Local Finance

Five Steps for a Smart Financial Start in 2012

If you pay attention to the news, you've seen governments around the world struggling to balance their budget and stay afloat. Ironically, the basics of balancing the income and expenses of a country are not that different from what you do with your own finances — and it can be just as much of a challenge. But a well-planned budget is an invaluable tool if you want to improve your financial position. Here are five things you can do now to make setting and reaching your 2012 financial goals a lot easier.

Step One: Organize your bills
Start by gathering all of your monthly, quarterly and annual financial obligations. Next, look back through your check register or your bank statements and collect data of all the products and activities that drain money from your wallet. Then list and categorize these expenses. Standard categories include food, clothing, general household, transportation, entertainment and so on. Saving for various things should be on the list too, since it takes money out of circulation, if only for the time being.

You'll be ahead of the game if your budget accounts for "unplanned" expenses such as a visit to the emergency room (now an especially costly adventure, thanks to high deductible medical plans) and car or home repairs. While you may not be able to name what financial burden will arise in the next 12 months, you can be sure something will cause you to part suddenly with some of your hard-earned money. If you have cash set aside for just those occasions, then you can pay the expense and avoid a crisis. If not, you risk defaulting on other obligations, damaging your credit and causing all too much stress in your life.

Step Two: Scrutinize the numbers
To create a realistic budget, examine and adjust the expenses you've identified above against your take-home pay. Highlight areas that are out of whack. One way to evaluate the numbers is to break down your budget categories by percentages. Ideally, your housing costs should not exceed 30%; transportation expenses should not exceed 20%; and food should fall under 15% of your total expenses. Look online for guidelines and see where your spending exceeds recommendations.

Step Three: Fix what you don't like
To change your financial reality, set realistic and stretch goals that will improve your bottom line. When you identify a target — for example, to trim $100 from your monthly food budget — break it down. What does this mean for you on a daily or weekly basis? Maybe you need to buy items in bulk, purchase off-brand, clip more coupons or employ some other cost-saving strategy. Be creative and rise to the challenge.

If it's clear you don't have sufficient money coming in each month, consider ways to up your income. Do you need to work overtime, go after that promotion, pursue a new career or get a second job? If you're stuck where you are, circle back to your spending habits. You may need to downsize your house or car, stop eating out or cut up your credit cards. You'll be pleasantly surprised by the ideas you generate when you take the time to examine the numbers with a clear head and a critical eye.

Step Four: Follow your budget
There's no point in making a budget if you don't intend to act on it. Keep your budget in front of you and document your expenses on a daily basis. Then adjust your spending as necessary. Monitoring your budget this way can make your money more manageable and give you the feeling of being in control.

Step Five: Check in with a financial advisor
There are books and websites that can teach you the finer points for preparing and following a budget. But there's nothing quite like being in the presence of someone who can share their financial knowledge. Consult a financial advisor for an honest assessment of your financial health and take advantage of insights and strategies that can help you improve your finances in 2012 and beyond.

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Brokerage, investment and financial advisor services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

© 2010 Ameriprise Financial, Inc. All rights reserved.
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