When you create your financial strategy, it’s important to know how much money you have access to and how, if possible, you can increase that amount. This money is your cash flow and can help you accomplish many things, including reducing or eliminating debt and increasing your savings.
Here are some strategies you can use to increase your cash flow:
- Create a budget for your monthly expenses and needs – and stick to it
- Spend less than you earn
- Raise deductibles on your auto, homeowners and other insurance policies, which can help to lower premium
- Look for ways to earn higher interest on money that is currently in low-interest savings accounts
- Start a second career or a part-time business to earn additional income
A big part of building a sound financial strategy is life insurance. Life insurance helps protect your loved ones in the event of your death. It not only helps replace lost income, but it can also help preserve your family’s assets.
A basic rule of thumb is to have enough life insurance to provide approximately 10 times your annual family income. For example, if your current household income is $50,000, you may want to consider having $500,000 in life insurance protection.
One of the biggest obstacles to a sound financial future is consumer debt. It’s important to have a strategy that can help reduce and eliminate debt.
Here are some approaches you can take:
- Pay more than the minimum, as much as possible within your budget, on the credit card/ loan with the highest interest rate. Once you pay off that credit card/loan, begin paying off the next highest interest rate credit card/loan.
- Consider transferring credit card/loan balances to a card with a low interest rate that is offering a promotional, no fee transfer option. Don’t hesitate to call the issuers of all your credit cards to ask for a lower rate.
- Quit charging. Put your credit cards away so you don’t consider charging on them while you’re paying down your debt or after it’s paid off.
No matter how much you plan in life, the unexpected happens. To prepare for life’s little “disasters,” set up an emergency fund to help pay for any resulting expenses. A basic rule of thumb for determining how much you should set aside is three- to six-months of your total expenses.
Don’t think you need an emergency fund? Consider these potential expenses and scenarios:
- Major car repairs
- Major home repairs
- Major appliance repairs or replacement
- Loss of a job
- Serious illness or hospitalization
- Extended elder care or long-term care
Having an extra source of funds gives your family peace of mind during a stressful time.
When developing your financial strategy, it’s important to ensure you put a long-term asset accumulation program in place that strives to outpace inflation and reduce taxation. When determining the best program for you, ask yourself the following questions:
- How long do I expect live?
- How much it will cost to live comfortably during those years?
There are key financial concepts that can help you as address these questions. For example, the Rule of 72 is an estimation of the time it takes for money to double. Additionally, understanding the cost of waiting gives you an idea of the financial advantage of starting to save today.
An essential part of your financial strategy is ensuring that the wealth you accumulated over the years is not impacted by taxes or other unintended consequences. A well-designed strategy can:
- Eliminate probate costs
- Help manage estate taxes
- Ensure your legacy reaches your intended heirs, including any life insurance coverage, pensions and annuities
- Provide an opportunity to set up medical and financial powers of attorney so that, should you become incapacitated, someone can take care of your finances, make medical decisions for you and more.
Please consult with your attorney and/or tax advisor for guidance regarding your specific circumstances.