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Five steps to feeling better about your finances

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Adapted from the Merrill Edge Minute e-newsletter.

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, Director of Behavioral Finance 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. Consider contributing to your employer’s 401(k) plan and possibly to an IRA. Your 401(k) may offer an automatic increase program, which lets you increase your contribution gradually, on a regular basis, with a simple election. Even small amounts invested regularly over a number of years have the opportunity to grow over time, as the chart below shows. You should also review your portfolio periodically to see if it is in sync with your goals, or if your asset allocation might benefit from rebalancing.1 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 soon and starting small can make a big difference

$100/month for 30 years (age 25–55)

$150/month for 20 years (age 35–55)

Total contributions:

$36,000

$36,000

Potential value by age 55:

$97,926

$68,347

This hypothetical illustration assumes contributions made at the beginning of the month and a 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. Taxes are due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to a 10% additional federal tax.

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."

Michael Liersch, Director of Behavioral Finance at Merrill Lynch

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

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“People sometimes think they need to make big changes all at once,” Liersch says. “Unfortunately, that rarely works.” Like crash diets or attempting to quit cigarettes cold turkey, sudden and 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.”

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

Aligning your investments with your goals can go a long way toward making you feel more comfortable about your finances.

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.

“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. 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.

Learn more and take action

  • Ready to start feeling better about your finances? Contributing to your 401(k) can help. If your plan is through Merrill Lynch, log on to Benefits OnLine® today to enroll or increase your contributions. Go to Benefits OnLine® >
  • Want to create a budget but not sure where to start? Our Budgeting & Saving video can help you figure it out. View video >
 
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1 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. Investors should select the asset classes for them based on their goals, time horizon, liquidity needs and risk tolerance.

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