The following article is based on the content covered in my book, Flourish Financially: Values, Transitions, and Big Conversations. If you’d like to read more, you may purchase a copy here.
How would you describe your level of financial confidence? One thing I have noticed in my line of work is just how many people find it difficult to talk about money. A lack of financial confidence can have a variety of root causes. Some people still consider money a taboo subject, some suffer from numerophobia,, others find it overwhelming or stressful, and still, others want to discuss it but feel silly asking questions they believe they should already know the answers to. Regardless of the origin, a lack of financial confidence is a roadblock on your path to accomplishing your goals.
If you want to feel more financially confident in the new year, follow the ten steps below and take control of your financial outlook for 2021.
Step 1: Understand Your Spending
Recent data shows that only 41 percent of Americans spend less than they earn. Of course, that means more than half of the country is spending the same amount they earn – or more than they earn. Where do you fall in this breakdown? Understanding your own spending habits is key to building your confidence, so take a moment to examine what percentage of your spending is critical versus nice-to-have. Critical spending is what you need to spend to live; for example, mortgage payments, groceries and utilities fall into this category. Then there’s the nice-to-have spending, like fashion trends, upgraded electronics, and vacations. If you notice you’re spending a lot in the nice-to-have column, make note of where you can cut back.
Step 2: Understand Your Debt
There’s good debt and bad debt, with good debt being the kind that facilitates a goal (think mortgages and student loans). Bad debt is the opposite, with the most common type being high-interest credit card debt. Many people aren’t aware they’re paying 18 percent or more in interest on credit card purchases, so be sure you understand any bad debt you’re carrying – and plan to pay it off sooner rather than later.
Step 3: Build an Emergency Fund
One of the most tangible financial confidence-builders you can aim for is to build and maintain an emergency fund. After all, life has a way of throwing us curveballs and it’s nice to have the peace of mind that you can handle financial surprises that could arise. I recommend working toward having three to six months of living expenses saved. If you’re just starting out, however, aim for $1,000 to begin with.
Step 4: Save Early
When you begin saving early on in life, rather than playing catch-up later, it’s much easier to build an emergency fund and establish healthy saving habits – and financial confidence, too. However, if you didn’t start early, all is not lost. Develop a “pay yourself first” mindset now and direct 10-15 percent of your paychecks to savings before you do any spending.
Step 5: Learn the Lingo
Financial jargon is a significant roadblock for many people when it comes to taking control of their finances. After all, if you don’t understand phrases like “Monte Carlo analysis” and “asset allocation” you won’t feel confident discussing your finances or making decisions designed to meet your goals. Here is my simple advice: do not let financial lingo scare you away. Is it confusing? Yes! Learning how to speak finance is like learning a new language. So, be patient with yourself, stick with it, and soon it will begin to feel more approachable to you.
Step 6: Avoid Lifestyle Creep
“Lifestyle creep” occurs when we increase our spending as our income increases, rather than choosing to save some of that additional income. It generally occurs for three reasons: 1) lacking a plan for what to do with additional income, 2) living too much for today instead of planning for the future, and 3) falling into the comparison trap and feeling the need to “keep up with the Joneses.” If you plan ahead, keep your focus on your long-term goals, and stop comparing yourself to others, you can avoid the financial harm lifestyle creep can cause.
Step 7: Be Leery of Outside Opinions
When it comes to money issues, lots of people will have opinions and advice for you. This includes parents, siblings, well-meaning friends, and even coworkers. They don’t offer financial advice to harm you – they likely intend to be helpful. However, it’s important to be cautious when heeding advice from nonprofessionals. If they don’t know all the specifics of your situation or fully understand your goals, their advice can do more harm than good.
Step 8: Know Your Number
Your credit score is an important number, and you should know yours. It paints a picture of your current financial status by examining your amount owed, new credit, length of credit history, credit mix, and payment history. You can check your full credit report, including your score, for free each year. However, many credit card companies offer an easy-to-access snapshot of your credit score on your online account. Apps such as Mint are also a great way to track your credit score (and much more).
Step 9: Negotiate Your Salary
Many people struggle with gaining the confidence to ask for a raise when it is well-deserved or negotiating a salary based on skill level. This can prove especially challenging for women. Even though women control more than half the country’s wealth – and are expected to control even more within the next few years – the income discrepancy between male and female earners remains an issue. Women continue to earn 81 cents for every dollar earned by men. The statistics for women of color are even more alarming. Asking for a raise isn’t always easy, but it’s one of the best ways to boost your income and your overall fiscal confidence in the process.
Step 10: Hire a Financial Planner Early
One of my clients hired a financial planner when she was just thirty years old, and she ranks that as one of the top five best decisions she’s ever made. Hiring a financial planner well before retirement gave her a lifelong financial partner and a relationship within which she could build her financial confidence. It also gave her a solid financial foundation that allowed her to save early, examine her expenses, and know what she personally wanted from her finances before she married. It also means she’s had a go-to person for any financial questions that have arisen at various phases of her life.
The key to hiring a financial advisor early in your career is to choose someone you’re comfortable talking to about your personal financial goals. If you can’t have open and honest conversations, or if you feel your advisor doesn’t adequately answer your questions, the relationship is unlikely to be fruitful for you over the long-term.
Build Your Financial Confidence and Let Go of Your Fears in 2021
The above steps will help you feel more financially confident in the New Year, and building confidence usually has the effect of helping you let go of some of your fears, too. Fear can hold us back from making financial decisions, and from achieving our life’s dreams.
Are you ready to tackle your financial confidence in 2021? At Flourish Wealth Management, we strive to help our clients gain financial empowerment for all life’s goals. If you’d like to start a conversation about your financial plan reach out to us today!
If you found this content helpful, I encourage you to read my book, Flourish Financially: Values, Transitions, and Big Conversations. You can learn more, or purchase a copy for yourself or a loved one, right here.