It’s time for spring cleaning! Out with the old and in with the new! But your house is not the only thing that should undergo this process…your finances should also be given a polish.
Just like there are golden rules for regular spring cleaning, there are certain guidelines for financial spring cleaning as well. Here’s what you should never do if you want to give your finances a fresh start and make lasting changes to your financial future:
Don’t get too worked up
The spring season might stimulate you to make a few changes but make sure you don’t make “capital repairs” that will leave you with an unsuitable and unreasonable budget.
“People go to the far extreme of trying to cut out as much as they can, and that is never going to work because life is all about balance,” says Crystal Rau, certified financial planner and founder of Beyond Balanced Financial Planning in Midland, Texas. “You have to be able to enjoy your money, but also be very smart with it as far as being intentional with your goals,” Rau says.
If you want to succeed in creating a sustainable budget, try the 50/30/20 budget method. This approach will allow you to assign 50% of your monthly income to your needs, 30% to your wants and 20% to savings and debts. Check out Cut These 11 Unnecessary Expenses and Save Money During the Coronavirus Crisis.
Don’t close out credit cards
Closing your credit cards randomly is also not a good idea. “You don’t want to do that because one of the factors that is used to calculate your credit score is your average length of history, and if you close your credit card, that affects that ratio,” says Shawn Tydlaska, CFP and founder of Ballast Point Financial Planning based in Burlingame, California.
“Another big thing that impacts your credit score is your credit utilization ratio,” Tydlaska says. “That’s how much credit you’re using compared to how much is available. So, if you close a line of credit, then it looks like you’re using more of your available credit, which also dings your credit score.”
If you want to close a credit card to cut expenses, don’t do it before reviewing other options. For instance, you could make a balance transfer to a card with a lower rate. Just make sure you don’t transfer a high balance on the new card because it could increase your credit utilization and your credit score could go down. Here are the other 10 Money Mistakes You’re Making, According to Financial Experts.
Don’t let your tax refund go to waste
Spring is not all about cleaning, it’s also about tax refunds. For many taxpayers, getting that big tax refund each spring is like getting a second Christmas. But many taxpayers also make this mistake the minute they receive their refunds. “I see that people typically will say, ‘Hey, I got this money back. I’m going to go splurge.’ But I would say, when you do get the tax refund, to not go splurge on something you wouldn’t otherwise buy or be able to afford.”
According to Rau, you should try to use your refund in more profitable ways, such as saving your extra money for your emergency fund or paying off some of your existing debts. More than that, pay attention to the refund you just received before spending it. You can find a tax withholding estimator on the IRS’s website to determine the right amount of withholding.
Don’t lose track of your money
We are not referring to physical places you can put and lose your money but to places that do not match your goals, like investments, retirement funds, and the like. For instance, according to Tydlaska, stockpiling emergency funds in your checking account is not a good idea. There are far better options for your money, such as high-yield savings accounts.
You can find banks that offer high-yield savings accounts at 1.5% to 2% APY, according to Devon Klumb, CFP, and financial planner at RhineVest in Cincinnati, Ohio. Saving your money into such accounts can help you earn more interest. Want More Money? Then Slash These 9 Expenses ASAP
Don’t keep unnecessary paperwork
Experts recommend keeping any financial documents related to your taxes for seven years since the IRS can look back for six years if your income is seriously underreported. The FDIC advises keeping credit card and bank statements that don’t have any tax significance for a year. ATM deposit slips, withdrawal receipts, and canceled checks unrelated to your taxes can be thrown out (or shredded to prevent identity theft) as long as there’s accurate evidence of the transactions on your bank statements. One other way to eliminate the paperwork is to opt for electronic bills to be sent to your password-protected email.
Make sure you keep receipts like charitable contributions or tax payments that you can deduct. Here are 11 Tax-Related Documents You Should Always Keep in Handy.
Don’t overlook the little things
Now that you’re considering ways to optimize your finances, keep in mind that there are certain organizational aspects that often go neglected. According to Lars-Alexander Kuehn, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, here’s what you should pay attention to:
- Look into your auto and life insurance coverage. (It might be a good idea to compare prices to make sure you’re getting the best rate.)
- Review your retirement account and beneficiaries to guarantee things have been arranged in accordance with your wishes.
- Log into your bank and credit card accounts. Install alerts so you’ll be notified whenever there’s any suspicious activity on your account. Apart from tracking your spending, it could prove extremely useful in discovering any unusual charges or withdrawals.