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Goooooooooal: Planning your way to financial victory

AICPA_LifeDecisions_Info_FinalHave you ever been to the gym the first week in January? It’s usually packed with folks looking to improve their health. Many of these newcomers are there as part of their New Year’s resolution, while others may be trying to rebound after a particularly indulgent holiday season. And that’s a noble pursuit. However, very few of them are likely to still be going to the gym a few months later. I’m not a psychologist, but it seems to me that human nature responds to a setback or feeling of being stuck in a rut with a flurry of positive changes. Unfortunately, once our memory of what caused us to want to make those changes fades, we tend to slip back into our old ways.

I sat down with Neal Stern of the AICPA’s National CPA Financial Literacy Commission to talk about how Americans can make some positive changes to their financial plans – and stick with them for the long term.

James Schiavone: First, let’s start with the good news. As the economy has continued to recover, we’re seeing more Americans feeling comfortable enough financially to achieve some major life accomplishments, including getting married, having children and buying homes. What advice would you give for someone trying to determine if their finances are secure enough to make these big decisions?

Neal Stern:  It’s important to give thought to how you will stay above water when the economic roller coaster is on the next downswing. If you’re not already using a budget, there’s no better time to start than when you’re on solid footing. Next, you should work to build up your savings so that you have at least six months of your income in an emergency fund. When thinking longer term about home ownership and having children, make sure your current income can comfortably cover your costs of living, including a realistic estimate of what the new commitment will add. 

JS: A lot of people have trouble developing a month budget – can you explain how this is the first step towards reaching financial goals?

NS: A budget gives you a view of how much of your income is left over after recurring expenses, like rent or mortgage and car payments, and provides a roadmap to help you make better spending decisions. When you know what’s available after paying everything that’s already on your plate – including paydowns of student loans, credit cards, and other debt – you can set a realistic target for savings each month. There are many free online tools to help you get started on your budget on the AICPA’s 360finlit.org website.

JS: In our recent Harris Poll, it was troubling for me to see that fewer Americans reported putting less money on their credit cards. What are some strategies to make sure you’re not carrying a balance and why is that important?

NS: If you can’t pay off your credit card bills in full each month, that’s a warning sign that you’re outspending your income. Once you have a balance, it can grow rapidly, fueled by interest charges. If you carry a substantial credit card balance and are faced with a job loss, you may struggle to make the minimum payments while also trying to cover your costs of living. Mapping out and sticking to a realistic budget can help you keep your spending from going into the red zone, and a solid emergency fund can prevent unexpected expenses from turning into credit card balances that you can’t pay off. 

JS: Once someone has their finances on track and feels like they’re in a good place – paying down debt, putting aside some savings – how can they stay the course without feeling like they’re denying themselves?

NS: A budget that leaves nothing for the things you enjoy is as unrealistic as a starvation diet – it won’t work for very long and may lead to the financial equivalent of a pizza and ice cream binge when you ditch it out of frustration. If your budget doesn’t allow for some fun, take a hard look at your recurring costs. For example, if your rent is soaking up too much of your income, it may be time to consider downsizing. 

JS: It can sometimes feel like our financial goals are competing with one another. How would you advise someone prioritize paying off student loans, saving for a down payment on a home and putting away money for retirement?

NS: First, don’t be overwhelmed. It’s important to strike a balance that fits your personal situation and allows some progress on each front. If buying a home is your goal, keep in mind that it may be difficult to handle student loan payments at the same time as a mortgage and the other costs of home ownership. Plus, mortgage lenders typically consider your existing debt payment obligations, which includes student loans. It’s important to remember that having the down payment in hand doesn’t necessarily mean that you’re ready to buy. And while retirement may seem a long way off, if your employer offers a 401(k) or similar plan with a contribution match and you’re not contributing at least enough to take full advantage of it, you’re leaving “free money” on the table. 

For more tips and tools on how you can develop a financial plan that will stick long term, visit www.360finlit.org.

James Schiavone, Senior Manager, Public Relations, Association of International Certified Professional Accountants 

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