It is never too early or too late to prepare for your financial future. Whether you are fresh out of college or focused on paying down your debt, these tips will help you get on the right financial track.
Let’s go over the five key areas that you can work on to improve your finances today. Don’t forget to take our Financial Savviness quiz at the end of the article to see how your finances stack up!
Set a Budget
This is the one piece of advice that will be repeated by financial advisors until the end of time. The first step to getting your finances in order is to set a budget that gives you a full understanding of where your money is coming from – and where it’s going.
Make a list of all of the checking, savings, credit card, loan, and other accounts that you either have money in or owe money to. Using an online budgeting tool can help you get a complete picture of where you stand financially right now.
Weight your income versus your debt to make a plan that allows you to boost your savings while paying down high-interest debts. If this is your first budget, make sure it is realistic. Leave yourself a little spending money for fun experiences such as the occasional evening out with friends or family.
Make sure you review your budget frequently. This will help you spot areas where you may be overspending and allow you to adjust your savings.
Most people wouldn’t be prepared for an emergency if one were to arise. According to a 2016 Bankrate survey, nearly 35% of adults in the United States have zero dollars in savings.[i]
Saving money can be hard. There is always something to save up for – a new car, that vacation you’ve been dying to take, or your first home. Those savings should never get mixed in with your emergency savings. Your emergency savings should consist exclusively of money that is set aside specifically for a medical emergency, an accident, or loss of a job.
Start building your emergency fund by utilizing a high-yield savings account to help your savings dollars grow faster. Contribute small amounts each month until you have a solid six months’ worth of expenses set aside.
Imagine you were out of work for six straight months. What expenses would be necessary for you to live? These expenses should include the cost of your mortgage or rent payments and all costs related to transportation, utilities, and groceries.
Know Your Credit Score
We understand that you are not going to be able to buy everything with cash. It is important to know your credit score so that you can secure the lowest loan rates when you need to borrow money.
Your score comprises your payment history, the percentage of available credit you are using, how long you have had a credit history, how many accounts you have, and any negative marks such as a bankruptcy.[ii] With all of this information, credit reporting agencies are able to compile a three-digit score.
Your credit score can range from 300 to 850, although you should aim to get a “Good” credit score of 690 or higher.[iii] This will put you in the best possible position to secure a low-interest loan if you need one. If you have a poor credit score or have recently had a bankruptcy, there are plenty of ways for you to improve your credit score.
Not sure of your credit score? There are numerous services that can provide you with a free credit report once a year. Make sure not only that you know your numeric score, but that you also review all of the records on your credit report. Credit agencies can make mistakes. If you see something that isn’t correct, call the credit agencies immediately to start the process of getting erroneous records removed.
Don’t Neglect Your Retirement
It is never too early to begin thinking about your retirement. Saving small amounts early on can reap big rewards thanks to the power of compound interest. Compound interest allows you to earn interest on your initial investment as well as previously earned interest.
Consider this example: if you earned 8% compound interest on an initial investment of $10,000, you would earn $800 in interest during the first year. During the second year, you would earn interest on that $10,800, resulting in an additional $864.[iv] That compounding interest would continue to build until your retirement.
At the same time, it is never too late to focus on your retirement savings. Starting later may simply mean that you need to put aside more of your income to allow for higher savings when you hit retirement.
Look into different ways to build your retirement savings. You don’t have to rely solely on your work’s 401(k) plan. Explore retirement accounts such as our traditional and Roth IRAs.
Pay Down Your Debt
High-interest debts can be crushing. Review your debts to determine which accounts are costing you the most. Credit cards can rack up interest charges ranging from an Annual Percentage Rate (APR) of 15.99% to 20.90%.[v] For those only paying the minimum balance, those interest rates could cost you hundreds or thousands of dollars a year.
Pay down your debt by starting with the highest-interest account and make larger payments each month to pay down the principal amount.
It is hard to make a dent in your debt by making just the minimum payment, even if you stop using that credit card. Increase your payments and your debt will disappear more quickly.
Getting your finances in order can feel overwhelming. That is why it is so important to create a realistic budget as the first step to ensuring you know how much money you have to work with and how you can allocate your funds. While it can be hard to get started, keeping your finances in order will quickly become second nature.
Would you like to find out how your personal financial plan stacks up? Click below to take our Financial Savviness quiz.
Test Your Finances