We all know how important your financial health is to allow you to achieve your goals like buying a house or being able to retire somewhere warm and sunny. Whether you’re going to get groceries for the week, weighing your choices on where to go for dinner, or deciding on if you can take the family out for a movie, your finances have an impact on what happens.
Financial literacy and education have been declining over the years as many studies have shown. The FINRA Investor Education Foundation’s 2018 National Financial Capability Study found that only 7 percent of respondents were able to answer six basic questions about personal finance and economics.
Another alarming statistic is from Bankrate’s recent Financial Security Index survey where only four in ten U.S. adults indicated they could cover a visit to the ER or other types of emergency that cost $1,000.
You can make changes regardless of your current financial situation that will improve it. But it will take time and effort to do. Here are 7 personal finance tips that will change your life below.
Choose one or two, a few, or even all of them to try, just as long as you work towards making them a habit or goal. Eventually, you will reap the benefit of having less stress and worry over money and finances.
7 of the Best Personal Finance Tips
1. Start Tracking Your Expenses
This may sound tedious to account for all your expenses. But technology has made this really easy to do. You can create a spreadsheet that you can keep track of on your computer or phone. Google sheets are one such app that you can use to easily tally your expenses as you make them.
There’s also a ton of money tracking apps that you can download on your phone like Mint. A lot of financial institutions have also started to provide free budgeting tools within their mobile banking app. See if your bank or credit union offers one.
The point of tracking your expenses is that most of us have no idea how much our expenses are costing us. To know what costs you need to focus on, you need to know if cutting down on eating out is the right move or the problem is you consistently overspend at the grocery store.
2. Figure Out a Budget
You might as well consider budgeting as personal finance 101. If you start tracking your expenses, starting a budget will be easier. A budget is simply making a plan of how you’re going to use your money each month.
Writing down your goals has been linked to a higher likelihood of achieving them. Consider using a paper and pen to write your budget first. Then you can use a spreadsheet or budgeting app if that helps you keep track of where you are during the month.
To create a budget, start by writing down your monthly income. Make sure to account for all your sources of income.
For example, if you have a full-time job that pays you weekly, a weekend job that you are paid biweekly, and a side hustle which you consistently earn money each month, you’re accounting for it all. You may have to estimate or use an average for income sources that fluctuate.
Next, add up all your fixed expenses which include your rent/mortgage, utilities, car payments, etc. You also want to account for the variable expenses that you generally have on a monthly basis. This would be your car maintenance, groceries, and doctor visits.
The key to having an effective budget is creating financial goals that you can fund using your budget. Determine what that goal is that you want to achieve.
Examples of a financial goal are paying off a credit card, starting an emergency fund, or saving for a big purchase. Starting an emergency fund is one that’s considered a necessity to avoid making a bad situation worse by going into debt.
Don’t use your “leftover money” to fund this goal. Decide how much money you want to go towards this goal each month and treat it like your fixed expenses.
You can’t have all “work” and no “fun” when it comes to budgeting. So set aside how much you want to spend on discretionary expenses. This includes items such as entertainment, eating out, personal care (salon, gym memberships), clothing, etc.
Now that you have accounted for all your incoming and outgoing money, take a look at your budget to make sure your expenses are lower than your income. Adjust from your discretionary or variable expenses if you need to.
Put your budget to work and start spending and saving based on your new budget. It’s normal to make adjustments as you go. Once you’ve achieved your financial goal, start working on another and so forth. Not only will you feel like you’re accomplishing something but you’ll also be becoming more financially healthy.
3. Work on a Positive Money Mindset
If you believe that you’ll always be struggling financially, how can you expect to get yourself into a better place? Work on removing that self-fulfilling prophecy of negativity and work on creating a positive money mindset.
Your money mindset is your attitude towards your finances. If checking your bank account causes you emotions of dread or fear, that mindset will make it harder for you to hold onto money or stay on a budget.
For example, let’s say that you are $20,000 in debt on your credit card. One of the thoughts you might have is that “The interest rate is so high that it’s costing me about 60 percent of the payment I make”.
