As 2015 draws to a close, it’s time to figure out if you’re in your best possible financial shape. While performing a self-audit can seem a daunting task, we’ve created a simple way to get started. Below, we ask three questions about where you are now compared to where you were a year ago. Your answers should help you understand if you made the right choices in 2015. After that, we’ve got three more questions to help guide your 2016.
2015: Do you have less debt than a year ago?
2016: Could you pay off your credit cards this year if you had to do so?
December can be a rough month for our credit card statements, so you might already be dreading the daily arrival of the mail just as much as your kids eagerly anticipate it. But debt is part of life, and the kids can’t unwrap a copy of the family credit score, so you grit your teeth and swipe. Don’t let the fact that you have credit card debt be a source of guilt or shame, and definitely don’t assume that burden even if you are carrying some credit card debt into 2016. Instead, take a look at where you are now, then compare it to where you were a year ago. Have you reduced your debt in 2015? If not, why not? Maybe you had an emergency you needed to cover. Maybe this was the year you installed the home theater you’ve been wanting. The important thing to ask yourself is whether you’ve reduced your credit card debt, and if not, is what you bought with that debt worth it to you now?
With other forms of debt, the questions can be more complicated. While you’d like to have a smaller outstanding balance on your mortgage or car note, reducing the amount you owe might not be the best idea. After all, mortgage rates are incredibly low right now, so turning your credit card debt into a home equity loan might be a smart move. You might have a new debt balance that you didn’t have at this time last year if you bought a new car, upgraded the kitchen, or went back to school.
2015: Do you have more money saved than you did a year ago?
2016: What would happen if you didn’t get paid next month?
Again, the best way to determine your financial position today is to compare it to where you were a year ago, and savings is important. If you have more saved this year than you did last year, it means your budget is working and you’re headed in the right direction. If you have less saved than you did a year ago, try to determine why that is. Did you have to dip into savings to pay the down payment on a long-term purchase? Did you have to cover a gap in employment? Just like with debt, figure out how much less you saved, compare it to what you bought, and determine whether or not the purchase was worth it.
Just like with debt, however, simply looking at the bottom line probably isn’t enough to tell you if you’re making the right moves. Having an emergency fund that represents six months of your income is incredibly important for easing your family’s mind and protecting them if something unfortunate happens. But having an emergency fund much larger than that isn’t necessarily better. You don’t want to be a dragon, sleeping on a hoard of gold simply because it’s pretty. Instead, you could put that savings to work for you in the form of a retirement fund, college savings or even the down payment on a second home to use as a rental property.
2015: Is your credit score higher than it was a year ago?
2016: What will you do this year to improve your life?
These questions might not look like they go together, but they do. This is the section where you take a big-picture look at your financial world. If your credit score is improving, then you’re probably making the right choices overall. If not, it would be good to find out why that is the case. Make sure all of the charges on your credit report are accurate, work to tackle your debt, and try to bring in more income. If you work to improve your credit score, you’ll almost certainly have to improve your overall financial standing.
But your credit score isn’t your life. What are you going to do this year? Are you going to take a trip to Europe? Get started in a new career? Buy a vacation home on the lake? Learn a new language? What is it you’d like to actually do?
Once you know what you want to do this year, figure out what it’ll take to make it happen. Can you save for it? Will you need a loan? Is your credit score too low for a second mortgage? Whatever is in your way, make that your next financial goal. Get your savings and debt into good positions, and then try to live your life. After all, that’s what the money is for.
For more information about credit scores and how to improve them, click here. Or, give us a call and schedule a “deep dive” into your own personal credit report. We can help you understand what’s on your credit report and how you can improve it (if necessary).