5 steps to feeling better about your finances

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Michael Liersch, head of Behavioral Finance
Michael Liersch, managing director, head of Behavioral Finance and Goals-Based Consulting at Merrill Lynch, explains how to take control of the money you have.
From the Merrill Edge Minute e-newsletter.

Key points

  • Figure out what's most important to you, and try to be flexible about how to pursue it
  • Begin by recording what you spend or by taking other small steps that can help you gain confidence and build a sustainable long-term plan
  • Set goals and invest carefully. Chasing returns may bring anxiety as well as risk, while investing according to long-term goals can help you work toward reaching them.
It's only natural to have concerns about money. Your finances are intertwined with the aspirations you have for you and your family. It may be hard not to feel a little anxious about the possibility of falling short of your goals, particularly during difficult economic times. But even if you never quite achieve a worry-free financial life, you don't have to resign yourself to feeling overwhelmed, says Michael Liersch, managing director, head of Behavioral Finance and Goals-Based Consulting at Merrill Lynch. Consider taking these easy steps that may help you minimize the uncertainties in your own finances and give you optimism about the future.

Step 1: Start early and invest steadily toward your goals

Put time on your side by starting as early as you can to invest steadily toward your goals. Even small amounts invested regularly over a number of years have the opportunity to grow over time as the chart below shows. Setting up regular, automatic contributions to a Merrill Edge® IRA with the Merrill Edge® Automated Funding ServiceFootnote 1 can help simplify this goal. You can also periodically review your portfolio to see if it is in sync with your goals, or if your asset allocation might benefit from rebalancing.Footnote 2 Just remember that all investing involves risk and returns aren't guaranteed. When it comes to investing, don't try to "hit the cover off the ball," Liersch suggests, but instead think of investing as a way to address the concerns, necessities and goals you've identified.
Starting early may help results, even investing a small amount
Source: ChartSource, DST Systems Inc. This example is hypothetical and does not represent the performance of a particular investment. Your results will vary. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example.

Step 2: Put it in writing

"Often, the sense of being overwhelmed comes from not having a clear picture of your goals and how to achieve them," Liersch says.
  • Start by making a list of some of your financial concerns: Can I afford to send my child to a private college? Will I ever be able to afford that trip to Europe that I've promised myself? What if I outlive my savings?
  • Next, write down necessities, such as rent or mortgage, car payments, food and other must-haves. Don't list exact dollar figures. The idea is to get an overall picture.
  • Finally, outline your goals in a way that's specific enough for you to act on them, but flexible enough to allow for more than one approach. "Educate my child," for example, rather than "send my child to Harvard."
You may find that just completing this exercise can relieve some of the anxiety, plus, identifying your goals may help you find trade-offs and alternatives. For example, if it's "Ivy League or bust," what other goals could you compromise on? Or, could your child get an equally good education at a public college for a fraction of the cost?

Step 3: Create a long-term plan based on small changes

"People sometimes think they need to make big changes all at once," Liersch says. "Unfortunately, that rarely works." Like crash diets or quitting cigarettes cold, sudden, radical changes in your budget can lead to frustration and backsliding.
You might start with a commitment to record your spending habits. "Don't do anything differently at first, just keep a record," Liersch suggests. Then, every few weeks or months, identify one or two regular expenses that you can eliminate or adjust. If you check your progress periodically, you'll see how minor changes can begin to have a major impact, and that may inspire you to keep going. "Five years later, you might look back and not even recognize who you used to be, financially," Liersch says. "And although you've put yourself in a much better situation, you barely felt the changes as they occurred."
If you're not sure where to start, the Budget for the entire year by using the Merrill Edge Cash Flow Calculator can help you figure out how to budget for the entire year.

Step 4: Follow your plan, not someone else's

Research in behavioral finance confirms that people often judge how well they're doing by comparing themselves with others around them. "If you're taking less expensive vacations or buying fewer things than your friends or neighbors are, there's a real tendency to think, 'There's something wrong with me,'" Liersch says. Yet those other people may be maxing out their credit cards, or taking on bigger mortgages than they can afford. All the more reason to stick to a plan based on your own goals and values, he adds. The potential long-term benefits of spending less and saving more can have a real impact on your overall financial security. And when you make a positive decision to avoid overspending, it can be a source of pride and happiness rather than a signal that you're not "keeping up with the Joneses."

Step 5: Share and compare

If you have a spouse or partner, a final step can be to compare notes. Where do your concerns or goals differ? "The other person's expectations may be quite different from yours," Liersch says, and that could lead you to a valuable discussion about where to give and take. You may also discover surprising similarities, or find that things you thought were major concerns for your spouse or partner really aren't so important.
Having your investments in line with your goals can go a long way toward making you feel more comfortable about your finances.
"If you have teenage kids, bring them into the conversation," Liersch suggests. "They could be willing to help you make trade-offs you never imagined. A part-time or summer job might teach them discipline and finance, and also help defray some costs, which could leave you with more resources to put toward family goals." Having that kind of family-wide commitment to your goals can provide powerful motivation to stay the course with your plan, says Liersch. That, along with clearly defining your priorities, taking a gradual approach to improving your money habits and creating a careful, long-term investment strategy, can help you work toward attaining your financial goals, even when life and markets create unexpected bumps along the way.
Next steps

Footnote 1 Keep in mind that systematic investing cannot guarantee a profit or prevent a loss in declining markets. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.

Footnote 2 Diversification, asset allocation and rebalancing do not ensure a profit or guarantee against loss in declining markets. All asset classes are not suitable for all investors. Each investor should select the asset classes for them based on their goals, time horizon, liquidity needs and risk tolerance.