the numbers, or looking at what your risk tolerance level is, can help you determine which investment portfolio is best for you. Often times reviewing the length of time a stock market crash lasts, or how your investments behaved during that time can help show that long-term investing works. Invest in what you know, and take some time to research what you want to invest in so that you make educated decisions. If the stock market is crashing and your investments are plummeting, don’t panic, use your knowledge and reason to assess your risk tolerance and make the best decision. If you are in a good, long-term investment that is going down because the stock market is going down, then you likely have a scenario where staying the course will work for you. For example, the average stock market crash can last for 6 months to 2 years.

Putting it all into action

Each of these questions on risk tolerance will have a unique answer, depending on the individual’s personal values, financial situation, and desired outcome. If an individual has over-saved or has enough other income for retirement, then their investment portfolio could be viewed from both lenses, conservative or moderately aggressive. Maybe this individual wants the money to go to a family member 1 or 2 generations down. Then they could afford to take more risk, because the time horizon is maybe 20 years or more. However, the individual may want to spend some or all of their portfolio, be uncomfortable with market volatility, and decide they want a conservative portfolio. That’s appropriate too. It depends on various circumstances. 

Contact us for a complimentary risk assessment

If you’ve been wondering about the recent market volatility and want an honest opinion on your portfolio and risk level, then go to our website at www.newcenturyinvestments.com/contact-us or schedule an appointment online. New Century Investments is an independent investment advisory and financial planning firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. 

CLICK HERE TO COMPLETE OUR RISK TOLERANCE FORM ONLINE

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A. Now. Nobody can tell you when the stock market will improve, but when it does, you will have missed all of the gains, and you will be buying high.

Instead, if your risk tolerance allows for it, buying stocks during a recession can add much greater wealth. Rather than selling your stocks after they are 30% down (locking in a 30% loss!), buying stocks during this time, while difficult, actually means you are buying low.

Now, with stock investing, you have to be patient. Corrections can take a couple of years to work themselves out. However, if you look back through each market crash, we always believe that there is no way we can get out, but when we do, instead we ask ourselves, “how did we ever react so poorly?”

The point is that assuming you have the risk tolerance to invest in stocks, you are better off investing and leaving it in the market. You are worse off when you try to wait and time the market. See Fidelity’s article on missing days in the market, and how missing the best 5 days,. to missing the best 50 days impacts your overall return.

Q2. SHOULD I REFINANCE MY STUDENT LOANS?

A. Hmmm…Maybe.

Refinancing your student loans could potentially save you thousands of dollars! But is a student loan refinance the right move for you right now? That’s actually a trickier question than you’d think.

Refinancing only makes sense if you can get a lower interest rate now than when you first accepted the loans. To get a better interest rate, you need to have better credit and higher income now than you did back them. You also need to know what the national interest rates have been doing.

Your interest rates will depend on your credit and income, but it would be exceptionally difficult to get a better rate from a refinance if the current available rates are higher than the rates on your existing loans.

You also need to consider any federal protection you might accidentally waive by refinancing.

In some cases, there are government programs for student loan forgiveness (like for some teachers and public servants). This isn’t usually the case, but it is something you should look into to make sure you’re not waiving rights that could benefit you more than the refinance.

Q3. SHOULD I REFINANCE MY MORTGAGE NOW?

A. Another…Maybe.

The time to refinance is when you want to make a less-than-desirable mortgage better with a new interest rate.

Do a break-even analysis to see if refinancing is something worth doing in your situation. A break-even analysis means running the numbers on whether you’ll be in your home long enough to benefit from the savings that a lower interest rate and payment could bring.

Then you should work out how long it’ll take you to make up the closing costs you’ll have to pay for your refinanced mortgage. Yes, there will be closing costs—we’ll get to them soon!

In general, refinancing makes the most sense if you fall into one of these categories:

1. You Have An Adjustable Rate Mortgage (ARM)
With your ARM having interest rates that are adjustable, you might start off with the first few years at a fixed rate. But after that, the rate can adjust based on multiple factors like the mortgage market, LIBOR market index, and the rate at which banks themselves lend each other money. Bottom line is ARMs transfer the risk of rising interest rates to you—the homeowner.

So, in the long run, an ARM can cost you an arm and a leg! (Yes, we went there.) That’s when refinancing into a fixed-rate mortgage could be a good financial move. It’s worth it to avoid the risk of your payments going up when the rate adjusts.

2. The Length Of Your Mortgage Is Over 15 Years
If your original mortgage is a 30-year term (or more), then refinancing is a good way to get to the ultimate goal of locking in a 15-year fixed-rate mortgage—ideally with a new payment that’s no more than 25% of your take-home pay.

But if your interest rate is low enough on a 30-year fixed-rate mortgage to compete with the 15-year rates out there, make sure refinancing just to get the shorter term isn’t going to cost you more. You’re better off making extra payments (and are committed to making them) on your 30-year mortgage every month to shorten your payment schedule.

Simply put, you want to own your home as soon as possible instead of your home-owning you! Use our mortgage payoff calculator to run your numbers and see what your monthly payment would be on a 15-year loan.

3. You Have a High-Interest Rate Loan
If your mortgage has a higher interest rate compared to ones in the current market, then refinancing could be a smart financial move if it lowers your interest rate or shortens your payment schedule.

If you can find a loan that offers a reduction of 1–2% in its interest rate, you should consider it. Remember to factor in your break-even analysis too! Refinance only if you’re planning to stay in your home for a long time because it will give you time to make up those closing costs.

Q4. SHOULD I BUY OR LEASE A CAR?

A. Buy!

Leasing is tempting because the monthly payments are usually lower, and you usually don’t need as large a down payment with a lease as with a purchase.

But there are a few big problems with leasing:

1. IF YOU DRIVE A LOT, IT’LL COST YOU.

Lease agreements allow you to drive a certain number of miles per year (often 10,000 or 15,000 depending on the lease agreement). If you go over that number, you pay a small fee for every additional mile. That fee is somewhere between 10 and 20 cents, but again, it’s for every mile over your lease limit. And it adds up quick!

2. IF YOU DAMAGE THE CAR, IT’LL COST YOU.

If you park on the street or in a tight-space lot where your car is prone to mystery dings, you’ll have to pay for that damage when you lease expires. Have kids or pets? If they make a mess of the interior, you’ll also be paying for that.

3. IF YOU TERMINATE THE LEASE EARLY, IT’LL COST YOU.

If you need to terminate the lease before it expires for any reason, you can expect to be heavily penalized. The fee could be as much as 6 months’ worth of lease payments. Yikes!

4. AT THE END OF THE LEASE, YOU HAVE NOTHING.

Here’s the real reason we recommend buying over leasing: when you buy, you own the car free and clear once all your payments have been made. That gives you options. You can continue driving it for years payment-free! Or you can sell it to provide the down payment for your next vehicle.

When you lease, on the other hand, you have nothing at the end of your lease. You would need to start the process all over again, coming up with a fresh down payment for a new lease.

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