Master Your Money: Best Practices to Secure Your Financial Independence

By Rachel Gil, Director of Family Governance, and Cayla Surovsky, Associate, Family Governance

In the U.S., only 55-75% of adults are considered financially literate, according to the Global Financial Literacy Excellence Center*. If you’ve reached adulthood without mastering personal finance, you’re not alone. There is no need to feel embarrassed or ashamed if you need to brush up your knowledge of financial concepts. Below are some specific actions to help you take ownership of your finances and align your financial behaviors with the life you want to lead.

1. Understand how you relate to and use money. Personal finance is taking what you know about money and applying it to your own lifestyle and behaviors. In order for your knowledge of finances to impact your behaviors, you have to – as the name implies – make it personal.
   1. Consider your personal style. Are you a spender? Saver? Giver? Do you know how much money you have in your accounts? Where your money comes from? Where it goes? Or do you avoid thinking about it all?
   2. Consider your relationship with money. Our beliefs and attitude towards money greatly shape how we manage it. What were some of the messages you heard about money growing up that have stuck with you? Were they around scarcity, abundance, freedom, apathy, etc.? How do you feel about it now?
   3. How does your personal style and relationship with money impact your ability to spend or save for the future? Might a small change to your mindset affect how you manage your finances?
       
2. Set your goals. Think about the life you want to live in the next one, five, or 10 years. What does that life look like? What resources, financial or otherwise, will you need to achieve that life? Remember that making a plan for your finances requires identifying what you truly want.
    
3. Put together a personal net worth statement. Our finances often become more complex as we get older, with a number of accounts across different institutions. Knowing where your assets and/or liabilities are held, and the values of each, can provide a snapshot of your financial wellbeing as it stands today. Consider filling out a personal net worth worksheet to document your accounts.
    
4. Make the invisible, visible. We all have a financial track record, but only some people know what it looks like. Being aware of your day-to-day spending that you are already doing can help you make the necessary adjustments and eliminate any nagging thoughts of “should I be buying this?”
   1. Know your inflows. How much cash you are bringing in each month? This may include your salary, trust distributions, interest income, etc.
   2. Know your outflows. How are you spending your money? What are your fixed costs each month (i.e., costs that stay the same, such as a mortgage payment, subscriptions, etc.) and what are your variable costs (i.e., costs that vary each month, such as groceries, gas, etc.)?
   3. Recalibrate. Does your spending align with your goals? Are you able to live the life you want now? Will you be able to do what you have set out to do in the future?
   4. Consider the products you use for spending. What do you use most often to pay for things? A credit card? Debit card? Cash? Credit cards can be a great tool to use to help manage cash flow and earn rewards (think airline miles, cashback, etc.) for spending. But if you have a hard time staying within your budget or remembering to pay your bills, using a debit card or cash might be a better fit for you.
       
5. Know your financial reputation. Regularly reviewing your credit report is important because financial firms use this to determine whether you qualify for certain products, like loans and credit cards, and if so, with what terms. Having familiarity with your credit report can provide insight into what you may qualify for, e.g., if you are planning to get a new credit card, apply for a mortgage, etc. Review your credit report for free by visiting https://www.annualcreditreport.com/index.action.
    
6. Unhappy with your credit score? There are a few things you can do to change that.
   1. Ways to raise credit score
      1. Utilize less than 30% of your credit card limit.
      2. Pay your credit card balance in full and on time each month.
      3. Avoid closing old accounts to maintain the age of your credit history.
   2. Things that could hurt your credit score
      1. Not paying bills on time, especially if you let them go to collections.
      2. Frequently applying for new lines of credit.
      3. Maintaining a high utilization rate on your credit (such as maxing out your credit cards).
      4. Fraud: Reviewing your credit report can also be a tool to ensure that someone is not using your identity to take out loans or commit other types of credit fraud.
          
