How to Do a Spring Cleaning of Your Finances
When temperatures start to rise, many of us naturally want to open the windows, give it a good scrub and get rid of the clutter. Why not apply the same refreshing ritual to your finances? Just like trimming dead wood in your yard, you can break wasteful habits. Plant the seeds for new financial goals as you prepare for April tax deadline . Take out your (figurative) feather duster and carefully evaluate your budget.
Check money
The first step is to analyze your overall financial situation. Gather your latest bank statements, pay stubs, bills and debts. Use a reliable budgeting app or spreadsheet to calculate your monthly income and expenses. This bird’s eye view will reveal whether you’re living within your means or drowning in debt.
If you review your spending over the past 90 days, you’ll likely find that you can cut back on areas you didn’t even know you were spending money on ( missed subscriptions come to mind). It also helps tackle unconscious spending with tricks like physically writing down the things you want to buy before you buy them.
For example, let’s say your net monthly income is $4,500 and your expenses are $4,100. Each month, you’ll have $400 left over to spend on things like saving money or paying off debt faster.
First, address the problem of persistent high-interest debt.
Speaking of debt, your top priority should be eliminating any debt that you’re paying high interest rates on, such as credit cards. List all debts by interest rate from highest to lowest. Each month, invest as much as you can towards the debt with the highest interest rate, while paying the minimum amount on the rest.
For example, if you owe $10,000 at 19.99% interest on one credit card and $5,000 at 0% interest on another, focus on aggressively paying off that high 19.99% balance first.
Get your serves in a row
Make collecting your tax documents part of your spring cleaning ritual. Have a special folder or binder for compiling W-2s, 1099s, mortgage interest statements, donation receipts, and any other required forms. Safely throw away what you don’t need, such as paid bills or six-plus years of returns/documents after filing. Proper record keeping will make tax season much less stressful next time.
For example, use a binder or digital system with separate sections for income, deductions, credits, and previous year documents to stay organized.
Automate finances where possible.
Spring is a time for acquiring new habits and organization. Now is the perfect time to set up automatic payments and transfers to keep your finances running smoothly in the months ahead:
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Arrange for automatic payment of all bills from a central account.
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Set up recurring transfers to direct funds into separate savings buckets for different purposes.
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Sign up to automatically increase your 401(k) or IRA contributions each year.
Eliminate account/credit clutter
While you’re going paperless, eliminate the mystery charges on your bank or credit card statements. Eliminate any zombie subscriptions or recurring payments for products/services you no longer use or need. These small losses of money can easily go unnoticed, but add up over months and years.
Choose the right account types for your needs
Different savings vehicles offer different tax advantages. For example, if you have children, explore the possibility of setting up tax-advantaged 529 educational accounts.
Spring is the right time to ensure you maximize these benefits. To achieve a long-term goal, such as retirement, you should consider setting up a retirement account, such as a 401(k) or IRA, to earn compound interest over a long period of time—money invested over time, even small amounts, can have a great importance. .
To achieve your short-term goals, you need your money to be easily accessible in the form of cash and earning high interest rates. Something like a high-interest cash management account allows you to easily withdraw money when you need it.
Bottom line
No matter the season, taking a periodic, comprehensive look at your finances will allow you to break unhealthy financial habits, identify problem areas, set new goals, and identify smarter ways to save, spend, and invest. An annual financial cleanse provides clarity on your actual financial situation and what needs to be prioritized. Things like mounting credit card debt, lack of retirement savings, and unhealthy spending patterns can easily spiral out of control if you don’t regularly evaluate your money situation.