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Radford Words: Money Makeover: Planning Today Could Mean Comfort Tomorrow
Money Makeover: Planning Today Could Mean Comfort Tomorrow
by Charles Smith
All things change. Our financial situations are no exception. Changes in income and cash flow are inevitable, and in the wake of such changes it sometimes becomes necessary to undergo a financial makeover.
Unlike cosmetic makeovers, financial makeovers are often met with fear and concern. But according to Radford University finance professor Shalini Perumpral, the anxiety accompanying a money makeover can be minimized with careful planning.
The first step to giving yourself a money makeover is to get acquainted with your current financial situation. "Assess what you have," Perumpral recommends. Sit down and evaluate your situation before taking any action.
Companies like Transunion and Experian provide credit checks over the Internet, sometimes free of cost. These credit checks can be a good place to start for someone interested in adjusting their finances. Credit reports are a valuable asset to financial planning and should be checked annually.
The next step is to map out spending. Live within your means, and avoid getting trapped under credit card debt. "Watch the plastic. Don't use 10 cards," Perumpral suggests. A smart spender should have no more than two cards at their disposal.
When looking for a new job is part of your money makeover, be sure to factor in benefits, location and the cost of living. Only looking at a position's salary can be misleading if benefits are low and cost of living is high. "Look at the total picture," Perumpral says.
Finally, and most importantly, invest. No matter how grim the situation, saving what you can for retirement or for a rainy day pays off in the long run. Even saving or investing $10 or $15 weekly can amount to a larger sum, given time. Given inflation and the rising cost of health care, saving early could mean the difference between financial security and going broke.
Students should begin investing early. After graduation, single college graduates have more disposable income than they will at any other point in their lives. Perumpral estimates that some graduates could afford to spend up to 50 percent of their income on investments and still make ends meet.
Although there are no guarantees, younger investors should take their chances with riskier investments, such as stocks. "For a high risk, expect a higher return," Perumpral says. Because younger investors typically have no family to support and fewer bills to pay, they have less to lose if an investment fails to collect value.
In an area where the cost of housing is low, young investors might also want to consider buying a home. Owning a house establishes equity. Though paying for a home means having less cash flow for investments, it also means being able to claim mortgage deductions.
However, if real estate is high, the benefits of renting may outweigh those of buying. Though a home can be a wise investment, a slumping housing market can prove disastrous to a struggling income.
Money makeovers later in life should also involve investment, although the risk should be more calculated. Making a financial plan after marriage should involve investing in more stable assets, but newlyweds should still be able to make some higher-risk investments.
Perumpral recommends that investments become increasingly safe with age. Although stocks are a wise choice of equity for younger investors, retirees should exercise more caution. For this reason, the bulk of an investor's assets should be purchased early; as the cost of and need for health care increases, investments made earlier in life can fill the gap between income and living expenses.
Poor financial planning can spell doom in the event of unforeseen expenses like relocation or illness. It can also cause you to miss out on some terrific opportunities, such as vacations or retirement travel.
According to Perumpral, "For every decision you make, there's an opportunity cost." Though financial security is never a guarantee, applying a successful money makeover can ensure that you not miss out on some of life's richer opportunities.
Article courtesy of Radford University (www.radford.edu).
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