Finances can be a major stressor in life. Whether you have a small amount of money or a lot, it seems as though it’s never enough. Tight finances can cause more than a little anxiety.
We all know that crossing your fingers and hoping your financial future will somehow magically be rosier isn’t a good plan. Instead, it takes making smart choices and sticking to them to move in the right direction. It also takes patience and sheer determination. If you want to work toward a more secure tomorrow, get started today. Listed below are four tips to get you started making better financial decisions.
1. Live below your means.
A significant number of people live beyond their means. They rely heavily on credit even when making routine purchases. Others live just within their means, usually paycheck to paycheck but with little debt. However, the wisest choice is to live below your means, saving and investing for the things you want.
Looking for the best place to begin looking for ways to live below your means? Take some time to sit down at your kitchen table and empty every last piece of plastic from your purse or wallet. Many of us are walking around with credit cards that charge interest rates just below those of crime syndicates.
Even if we’re not carrying a balance on those cards, why risk the temptation to use them? Other cards — such as specialty store cards — may offer special incentives, but you end up paying for those perks one way or another.
Balance your card-cutting fury with the knowledge that some credit cards are actually good for improving your credit score. For example, consumers interested in building (or rebuilding) a credit score can look into a secured credit card. Unlike an unsecured card, secured cards typically require a deposit that becomes your credit limit; this reduces the issuer’s risk. Just as with an unsecured card, though, prudent use and on-time payments on your account will boost your credit rating.
Living small means you’ll have money left from your last paycheck when you get your next one. Put any extra in an interest-bearing account or deposit it into your retirement fund. Socking money away is a lot less stressful than having “too much month” at the end of your money.
2. Set goals and establish priorities.
As the saying goes, failure to plan is planning to fail. It’s unnecessarily difficult to discern where your financial situation is going if you don’t set a few goals and milestones along the way. Plus, setting goals motivates you to make smarter financial decisions along the way.
Try applying the SMART approach to setting your financial goals. Goals must be specific, measurable, attainable, relevant, and timely. Put your SMART goals in writing and commit to working toward them. Otherwise, you’re just setting yourself up for frustration and failure.
Bear in mind that it’s OK for goals to change over time. As you reach one, set another. As your circumstances change — examples include marriage, having kids, changes in employment, or health issues — adjust any corresponding financial goals accordingly.
You’ll also need to set your priorities. Helping your child pay for college will probably take precedence over buying a vacation home in the mountains. Both are perfectly acceptable goals, but realistically you might only be able to achieve one of them. Let your priorities drive your financial goals. Plan them well, monitor progress, and move the target as needed. If you can’t reach one, don’t let it be for lack of planning.
3. Plan for the unplanned.
As another saying goes, life is what happens while you’re making other plans. Not everyone leads a charmed life that proceeds as scheduled. Most don’t. As you’re establishing your priorities and setting goals, don’t forget to plan for the unplanned.
Case in point? Job losses and other financial struggles resulting from a global pandemic.
Experts have long espoused having at least six months’ worth of expenses in a liquid savings account in case of emergency. You still have to pay the bills even if no money is coming in. A lost job, health crisis, natural disaster, auto accident, or a sudden death can send you and your finances reeling. If the unexpected costs too much or lasts too long, you risk never being able to recover lost ground.
It’s ill-advised to think that nothing bad will ever happen to you. Make some smart choices about not only a good-sized savings account but about insurance coverage as well. Health, life, disability, home, and auto insurance policies should provide optimal benefits. Paying the premiums and deductibles should factor into your monthly budget priorities.
Finally, whether you’re 18 or 108, if you haven’t done any estate planning, start today. Choosing where your assets go when you’re gone should be your decision, not that of a judge. Don’t saddle grieving family members with the time and expense of doing it for you.
4. Build your net worth.
Building net worth isn’t only for the wealthy. Net worth is an important target for anyone wanting to make better financial decisions.
Calculating net worth is fairly easy. You add up all your assets, subtract all your liabilities, and that’s your net worth. Since assets and liabilities change as you pay down debt and make (or avoid making) purchases, net worth is fluid. Set up a spreadsheet to determine what your assets and liabilities are. It’s a good way to see where your money is going and for what. Figure out where you can spend more money to reduce liabilities or avoid them altogether.
Weigh the potential of using your assets to reduce your liabilities. For example, let’s say you’re paying 17% interest on credit card debt and earning less than 1% on money in your savings account. Consider paying off the debt using your savings, then rebuilding the balance using what you were paying on the debt.
When you retire, you’ll likely start seeing your net worth drop as you begin using some of those hard-earned assets. That’s OK. Enjoying them is why you worked so diligently to build your net worth in the first place.
Making better financial decisions isn’t always easy, especially in the beginning. If you have a history of making impulse purchases, don’t waste time lamenting your previous mistakes. You can decide today to begin a new chapter.
Maybe you decide to live with the current version of your smartphone rather than start making payments on the latest iteration. Maybe that bathroom renovation can wait until Junior’s braces are paid in full. You can probably wait to buy a new pair of Italian boots after you’ve saved enough to take that trip.
Whether the prize is a new car in two years or a yacht in the distant future, keep your eye on it. A few smart financial moves, a little sacrifice, and patient persistence may be all you need to reach your goals.
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