Organizing your finances is a great New Years’ Resolution.
But after a year that created so much economic turmoil for so many, how do you even get started with this seemingly behemoth task?
We sat down with Holly Reid-Toodle, CPA -- owner of The Master Playbook -- to get some answers.
Why is organizing your finances important?
When your finances aren’t organized, it’s easy to feel overwhelmed. It’s easy to feel paralyzed by the myriad of tasks and decisions you must complete to get things back on track.
While organization may seem like an intimidating goal, it’s actually the very thing that will help make everything else easier.
“Organization reduces stress and allows you to make decisions faster with increased certainty,” says Reid-Toodle.
She notes that when you’re organized, overwhelm becomes a thing of the past.
“You can identify wasteful spending and now apply your hard-earned money to your higher priority goals, like eliminating debt, saving for retirement or moving into a new house.”
Gather your documents.
Reid-Toodle says the first step in organizing your finances is gathering up all your documents. That includes:
- Bank statements.
- Statements related to debt.
- Information on your investment portfolio or retirement account.
“When creating your list, decide if you prefer to manually create a list or spreadsheet, or if you are more technically inclined,” says Reid-Toodle.
If you are more technically inclined, you may prefer to use software to organize your finances. Some programs that help you do just that include:
Get a free copy of your credit report.
You might think you have a complete picture of all your debts. But it’s possible some have slipped through the cracks.
For this reason, Reid-Toodle recommends obtaining a free copy of your credit report from all three credit reporting bureaus. You are entitled to one free copy per year. You can do so at www.freecreditreport.com -- the only site endorsed by the government.
Along with identifying debts you may have missed, getting a copy of your credit report can help you find any incorrect information. You can then attempt to get erroneous information removed. It’s a difficult process, but getting an erroneous item removed can sometimes have a positive impact on your credit score.
Set up autopay.
The next step Reid-Toodle recommends is setting up autopay for your bills, savings and investments. Saving for your emergency fund or retirement automatically increases the chances that it will actually happen. And setting your bills on autopay removes the need to remember every last due date.
By automating as much as possible, you’re cutting down on any unnecessary stress.
Plan for interrupted income.
Prior to the pandemic, many financial experts recommended 3 to 6 months’-worth of expenses as the goal for your emergency fund. Since the pandemic hit and we have all learned instability on new levels, that number has generally been upped to at least 12 months’ worth of expenses.
For that reason, it’s important to put more into liquid, accessible savings.
“The events of 2020 have also shown us that one source of income may not be sustainable and that it’s unwise to rely on the government for a bailout,” says Reid-Toodle. “We should all be taking an inventory of individual skills and talents we can monetize to create multiple streams of income.”
She notes that even if you don’t immediately need multiple streams of income in this very moment, we should all have a Plan B. You never know when that primary source of income could dry up.
Pay off debt.
Even if 2020 was a hard year for your money, you can still take steps to address your debt. Reid-Toodle suggests negotiating with your creditors for lower interest rates.
For example, if you’re far enough behind on your credit cards, your account may be moved to the credit card company’s collection department. This isn’t great for your credit score, but if you contact customer service they should be able to put you on a payment plan with a much lower interest rate. Sometimes it’s even zero percent..
As you pay off the debt, the initial hit to your credit report will fade. You will also build up a positive history of on-time payments, as they’re more likely to be lower and more affordable than the initial minimum payment. Because the interest rates are so much lower, you won’t be paying back nearly as much.
If you do have enough money to get by, paying off your debts is also an important step in organizing your finances.
Invest if you can.
If you don’t have enough money to pay for your basic needs, you likely don’t have enough to invest.
But if you are lucky enough to still have disposable income, Reid-Toodle encourages you to invest. Consistently investing over a long period of time and trading infrequently is one of the safest ways to build stable, sufficient retirement savings.
Engage in estate planning.
Twenty-twenty gave us all something else to think about more viscerally: Our own mortality.
“I would also encourage people to make sure they more urgently prepare certain documents to protect their family, their money and their property,” says Reid-Toodle.
She suggests contacting an estate planning attorney to create or update critical documents like:
- Healthcare Power of Attorney.
- Living Will.
- Durable Financial Power of Attorney.
- Revocable Living Trust.
You can create most of these documents for free using the Tomorrow app.
Commit to tracking and updating.
Now that you have a pulse on your money, don’t quit. Reid-Toodle says it’s important to continue tracking your money, stressing that updates need to be done at least once or twice a month.
Give your organizational goals time.
When we set resolutions, we often run out of steam by the end of January. Don’t do that with your money goals. One month is not enough time to label yourself a success or failure.
“On average, it can take at least three to four months for people to feel confident that they’ve captured all of their spending and, more importantly, see a pattern,” says Reid-Toodle.
She says that at that point, you start to hit stride, getting into a rhythm of assigning every dollar a job. Plus, once you have your money under control in this way, you can start getting excited about creating a lifestyle you love.