When it comes to setting yourself up for financial success, there are a few concrete steps that you'll want to take. Spending less than you make over the long run is an important key. Additionally, you'll want to invest much of the money that's left over after paying your bills. In a nutshell, this is how you can build wealth over time. However, this can be easier said than done. Therefore, you'll want to have a more detailed road map to follow.
It's hard to fully understand your personal finances without understanding where your money goes each month. Many people wake up at the end of the month with no money left in their bank accounts. They wonder what happened to all of the money they brought in. To avoid falling into this situation, setting up a budget is a necessity. A budget provides a snapshot of where your money goes each month.
There are some great budget apps that will allow you to track your spending and see where you might be able to squeeze some savings to improve your financial situation. If you don't feel comfortable allowing an app to track your spending, you can simply plot every purchase on a simple spreadsheet. Over time, patterns in your spending will emerge, and this knowledge will give you the power to adjust where your money goes.
Some of your money should go into savings each and every month. Before using that money for long-term investments, you'll want to set up an emergency fund. Unexpected expenses will pop up occasionally, and you'll want to be prepared to take care of them with funds you've saved up. Otherwise, you'll need to go into debt and spend even more on the emergency.
If your budget is tight, you might only be able to start out with a small amount going to savings each month. Even $20 a week will add up to more than $1,000 over the course of a year. Saving between three and six months of household expenses in an emergency fund is the general consensus among personal finance experts. There are a few outliers who recommend saving up as much as a year of expenses in a money market account, but three to six months is the general rule. Having any money in an emergency fund is better than having no money in savings.
After a couple of months of budgeting, you should have a pretty good idea of where your money is going. You might need to make a few tweaks here and there, but you should have increased control over your finances. Many people view a budget as a constraint. However, a budget actually gives you permission to spend your money. If you need to spend more in a given line item, you'll just need to transfer that money from elsewhere. As long as you have money left in the budget, feel free to spend. Once it's gone, you'll need to wait until next month or find a way to come up with a few extra dollars.
If you have a relatively low credit card balance, you should just work hard to pay it off as soon as possible. However, with higher balances, this can become more difficult to achieve. Credit card debt will usually have the highest interest rates that you'll need to pay. This interest can really take a chunk out of your monthly budget. That's why you might want to look into consolidating your credit card debt with other loans. This will be a better idea when you have multiple outstanding credit card balances that you can't pay off in full.
Opening up another credit card to make a balance transfer is one great way that you can pay off your credit card debt while cutting down on your interest expense. Many credit cards offer new cardholders a period of 12 or 18 months to pay off their balances without accruing interest charges. They will usually come with a 3% balance transfer fee, and this will work out to $30 for every $1,000 you decide to transfer. However, paying the fee can be worth it if you're able to pay down your balance more quickly. After the fee, every dollar you pay will decrease the balance you owe as long as you put no more spending on the card.
Another option for dealing with overwhelming credit card debt is a debt consolidation loan. You'll need to go to a bank to get one of these loans, but you can consolidate your outstanding debt with a personal loan or a home equity loan if you qualify. The number of payments that you'll have to pay will go down, and the one payment that's left will usually be lower than the combined payments. Additionally, these loans tend to have lower interest rates than credit card debt, and this will allow you to pay down your debt more rapidly.
The final benefit of a debt consolidation loan is the fixed term it will come with. As long as you pay the minimum each month, you'll pay off the debt in the amount of time stated when you get the loan. A five-year loan will pay off in five years as long as you pay the minimum and make no additional payments to the principal. Cutting down on interest can help free up the rest of your budget.
Your credit score is made up of five components, but two of them make up about two-thirds of the score. These are also the easiest to impact with proper financial strategies. You'll want to pay the minimum payments on your debt by the due date every single month. Delinquent payments are the issue that can cause the greatest negative impact on your credit report. Additionally, you'll want to keep the utilization of your credit lines as low as possible.
A lower level of credit utilization will help your score with the credit bureau. A debt ratio lower than 30% is best. Accessing your credit report is another step that can pay off. If you find any errors on your report, you can dispute them and ask the credit bureaus to remove the negative marks. These have to be legitimate errors and not just debts you regret incurring.
Companies are increasingly becoming targets for hackers. These hacks can cause your personal information to be compromised. Using complex passwords for your online accounts is key to cutting down on the likelihood that your accounts will be hacked. Also, make sure that you avoid giving out personal information in response to unsolicited emails.
Many Americans will get a windfall each year. A big tax refund is the most common, but some people will get rebates or inheritances. It's fine to make a small splurge with some of the money from a windfall, but most of it should go to long-term goals. Debt repayment can be a great use of a windfall. You might also choose to beef up your emergency fund or funnel some money to long-term investments that will grow over a period of years.
Windfalls will not usually show up as a line item in your monthly budget. Therefore, you'll want to plan ahead for exactly where you want this money to go. Taking these recommendations into account can greatly increase the likelihood that you'll have long-term financial success.
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