Make Your Financial Strength A Priority Early On

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OCEAN CITY — Given an uncertain economic outlook, what can you do to improve your personal balance sheet?

Overall, it is a good idea to make the most of what you have. For example, you may be expecting a tax refund, but may not be certain of a pay increase or bonus. While resources may be tight, there are steps you can take to improve your financial strength.

1. Build an emergency fund.

Having a cushion of easily accessible cash is the foundation of long-term financial security. It can help you avoid panic — and your credit cards — if you lose a job, become injured or disabled, or face an unexpected expense. If you receive a raise, a bonus or a tax refund, use at least part of it to jump-start an emergency fund. Then, add to the fund until you have enough to cover four to six months of living expenses. Choose a safe, liquid account for your money, such as a savings account or money market mutual fund.

2. Pay down your credit card balances.

According to Index Credit Cards, an online credit card monitoring service, the average interest rate on a credit card was about 16.65% as of Jan. 20, 2012. At that rate, it would take 59 months (4 years and 11 months) to repay $5,000 if you paid only $125 a month toward your balance — and that $5,000 would end up costing you $7,375. If you keep adding to your balance with new charges, you’ll dig yourself into an even deeper hole. One of the best things you can do to improve your financial situation is to pay down your credit card balances and aim to pay them off entirely. If you stop using your credit card for nonessentials, you may be surprised at how much more quickly you can break the habit and rid yourself of interest payments that give you nothing in return.

3. Get the health services you need.

That’s important even when the services aren’t covered by your health plan. It’s tempting to put off eyeglasses or dental work that you have to pay for out of your own pocket. But going without these routine health care services can make a significant difference in the quality of your life. If you’ve been putting off a trip to the dental hygienist, use some of your tax refund or bonus, if you’re getting either, to pay for it. Then, make health care a regular line item in your budget so that you’ll have the money you need to keep yourself and your family healthy.

4. Keep your home in good repair.

It’s tempting to let things go around the house when you have so many demands on your income. But if you’re a homeowner, it’s essential to maintain your investment. Otherwise, you could lose the key benefit of home ownership: building equity over time. A leaky roof, an inefficient heating system or leaky plumbing will become more expensive to fix if you ignore it.

5. Get the family involved.

It’s easier to commit to improving your finances when you get the family involved. Share your concerns about your financial situation. Let your children know that they can help by reining in their demands. Use allowances, tasks around the house and summer jobs when the children are old enough to teach financial discipline.

Financial strength is not something you can achieve overnight. But it is something you can aim for. And there’s no better time to get started than when you expect a little extra cash to come your way. Even if you can’t tackle your finances on all fronts, choose one thing to accomplish in 2012 and you could improve your financial situation for years to come.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

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