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Control Your Finances by Ignoring the Short-Term Frenzy

Aug. 3, 2016
Managing Money, Personal Finance
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By Daniel J. Friedman

Learn more about Daniel on NerdWallet’s Ask an Advisor

Big global events dominate headlines and send people scurrying for financial cover. In most cases, though, it’s better to ride out the frenzy and stick to things you can control.

Take, for example, last month’s Brexit vote, which sent the stock market into a sudden, deep decline. It stunned everyone — our wealth management firm received more than 100 emails from clients and friends in the financial community wondering what would happen next.

You can certainly understand the concern. In the two trading days after the Brexit vote, the U.S. stock market declined more than 5%, using the S&P 500 as a proxy. However, within three days it had recovered its value, and it has continued to rise since then. The concern that Brexit would send the markets into a long-term free fall turned out to be unfounded.

The lesson is that it doesn’t make sense to overreact to large global events that you can’t control. What you can do is get your financial house in order, focusing on the things you can control. Here are a few of them:

Your tax outlook

At the midyear mark, where are you on your federal and state taxes? Have the first six months indicated that your financial picture will remain the same as 2015, or is there some significant change that will affect your income and how much you’ll pay in taxes?

If you received a tax refund from last year, have you invested that money? And if it is shaping up to be a year in which you’ll have a tax bill, do you have a plan to pay it?

Your credit card debt

If you’re planning your summer vacation, how are you going to pay for it? If the answer is that you’re putting it on your credit card, you may want to reconsider — now may be the time to say you are sick and tired of paying outrageous interest. This may require changing your mindset, from “I’ll deal with the debt later” to “I’ll only pay what I can afford now.”

As a way to ease into that mindset, consider committing to paying cash for the next handful of transactions you make. That would be an excellent way to begin gaining control over your finances.

Your 401(k) company match

Are you picking up the company match on your 401(k)? Many people don’t do it, which is a mistake — it’s free money from your company. If you aren’t taking advantage of this opportunity, change that today, even if you set aside only a small amount of your paycheck to get the free money. It’s an easy step that will put you on the path toward a better financial future.

Your emergency fund

If a 5% two-day decline in your stock portfolio caused you significant agitation, now may be the time to think about why. Temporary dips are only a problem if you are relying on your invested capital to take care of short-term expenses. It’s better to have a separate source of money available to take care of occasional and unexpected costs.

If your daughter’s college tuition bill is due in a month, it shouldn’t be invested in anything other than a bank account. You should also have some money set aside in an emergency fund for things like home and car repairs and medical expenses. If you don’t have such an emergency fund built up, start small — a modest amount set aside every month will eventually come in handy and help you avoid going into debt or tapping retirement savings.

Your spending patterns

Many people wonder where all the money went at the end of the month. Each individual purchase may not seem like a bad idea, but if together your expenses add up to more than your income, you should work to reverse the ratio. A great idea is to adopt the “every dollar has a name” strategy. Writing down every dollar spent, and where it went, can be an enlightening exercise. After a month or two you’ll start noticing patterns, and you’ll find that cutting out a luxury can give you more financial breathing room.

Taking these small steps will allow you to sit back and watch others panic. Meanwhile, you’ll be calm, knowing that your money is where it should be.

Daniel Friedman is the chief executive of wealth management firm WMGNA in Farmington, Connecticut.