7. Make your money work for you. Albert Einstein referred to compound interest as “the eighth wonder of the world” and investing enables you to take advantage of this “wonder.” It is a powerful tool to help you create long-term growth from your money, while protecting the value of your money as the cost of living increases.
   1. Don’t put off getting started. Many people may think they need to amass a certain amount of money or master the subject of investing before they get started. The truth is, there are fairly streamlined and self-service options for investing that do not require a significant amount of money or expertise to get started. Acorns, for example, is an app that rounds up transactions from your debit or credit card and invests the change. It recommends one of five portfolio options based on your age, goals, risk tolerance, and other considerations.
   2. Explore investing options. There are many educational resources available when you’re ready to learn more about investing, from books like Beth Kobliner’s Get a Financial Life: Personal Finance in Your Twenties and Thirties to websites like investopedia.com and many of the resources listed below.
       
8. Save more for retirement. The government incentivizes people to save for retirement by providing tax breaks on certain retirement accounts. Traditional Individual Retirement Accounts (IRAs) and 401ks, for example, allow you to contribute pre-tax income and you are taxed when you withdraw the funds during your retirement. Roth IRAs allow you to contribute after-tax money, which grows and can be withdrawn tax-free after a certain age.
   1. Understand your options. Many employers offer retirement accounts, such as 401ks or 403bs, as part of their benefits package, and they may even offer matching contributions up to a certain amount. If you are unsure if your employer offers these benefits, reach out to your company’s HR team to learn more.
   2. Save more tomorrow. If you feel like you don’t make enough money now to allocate a portion to retirement, one approach is to commit to saving a portion of any future salary increases. For example, if you receive a $5,000 raise, you may opt to put $5,000 into a retirement account rather than change your current spending habits.
       
9. Plan for your legacy. While it may be hard to think about a time when you are not around, it is important to be thoughtful around what will happen to the valuable assets you have accumulated over your lifetime, and how you want the transition of your assets to impact your family and those you care about. Basic estate planning documents, such as wills, powers of attorney, and ethical wills or letters of wishes can help to relieve some of the stress and burden of decision-making from your family and streamline the transition process overall.
    

RESOURCES

• Cresset Webinars
  • Investing series:
    • Investing 1.0
    • Investing 2.0
    • Investing 3.0
  • Taxes and Saving for Retirement
  • Purchasing a Home
  • Socially Responsible Investing
  • Budgeting and Credit
• Tamarind Learning: Innovative and interactive learning modules on different financial literacy topics (e.g., investing, estate planning, taxes, etc.).
• Invest in You: Money 101: Free 8-week learning course by CNBC on financial literacy, plus emails with tips on managing money during times of crisis.
• Stock Market Game (SMG) Invest Quest: SIFMA Foundation’s newest free, fun, and informative investing experience emphasizing diversification and long-term investing over a simulated five-year period. Company-specific and market-wide news that may impact returns helps you manage a pretend portfolio of stocks, bonds, and mutual funds, across beginner, intermediate, and advanced levels.
• Smart About Money’s Life Values Quiz: Quiz designed to reveal the underlying values that drive financial decisions. Creates an impactful conversation starter and provides insight to help adults understand their money behaviors.
• Smart Investing Courses: FINRA’s investing courses are interactive ways to learn the basics of investing, key terms to understand, common investment products and their associated risks, and more.
• Money Smart for Adults: Curriculum that provides participants with practical knowledge, skills-building opportunities, and resources they can use to manage their finances with confidence.
• The Balance: The Balance makes personal finance easy to understand. It is a resource to experts who provide clear, practical advice on managing your money. They publish news, how-to guides, and product reviews to help you make sense of every aspect of your financial life.
• Clever Girl Finance: Online blog and free financial literacy courses for women.
• Rich and Regular: Blog inspiring better conversations around money and investing.
• Copilot app: Money tracker app to track spending, budgets, investments, net worth, and more.
• How to Money: Your Ultimate Visual Guide to the Basics of Finance: Learn how to money in this in-depth, full-color illustrated guide from New York Times bestselling author and financial expert Jean Chatzky, Kathryn Tuggle, and the team at HerMoney.
• Get a Financial Life: Personal Finance in Your Twenties and Thirties: Best-selling book by Beth Kobliner that teaches the basics of personal finance to young adults.

*source: https://gflec.org/wp-content/uploads/2015/11/3313-Finlit_Report_FINAL-5.11.16.pdf

Contact Cresset to learn more about how you can secure your financial independence.