Thursday, 4 October 2012

Is Your Financial Situation Sustainable And Renewable?

Two words that have attracted a lot of attention are "sustainable" and "renewable." These words are generally used in an environmental sense when discussing energy and natural resources, but they should also be applied to your personal financial situation. Using sustainable and renewable sources of energy, for example, can create a secure supply of energy upon which people can rely. Similarly, ensuring that your lifestyle, savings rate and income can be sustained and/or renewed will help you achieve long-term financial security.

Your Lifestyle

Let's start by examining the spending portion of your financial equation. Do you know how much money you spend each month? If you don't, there's no time like the present to take inventory.

Even if you don't know how much you spend, you should certainly know how much you earn. Starting there, do you know what you would do if your next paycheck did not arrive? How long could you continue to support your current lifestyle? Even if you can't bring yourself to create a budget, at the very least you need to stash away some cash in case you find yourself unemployed.
Your Savings Rate

Now let's look at the savings portion of your financial equation. How much do you save each month? Include all sources, from money set aside in your checking or savings account to your 401(k) plan or other employer-sponsored plan. Don't overlook the cash you stash in the cookie jar.

Now figure out how difficult it would be to save that same amount if you were unemployed or were forced to accept a lower-paying job than the one you have today. When you are saving for long-term goals, such as retirement or the cost of a child's education, the amount you end up with is significantly impacted by the amount you put away early on because of the effects of compound interest. Any interruption of the steady stream of savings could significantly reduce the likelihood of achieving your goal.
When you put your savings plan under the microscope, be sure to view it in the context of your income. Are there places where you could cut your spending if times get tough? Is there a way to cut other expenses before you reduce the amount allocated to savings?

Your Income

Now, let's examine your primary income source. If you are counting on a paycheck from your job to finance your expenses, you should put some thought into where your job ranks in terms of sustainability. Are your skills likely to be in demand five years from now? 10? 15? Is your present employer stable? If not, are your skills easily transferable to another employer? Could you earn an equal or greater paycheck if you changed jobs?

If not, are you taking action? Remember, today is the best time to start preparing for tomorrow.

Hope for the Best, Plan for the Worst

Although the future is unknown, taking inventory of your life will certainly let you know where you stand today and take the stress off your tomorrow. If your current level of income would not be easy to replace, spend some time contemplating the merits of living with less.
Simplifying your lifestyle without reducing your income is a great way to free up some cash to build up your emergency fund or give your investment plan a major boost. With a little forethought, you can be prepared for any eventuality. 

The Bottom Line

Of course, if your cash inflows are steady, your savings plan is on track and your source of income is secure, there's nothing wrong with living the good life. Just do so responsibly. Don't buy more than you can afford, keep your debt-to-income ratio low and have a backup plan in the event that life rains on your parade.

Read more:

No comments: