5 Ways to Optimize Your Financial Toolkit

When you think of a toolkit, you probably think of a container with a mixture of gadgets to fix things around the house. Most people don’t run out and buy everything for their toolkit right off the bat. They buy a few items to help them with the issue at hand and then continue to build up their kit as needs evolve.

The same goes for your personal finance toolkit. When you first begin to manage your finances, you’ll probably start slow—maybe a savings account and a checking account with a debit card. Then, after you’ve mastered that, you may decide that you need a credit card. Over the years, you’ll add more to your toolkit as life changes and grows.

When it comes to financial tools, it’s not only important to have the right tool for the job, but also to know how to use it for maximum benefit. Knowing where you stand financially will help you act proactively and avoid costly problems. Here are some items to keep in your arsenal with tips to utilize them to their fullest potential:

1. Budget—If you’ve ever sought financial help, you’ve likely been given the advice to create a budget. Tracking every dollar in and out of your accounts will help you understand where your money is going and identify opportunities to cut back. Over time, a budget can help you to see what’s working and what’s not.

    

   Optimize it—A budget is a great tool and should definitely be part of your plan—but it won’t become effective if you don’t take the time to review your numbers to make sure they make sense. If your initial version just isn’t adding up, don’t be afraid to make adjustments. Take the time to get it right. Your bank account will thank you!

    

   Once you’ve got a budget that works, you still have work to do. Make sure your budget will continue to be a solid financial companion by reviewing it often—at least annually—to determine if categories need to be added or updated. As your life changes, so too should your budget.
    

2. Long- and short-term financial goals—Identifying your financial goals is something most of us do in some way or another. The key is to set long- and short-term goals. It’s not just about purchasing a new home or saving for your kids’ tuition—you should also make short-term goals like beefing up your emergency fund, paying down debt or saving for new appliances for your kitchen.

    

   Optimize it—In addition to identifying your financial goals and writing them down, it’s important to put a plan in place to help you get there. When it comes to short-term goals, a great way to stay on track is to set up a savings account specific to your goal. Add an account and call it, say, Anniversary Trip. Then set up automated monthly or bi-monthly transfers. That way, you don’t have to remember to transfer the money manually and take the risk of forgetting or accidentally using that money for something else.

    

   For long-term financial goals, take this tool to the next level by investing your money. You’ve identified your goals, now take steps to get you there. Take advantage of your company’s 401(k) or start your own retirement account. Automated transfers are a great step here, too.
    

3. Investments—As we mentioned above, a financial portfolio can help you reach your long-term goals—no matter what they are. There are several ways to get started. If you’re new to the process, enlist the help of a professional financial advisor who can guide you. Before you choose an advisor, consult with a few firms to get a feel for who best aligns with you and your goals.

    

   If you have the desire to manage your own investments (or at least some of them), try a self-serve option like a robo-advisor or automatic micro-investment tool. This lets you add money when you want and buy and sell whenever you want—no need to wait for your advisor.

    

   Optimize it—Balance risk and reward by diversifying your portfolio. What does this mean? Diversification is a risk management strategy that mixes a variety of investments within a portfolio to limit your exposure with any one type of asset. This practice is designed to help reduce the volatility of your portfolio at any one time.

    

   Diversify two-fold—mix up the industries in which you invest as well as the types of assets you choose. In other words, don’t invest only in, say, tech stocks. If this industry interests you, buy some stocks in this field and then also buy something like mutual funds, real estate or stocks in other industries like entertainment or finance.

    

   Take diversification one step further by including both U.S. and global stocks. Different markets and currencies tend to respond to market cycles and world events in their own unique ways, not always following the U.S. There is a low correlation between the different markets, meaning the volatility experienced in one market is not likely to affect others.
    

4. Estate planning—No one really enjoys thinking about their own death. That being said, planning for it is vital to make sure your money and possessions go where you want them to go. There are many reasons some people put this off—I’m not married, I don’t have a family, I don’t have anything of value. No matter your marital or financial status, it’s always best (and relieves stress from your loved ones) if you have your affairs in place.

    

   Here are some things to consider including:

   • Will or trust

   • Insurance policies

   • Power of attorney

   • Health care directive

   • Beneficiary designations

   • Guardianship designations

   • Digital asset trust

    

   Optimize it—While the list above includes the most important information to include in your estate planning, there are other documents that will be helpful as well.

    

   • Annuities

   • Investment accounts

   • Pension or retirement accounts

   • Bank accounts

   • Divorce/marriage records

   • Birth and adoption certificates

   • Real estate deeds

    

   Since we live in a digital world and a lot of these documents are saved on computers and external hard drives, it’s important to think about keeping this information safe in multiple locations in case something happens to the original files or your computer. Consider keeping these documents (or a digital copy) in a safety deposit box at a financial institution or a secure fireproof lockbox at home. There should be a short list of trusted individuals who know where this information is located and how to access it in the event of an emergency.
    

5. Commitment—We all know that no matter how good the intent, life sometimes happens, and you get thrown off track. The good spending and saving habits you put in place start to go by the wayside or the debt you worked so hard to pay down has grown. Missteps can happen—it’s what you do afterward that matters. Make adjustments to your goals, if needed, and recommit yourself to your plan.

    

   Optimize it—A big part of working your plan is accountability. If you involve someone else, you are more likely to follow through. It can be someone in your household, a trusted friend or even your financial advisor. Set up a recurring meeting (weekly, monthly or quarterly—whatever works for you) and discuss your progress. If you have a friend or family member who also wants to improve their finances, you can be accountable to each other.

    

   Building your financial toolkit takes time, focus and dedication. Break down your long-term goals into smaller, short-term goals to stay on track and enjoy successes along the way.

One last tool for your toolkit? A financial advisor. Meet with a financial professional regularly to review your progress and get recommendations for adjustments. This may end up becoming your most valuable tool.