Instead of focusing on what’s wrong, you shift to thinking with solutions. Now despite being $20,000 in debt, you may have improved your credit score over the past year. You can look for options to consolidate your debt with a lower interest rate that will get you out of debt faster.
Create a money mantra that will help keep your mind focused. A money mantra is similar to an affirmation as it’s a statement that covers what you want to achieve for your financial life. By stating what you want to have manifest for you in your life, it keeps you pushing mentally to act in that direction.
To create an effective money mantra, consider what specific financial goal you want to accomplish in the next six months. With your goal in mind, consider what financial habit you will need to reach it. Turn that into a phrase that you can repeat a few times out loud or in your mind. You might also consider writing it down and posting it in places that you will see it at often.
4. Start Investing Now
While it’s ideal to start investing as early as possible like right after college, that might not always be possible. Don’t put it off for another paycheck and put away whatever you’re able to. The power of compounding works over the course of time.
Making investing a habit is best achieved by automating it. For example, set up an automatic withdrawal from your bank account that goes directly to a retirement account. Pick an amount that works for you, whether it’s $25 a week or $200 every two weeks.
If your employer offers a 401k, consider increasing the amount that goes to fund that out of your pay. 401k’s are tax-advantaged accounts that allow you to invest a percentage of your gross pay before taxes.
You don’t have to worry about paying taxes from your 401k account until you start taking money out during retirement. That also means that those dollars which would have gone toward paying taxes owed on your paycheck are going towards increasing the amount you have to invest.
IRAs are another type of tax-advantaged account to consider. There are two types of IRA accounts: Roth and the Traditional IRA. The main difference between the two is when and how your money gets taxed.
Roth IRAs use after-tax dollars that you earned through your salary, commission, etc. that you don’t need to pay taxes on after you retire and are taking withdrawals. A traditional IRA uses pre-tax dollars so your money grows tax-deferred until you start taking withdrawals.
Choosing whether to do with a Roth or traditional IRA will depend on your specific situation. Do research on the topic to figure out what’s best for you. Here’s a link to an article from Forbes that has some good considerations on the subject.
5. Stay Away From Bad Debt
The definition of debt is owing money to someone or usually a company. Not all debt is bad so you don’t need to avoid it completely. Bad debt basically occurs when the money you borrow is used to purchase something that loses its value or isn’t a source of long-term income. If you are paying a high interest rate to borrow money then it is also considered a bad debt.
Credit card and auto loans are some examples of bad debt. Cash advance loans and payday loans are among the worst type of debt possible. With these types of loans, you must repay the loan usually around your next paycheck plus interest and fees. According to the Consumer Federation of America’s payday lending website, the average payday loan costs 400 percent annual interest or more.
While “good” debt can be considered to be “no debt”, it isn’t possible for most people to be able to afford everything out of their own pocket. Good debt is considered a debt that is beneficial and used in the right circumstances. Interest rates on good debt are usually lower too. Here’s a few examples of debt can be good below:
Buying a home – Interest rates on a home loan is lower than other types of loans because the home itself is used as security. That means if you don’t repay the money that you borrow, the financial institution can take the property and sell it to recover their money. Homes tend to rise in value over time and the interest on a home loan is tax deductible.
Higher Education – Student loans also have low interest rates with the federal government making most of these loans for students and their parents. Going to college increases your ability to earn money and move up through your career over just finishing high school. Many high paying careers such as engineering and medicine require higher education to be qualified for those roles.
Starting or investing in a business – Running your own business can be a great side hustle to earn another stream of income or a career change to work for yourself. Being your own boss has its challenges but the potential benefits and ability to be in control of its direction can be fulfilling. If you work in a field for an employer and decide to go off on your own, it’s possible to significantly increase your income potential which makes it worth getting a business loan to achieve.
6. Improve and Keep a High Credit Score
Having good credit is something you probably already relate to getting a loan with a lower interest rate. Nowadays, people use it for so much more. A good credit score means you can rent an apartment, pass a background check by a potential employer, and start a wireless plan with a new carrier.
