October is National Planning Month! It's a perfect time to think about your finances before the holiday rush.
Whether you tackle the challenge of performing a complete financial plan or just certain parts, October is an excellent time to begin. Here are some areas you can address. Consider working with a financial advisor, preferably a fiduciary, and planner for more elaborate planning.
Create a Budget
The first step in understanding and taking control of your finances is creating a budget and sticking to it. Everyone's budget will look slightly different, but the 50/30/20 rule is an excellent place to start.1
The 50/30/20 rule states that 50% of your budget should go to essentials like rent, food, and utilities; 30% should go to wants, such as entertainment or travel; and 20% should go to savings and paying off debt.
There are also a lot of helpful apps to help you stick to your budget, such as Mint, You Need a Budget (YNAB), and Honeydue for budgeting with a partner.
Be Smart With Your Debt
Not all debt is created equal, meaning debt isn't always a "bad" thing if you are smart with it. For example, taking on a car loan and making all the payments on time can help you afford a car if you don't have enough money to pay cash and can help you build up your credit score. But be wary of high-interest debt because that can get you into problems.
Understand Interest Rates
Regarding interest rates, it's essential to understand how they impact your finances and debt. Depending on the current market and your credit score, mortgage rates generally hover between 3% and 6%, though as we're currently experiencing, they can be much higher. In contrast, the average credit card interest rate as of March 2022 was nearly 20%. With that high of a rate, you can see how getting into credit card debt can quickly pile up and make it hard to take control of your finances.2,3
There's also a fundamental difference between financing an asset like a home, which can appreciate, and a liability like credit card debt, which only adds to your costs, often siphoning valuable dollars that could go toward saving for retirement.
In addition, understanding interest rates can help you make strategic financial planning decisions. Rather than paying all cash for an asset (e.g., a car or a house), if you can get a low-interest loan, you can consider investing the money you would have spent on an investment vehicle that could generate a higher return than you are paying in interest.
For example, if you have $10,000, you might consider putting $2,000 toward a car and financing the rest at a 2% interest rate while investing the other $8,000 in the S&P 500, which has delivered a compound average annual growth rate of 10.7% per year over the past 30 years.4
Get Covered by Insurance
Lastly, another thing you can do to celebrate Financial Planning Month is to ensure that you are adequately covered with the right insurance. Life insurance is a must-have if you have dependents or people relying on your income. Life insurance can ensure that the people you love will be cared for if something happens to you. More often than not, term life insurance can be an affordable way to provide for loved ones in the event of your premature death. In addition, you should consider renters or homeowners insurance, car insurance, disability insurance, and health insurance.
You can do many things to take control of your finances for National Financial Planning Month, and these are just a few. Kick off the holiday season by strengthening your financial fitness.
This content is developed from sources believed to provide accurate information and provided by Twenty Over Ten and Linden Wealth Managemen LLC. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your situation. The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.