Habits in Recognition of Financial Capability Month

April is a month that often conjures thoughts of spring cleaning. Fittingly, it’s also National Financial Capability Month, a time to reflect on the state of your finances and focus on organizing them in a way that will help you achieve your goals for the future. Here are five tried-and-true money habits I recommend to my clients this time of year, and all year long. These are also good principles to pass down to children and other dependents as they approach adulthood and become responsible for their own finances.

1. Create and follow a budget. A budget is a key tool to help households improve their financial accountability and stability. It’s a black-and-white reminder of monthly bills and the limits of household cashflow. As a rule of thumb, I recommend setting a 50/30/20 budget allocation, in which you assign 50% of your income to pay fixed expenses, allow 30% for flexible spending, and reserve 20% for savings. You can always modify the numbers as your income and expenses change over time.

2. Use credit wisely. Loans and credit cards are financial tools that are best used carefully. My advice is to delay discretionary purchases you cannot pay for today to avoid the inevitable cost of borrowing money. In general, it’s wise to keep your debt-to-income (DTI) ratio below 30% to avoid unwieldy payments. A higher DTI will require more of your resources and make it harder to get ahead. Cap your credit card debt to 20% or less of your maximum credit limit whenever possible. I highly recommend that borrowers review their current debt and create a payment schedule to pay it down. It’s especially important to pay installment loan payments and credit card bills on time to avoid late fees and maintain a high credit score.

3. Save for larger purchases and emergencies. I tell my clients to maintain some level of cash reserves for unexpected expenses. When life takes an unexpected turn, your savings can be a lifeline. Grow an emergency fund equivalent to six months to one year of income. If you must tap into your emergency savings, set realistic goals to rebuild the fund.

4. Invest for your future. By giving your money the chance to grow, investments have the potential to help you create a more prosperous financial future. I urge clients to make maximum contributions to retirement savings accounts and take full advantage of employer match opportunities. Another best practice for investing is to build a diversified portfolio - in other words, not just stocks, but also bonds, real estate, and other asset types. This principle of diversification can help balance risk against the volatility of any one asset class. Invest consistently, regardless of market conditions, to benefit from dollar-cost averaging (a lower average cost of shares).

5. Take time for financial wellness. Your relationship to money matters as much as your bank balance. Detrimental financial habits often have an emotional history. Identify triggers that lead to behaviors you want to change, such as overspending or neglecting bills. Pat yourself on the back for every positive step you take toward financial wellness. One of the most treasured rewards of my work is helping my clients strengthen their financial acumen and create a safety net for their families now and in the future. If this approach appeals to you, consider seeking the advice of a qualified financial advisor who can help you work to achieve your goals for the future.