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Are You On Track to a Better Financial Future?

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By Eva Norlyk Smith, Ph.D.
April 6, 2011

It is said that a journey of a 1,000 miles starts with a single step. This ancient Chinese saying reminds us that our greatest aspirations require preparation, planning and perseverance.

Our personal finances, of course, are no exception. For all but the very few, living the life of our dreams takes a lot more than good fortune. Of course, if you don’t know where you’re going, chances are, no matter how many steps you take, you won’t make it to your destination.

All Americans want to plan for a comfortable financial future; but less than 5 percent have a written financial plan for how to get there, says Bryan Link, CEO of the free online financial planning service SimpliFi.com. Yet, those with a financial plan are almost three times as likely to hit their financial and retirement goals, say experts.

Financial planning involves many variables, and it can be as detailed, or as complicated,as you want it to be. Whether you’re looking at a short-term financial goal — like getting rid of credit card debt or saving for a new car — or at a long-term goal, like saving for retirement, the first step is the same: Create a budget to get a picture of where you stand and how much money you can save each month.

To find out whether you’re on track for a better financial future, take this simple three-step test:

Take the test

1. List your current income.
List your after-tax monthly income, and be sure to include other sources of income, such as investment income, child support, tips and so on.

2. List monthly expenses.
Get out the bills from the last few months, and create a list of fixed monthly expenses. For variable expenses, you may need to track expenditures over at least a month. Write down anything you spend money on that is not part of a monthly, recurring bill. Create a separate category for debt payments and total monthly payments by type ( for example, credit cards, car loans or mortgage). Finally, create a total for all of your debt payments.

3. Find out where you stand.
This is the moment of truth. Once you feel confident that you have included all expenses, subtract them from your total income.

Grade yourself

How did you do? Grade yourself A, B or C, according to the following outcomes:

Give yourself an A if: You have money left over at the end of the month. Congratulations! You are managing your money well, either because you are a careful spender or because you earn enough money to easily fund your lifestyle.

What to do next: If you haven’t created a long-term investment strategy yet or planned for retirement, it’s time to move on to this important step. Consider setting up automatic monthly transfers into an investment or retirement account, and be sure to take full advantage of any employee matching savings plan offered by your employer.

Give yourself a B if: Your income and expenses are equal. The good news is that you’re not ending each month with a higher credit card balance or getting deeper into other types of debt. The bad news is that you are likely living paycheck to paycheck and not creating the foundation for a better financial future.

What to do next: Make a note of where you’d like to be financially in five years, and decide for yourself whether you’re willing to prioritize getting there. Then take a careful look at your monthly expenditures to see where you might be willing to cut expenses in order to achieve those goals.

Give yourself a C if: Your expenses are higher than your income. You also fall into this category if you rely on credit cards to make ends meet each month and if you pay only the minimum amount due on your cards.

What to do next: It’s time to get serious about your finances to avoid financial hardship down the road. Your first priority should be to pay back credit card debt and scale back other debt obligations. Set a goal to reduce the total amount you pay each month (including rent, mortgage and credit card payments) to less than 35 percent of your monthly income. Look for ways to cut back on expenses and, until your debt is scaled back, consider taking on a part-time job to increase your income.