When you’re starting out, you don’t have any credit history so build it by getting a credit card and using it responsibly. There are credit cards out there available to individuals who don’t have any credit that you may qualify for. Otherwise, see if your financial institution that you have your checking account with offers one that they can work with you to approve. You might also be able to have a family member such as a parent co-sign for one.
There’s more on how to use a credit card responsibly later. But if you don’t have good credit or otherwise want to improve it, there’s certain things you can do. For example, making your payments on your existing credit cards and loans makes up for 35 percent of your FICO credit score.
Put a reminder on your phone to help you remember when a bill is due. Most lenders and credit card issuers also allow you to set up alerts or automatic payments when logging into your account online. If you’re comfortable with having money in your account automatically withdrawn to pay your bill then that’s the easiest solution.
The amount of money that you owe to the credit you have available is the next highest ratio of your credit score. Making up 30 percent of your score, lowering that ratio can help improve your credit. Credit cards are the most common type of account that has a credit limit. There’s also home equity lines of credit and personal lines of credit which have an effect on your ratio.
For example, let’s say you have three credit cards and a personal line of credit which together have a total of a $10,000 credit limit. Between these four accounts, you owe a total of $8000. That means you have a total credit utilization of 80 percent (8,000 divided by 10,000).
To lower this ratio faster you need to work on lowering the amount that you owe. You should also not try to take on more debt. Generally, it’s ideal to have a credit utilization ratio of less than 30 percent.
Maintaining a good credit score can be done by practicing a few good habits such as not opening up more credit cards than you need. You should also keep your oldest credit card open even if you don’t use it actively. Your credit history largely begins from the time it was opened.
Another good habit is checking your credit report at least once a year. You can get a free copy of your credit report from the three credit reporting agencies: Experian, TransUnion, and Equifax. Review it to make sure that it’s accurate and report any mistakes to the agency as soon as possible.
7. Use a Credit Card the Right Way
People tend to think of credit cards as a bad thing and it can be when you use it to accumulate debt. But there’s a lot of good things that a credit card can be used for when you use it responsibly.
Many credit cards have rewards programs that allow you to earn cash back or points every time you make a purchase. This cash back or points can be used to receive a statement credit or towards gift cards, hotel stays, airplane tickets, and other rewards. Certain purchases like gas and travel can earn a higher point or cash back value.
The type of credit card that you get determines the type of rewards and potential value that you can earn. If you travel often, consider getting a credit card with a good travel rewards program that you can use for all your hotel, airline, etc. purchases.
No credit card offers rewards that outweigh the cost of carrying a balance or paying late. To use a credit card responsibly, you need to ensure that you pay the full balance on time each month.
If you have a debt from other credit cards or other loans, you might be able to use a credit card to consolidate it. Some credit cards offer 0 percent interest on balances for a certain length of time (usually around 12 months). You can transfer your balances with higher interest to a credit card that offers this.
Two things to keep in mind if you do this:
1. Check to see if the credit card has a “balance transfer fee”. This is a fee that’s on average around 3 percent of the balance on the existing account to have it “transferred” to the new credit card.
To put that into perspective, let’s say you are transferring a $10,000 balance to a credit card that’s offering 0 percent for 18 months with a balance transfer fee of 3 percent. You will pay $10,300 total if you pay back the balance within the 18 months. Crunch the numbers to make sure that you will save overall by transferring the balance to the new credit card if there’s a fee charged for doing so.
2. Make sure that you can pay back the full amount before the special financing rate is over. After the introductory interest rate period, the credit card will likely jump up significantly to double digit figures.
If you can’t pay it back in full, try to estimate how much you think you can repay. It may still make sense depending on how much interest you’re paying on the other account or if you believe that you will repay it shortly after the intro period.
Whether you need a little or more help getting your finances in order, a few of these tips can make a big difference. The only way these tips will work is if you take the steps that are necessary to create these habits and behaviors. With time you will have a new financial outlook that opens the possibilities to achieving your life goals.