A Center for Financial Services Innovation report published in November 2018 found that just 28% of Americans are “financially healthy.” Although the study noted numerous reasons for their lack of financial fitness, its big-picture finding was that 47% spent as much or more money than they made in the past 12 months. Four in 10 of those surveyed disagreed with the statement, “My household plans ahead financially.”
Catherine Harvey, senior policy advisor at the AARP Public Policy Institute, which partially funded the survey, told AARP.org that the strong economy risks obscuring working families’ financial realities. “Stock market trends, the unemployment rate, and other macroeconomic measures don’t always reflect people’s everyday financial lives,” Harvey said. The report reveals that more than a third of Americans can’t pay all of their bills on time. And a GOBankingRates survey found that 54% of Americans don’t have enough saved to cover medical emergencies.
- What Is a Financial House?
- Steps To Get Your Financial House in Order
- Storing Your Financial Documents
- Protecting Your Financial House
- Why a Financial House Cleanup Is Important for Everyone
Your “financial house” is a metaphor for all the aspects that make up your overall financial health, including the information found on your financial reports, any debt you have, your budget and your retirement planning and accounts. You might be on top of some of these “rooms” but neglected others — or maybe all of the rooms your house have been collecting dust for years. If it’s been a while since you’ve taken a complete look at your finances, it’s time to take out your mop and broom and clean house.
Whether you’re struggling or saving each month, take the following steps for a fresh financial start:
1. Scour Your Financial Reports
Especially if you’re planning to make a big purchase like a car or home, launch your efforts to freshen up things financially by checking your credit score. More than one in four Americans have a “potentially material error” on one of their three major credit reports, according to a Federal Trade Commission study. Errors can lead lenders to demand higher interest rates, offer less favorable terms or downright deny you a loan.
Also, check your auto insurance score. Although insurers have used the figure to set rates for some time, not all of them actually share it with consumers. Missouri-based Say Insurance offers a free online tool to help everyone get a better grip on their financial life. Marc Deiter, director of Say Insurance, told ReadWrite that an auto insurance score “fills in the financial blanks” that a driving record cannot. Knowing what goes into your rate can give you some power over it.
2. Sweep Debt Out the Door
Excluding home mortgages, the average American now has about $29,800 in personal debt, Northwestern Mutual’s latest “Planning & Progress Study” shows. Unless you’re part of the lucky few to carry no debt, your next priority should be paying back your creditors.
Start by paying down debts with higher annual percentage rates first, which will save you money on interest. Short-term loans and credit card debt tend to have the highest interest rates, while student, home and other long-term loans tend to have the lowest. If you have multiple high-APR debts outstanding, consider debt consolidation. Beware, though, that creditors often extend payment timelines to lower monthly bills, which can cost you more over the life of the loan.
3. Trim Your Budget’s ‘Big Three’
What’s the best way to stay out of debt? Unless you can substantially raise your income, it’s time to slice your expenses down to size. Where should you focus your efforts when you create a budget? The three big monthly costs most in your control: living expenses, food and transportation. Bureau of Labor Statistics data shows the average American household spends $37,000 per year — over half the average household income of $73,500 — on those three categories alone.
“If you can limit those expenses, that’s where your big savings will come,” a Minneapolis-based millennial, Sean, who’s managed to save $250,000 by age 28, told CNBC. Although Sean makes $80,000 per year, he saves more than 60% of his monthly paycheck. Until last year, Sean split a $640-per-month apartment with his girlfriend. He drove a decade-old pickup truck before buying a Mazda 3 for $13,000 in cash, avoiding the monthly cost of a car payment. Sean admits he struggles with restaurant spending, but he makes many of his meals at home to save money.
4. Plant Solid Retirement Plans
Financial professionals recommend that Americans have $1 million or more saved by the time they retire, but one in five Americans have less than $5,000 reserved for their golden years, according to the Northwestern Mutual study. More worryingly, a study by the Stanford Center on Longevity discovered that almost a third of baby boomers, at an average age of 64, had nothing in their retirement accounts.
If you’re within a few years of retirement, your best strategy might be to get a second job or cut the three expenses described earlier. Members of younger generations should regularly invest in market-based retirement accounts, regardless of recent volatility.
“Systematically investing means not trying to time when you invest your money,” Eric Roberge, a certified financial planner and investment advisor, told Kiplinger. “As should be clear at this point, timing the market is a pointless activity since no one knows what the market is going to do tomorrow.”
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Part of cleaning your financial house might include actual cleaning, especially when it comes to financial documents. If you’ve held on to every receipt and paystub for decades, it’s time to break out the shredder. Here’s exactly how long you should hold on to all types of financial documents, according to the Financial Industry Regulatory Authority, Inc.:
|How Long To Hold On to Financial Documents|
|Document Type||How Long You Should Keep It|
|Tax documents||7 years|
|Property records||At least 6 years after you sell your home|
|Mortgages and other loans||Indefinitely|
|Bank account records||1 year, especially if you can access them online|
|Paycheck stubs||1 year|
|Brokerage statements||1 year; 7 years if you make a tax claim|
|Bills||As soon as payment clears; for large purchases, as long as you have the item|
You wouldn’t leave the front door of your home unlocked, and your financial house needs to be secured, too. Otherwise, you could end up becoming the victim of identity theft. Fortunately, there are several tools you can use to protect your identity. Here’s some information on these helpful options:
- LifeLock: Helps to protect your identity on your computer, tablet and smartphone
- Identity Guard: Uses IBM’s artificial intelligence Watson to issue alerts when your personal information is found on the dark web
- Experian IdentityWorks: Monitors your Social Security number and address change requests, and alerts you in real time if there’s an inquiry on your credit report
- IdentityForce: Monitors for advanced fraud, change of address, court records, dark web activity, payday loans and more
If you enroll in one of these services and find that your identity has been stolen, you must report the identity theft to stop any further damage to your finances and credit. No matter what information is stolen, you should report all identity theft to the Federal Trade Commission, the police, all three credit bureaus and your creditors and financial institutions. Depending on the type of identity theft, you might also need to inform the Internal Revenue Service, the post office, the Department of Motor Vehicles or your medical insurance company.
Even if your financial house is in reasonably good shape, it never hurts to go do a quick touch-up. A better interest rate on a loan, a smaller debt load or a slimmer mortgage payment can pay big dividends — especially if you use the money toward long-term goals, such as building an emergency fund or saving for retirement.
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Gabrielle Olya contributed to the reporting for this article.