6 Key Areas of Personal Finance Success

Whether you are deep into your career, nearing retirement, or already enjoying your golden years, there are some personal finance topics that are always relevant. Some aspects of your finances take the back seat, or are at the forefront depending on what phase of life you are in. When you are just starting out your career, you might focus on budgeting and saving. When you get ready to purchase your first home, budget and debt (how much of a mortgage can you afford) take priority. And as you approach retirement, thinking about capitalizing on taxes and structuring retirement income become the main focus.¹

Let’s discuss how each area impacts your finances.

1. Budgeting

Knowing how much you spend and where your money goes is essential to creating and maintaining a budget. Budgets aren’t just for the young starting out on their own. They are great for any age whether deep into your career or especially when you are getting ready to retire.

A great starting point for budgeting can be a basic spreadsheet where you track income and expenses or one of the many free or low-cost apps for household budgeting. Your budget should include the following²:

• Income
• Essential expenses (housing including utilities, food, transportation)
• Any debt (credit card, loans)
• Money earmarked for savings (emergency savings, home purchase, vacation, etc.)
• Non-essential items. This is what is left after you’ve “paid for the other categories in your budget.

2. Saving

Savings accounts are used for a variety of reasons – to have an emergency cushion, or to save for a vacation or large purchase. For some people, saving is the last item that gets funded in their monthly budget. But at every stage, it should be considered as a top item in your budget, just behind essential expenses and debt payments.

Simple tricks like having multiple savings accounts³ for specific items and automatic deposit into those accounts makes it easier to save. You can put away a dollar amount or a percentage of each paycheck automatically into savings accounts.

The failure of several banks this past spring brought light to the concern about FDIC insurance limits. If you are a higher net worth individual, spreading your savings across multiple accounts or multiple banks can also help ensure all your deposits are protected under those FDIC insurance limits.³

In addition, bank CDs have finally become a little more attractive after years of near zero interest rates. If you have money in savings that is for a longer-term project or goal, banks may provide CD rates and terms that make sense for your specific needs.

3. Debt

At some point, or many, everyone has some debt they accumulate whether it is for the purchase of a home or vehicle, student debt, or credit cards. And for some people, they start life accumulating more debt than they anticipated by signing up for credit cards in hopes of building credit or purchasing a home that is more than they can really afford. Or there are circumstances or a catastrophic life event (loss of a job, family member, divorce, etc.) that cause debt to accumulate quicker. Regardless of how you get the debt or why, having a plan for how to pay for it becomes critical.

Owning a home is a great way to create potential investment even though you start off with a substantial amount of debt. It can be a great asset that you can leave to family, and a home that is paid off is a way to lower expenses in retirement. If and when lower interest rate environments return in the future, refinancing to a lower rate or shorter loan terms can be a good idea to help pay off that large debt faster and create a positive on the asset balance sheet.

For credit cards, paying off credit card balances every month is good practice. It is not always achievable if you’ve had an unexpected expense and had to pay with credit. But just making the minimum payment isn’t going to help you pay off the principal balance very quickly. Look at your monthly budget and make a plan to pay off those credit card balances by setting aside money in the budget.⁴

It can be overwhelming if there is a lot of debt or more than you realized when you put it all on paper. Ultimately, chip away at the debt you owe and work to limit accumulating more as you’re paying off existing debts.

4. Taxes

One of the greatest expenses most of us will have in our lifetime is taxes. From income taxes to property taxes, sales tax and everything in between, there are dozens of taxes we pay. One way to reduce the amount of taxes you pay is to find ways to pay less taxes on the money you make. Many employers offer benefits that allow you to receive or set aside untaxed money for things like retirement, health care, education, transportation, and childcare.⁵

A second way to potentially reduce your taxes is to defer them—meaning pay your taxes later—by contributing to a traditional IRA or 401(k). With these types of retirement accounts, you don’t have to pay taxes until you withdraw your money during retirement, when your tax rate may be lower.

When you reach retirement, tax planning can help you figure out how to convert income from those tax deferred accounts at a lower tax bracket (especially if you have stopped earning income at a job) or taking advantage of long-term capital gains tax treatment. Tax planning is a fundamental part of a comprehensive financial plan.

5. Insurance

There is insurance for just about everything – car, home, medical, dental, short-term disability, long-term care, life, pet, umbrella, jewelry, and sporting equipment.⁶ You name it, and it can probably be insured. Depending on where you are in your financial and life journey, your insurance needs might be different. Insurance is typically for things that are both catastrophic and unexpected. Over time, our insurance needs change, especially as we have a family, and then as we become empty nesters. Be sure to evaluate all your insurance needs on an ongoing basis.

6. Retirement

And we would be remiss not to discuss retirement savings. Your dreams for retirement might include sipping tea on the front porch in a rocking chair, spending time with family and friends, or traveling the globe.

Take advantage of opportunities to save for retirement at every age. There are a myriad of ways to save for retirement including employer sponsored plans (401k, 403b, Thrift Savings, etc.), IRAs, Simple IRAs or SEP for those that are self-employed, and so much more. The median age workers begin saving for retirement is 27.⁷ If you begin your career at 22 or 23, that is several years of retirement savings you could potentially miss out on. And if your employer provides matching funds for retirement accounts, you might be leaving “free” money on the table if you aren’t participating in the company plan or aren’t taking advantage of the full percentage the employer matches.