Ten Essentials of Financial Management
One of Your Best Buddies Is Budgeting
Making ensuring that your monthly expenditures don’t exceed your monthly income can be accomplished through budgeting and knowing how to balance your bank account. Just hoping that at the end of the month, everything will balance out can result in bank fees and credit card debt and prevent you from investing for the future.
You may gain a rapid grasp of your financial situation by reviewing your bank statements from the preceding few months and compiling a list of your average monthly income (after taxes) and expenses.
Budgeting can be simplified by separating out fixed expenses like rent and utilities from variable ones like entertainment and clothes. Spending a month or two keeping track of your money using a diary or a mobile app will give you a good idea of where your money goes on a daily basis.
You can see if you’re falling behind, breaking even, or, best case scenario, gaining ahead of the game financially by keeping track of all your monthly income and expenses on a spreadsheet.
Going through your budget and looking for places to cut back on discretionary spending is a good starting step if you aren’t living within your means or if you’d like to free up more income for saving. Is it possible for you to eat in more often? Spend less on apparel? No more TV? Leave the gym and start exercising at home?
Asking for a raise at work or launching a side business from home are two options to increase your income.
Establishing a Contingency Fund
No one knows when their automobile will give out or when they’ll need to get to the dentist in a hurry. It’s risky to rely on credit cards or fall behind on bills if you don’t have a savings cushion to cover unexpected expenses.
To prepare for situations like this, it may be wise to start setting aside money regularly. The standard recommendation is to have three to six months’ worth of expenses saved up in a liquid account.
An interest-bearing account that yet allows quick withdrawals in an emergency is a decent compromise. A high-yield savings account, an internet savings account, or a bank account with no monthly maintenance fees are all viable choices.
Avoiding Carrying a Balance on Credit Cards
It’s easy to go overboard while using a credit card because of the convenience it provides. But if you let the balance roll over from month to month, you’ll end up paying a hefty premium for the convenience.
The reason for this is that credit card interest rates are far higher than average, typically exceeding 16%. Thus, a nominal fee that is carried over a period of months can rapidly increase in size. Other forms of high-interest debt, such as certain forms of private or payday loans, are also affected.
Don’t freak out if you’re already carrying a heavy load of high-interest debt. It’s possible to eliminate that financial burden.
For instance, the avalanche approach has you pay the bare minimum to each creditor and then prioritize paying off the debt with the greatest interest rate. The borrower then prioritizes paying off the debt with the next highest interest rate, and so on.
Punctual bill payment
Creditors may charge you a late fee if you pay your bills late or skip payments altogether. A delinquent account or one that has been sent to collections has been ignored for an extended length of time.
A borrower’s credit score is one factor used in determining whether to extend financing.
There is a direct correlation between your payment history (which accounts for 35% of your credit score) and your credit score. If you have a low credit score, loan approval will be more challenging and interest rates on whatever loans you are offered will likely be higher.
Get a Head Start on Retirement Savings
Retirement may seem like a distant prospect while you’re young. But if you start saving early on, you may stretch your contributions out over a longer period of time and avoid having to play catch-up later on.
However, the power of compound interest is perhaps the most compelling argument in favor of getting started as soon as possible.
A little amount can expand over time since interest is earned on both the principal and the interest accrued. You should think about putting money into a 401(k) or other employer-sponsored retirement plan if your company offers a matching contribution.
A standard IRA, Roth IRA, or SEP IRA may be available to you, depending on your specific financial condition.
Investing
It’s possible that your retirement savings won’t be enough to provide for your basic needs once you stop working. Furthermore, there may be things you wish you could buy when you retire but before you stop working.
For example, if you want to save money for your kids’ college education, you might open a 529 plan.
Remember that all investments have some degree of risk and that the market is volatile, meaning that it swings up and down over time, if you decide to invest more money for other long-term savings goals.
You can open a conventional brokerage account with any financial institution of your choosing and begin investing immediately. The next step is to decide whether to invest in a diversified mutual fund or exchange-traded fund, or whether to invest in individual stocks and bonds after doing your own due diligence.
Obtaining Coverage
Sometimes, it’s best to insure against the worst-case scenario. That includes getting the legally mandated coverage for your car and health care. Protecting your dwelling and belongings with renters or homeowners insurance is a good idea.
Getting long-term disability insurance and term life insurance is a smart option if you have a family that depends on your income. Many workers have access to affordable health and disability plans through their companies. An insurance agent, broker, or the insurance company itself can be contacted if that route is unavailable.
Utilizing Credit Card Benefits
If your credit is good, you may qualify for a credit card that offers perks like air miles or cash back on purchases. If traveling is your top priority, it’s wise to seek for a credit card that offers travel points that can be redeemed for stays at a variety of hotels and airlines.
You should opt for a card that provides you with both points and a signup bonus if you make a certain number of purchases within the first few months of opening an account. One that doesn’t charge an annual fee is also great.
Read up on the card’s rewards program, including the value of its rewards units (points, miles, or cash back), how to redeem them, whether your rewards will expire, and any minimum redemption amounts, before making a final decision.
Remember that interest rates on credit cards are often far higher than rewards rates on credit cards. If you don’t want finance charges to eat up your hard-earned money, it’s probably a good idea to pay off your entire monthly statement balance in full right away.
Frequently reviewing your credit reports
At AnnualCreditReport.com, you may get a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion. Once only available once a year, the COVID-19 pandemic has prompted the three major credit reporting agencies to begin providing free access to your credit record every week.
Getting a copy of your report every so often and checking it for mistakes or symptoms of fraud can be a good idea. You should contact the credit reporting agency or the account provider as soon as possible if you discover any discrepancies and register a formal dispute if necessary.
If you check your report often, you can catch identity theft early and get it fixed. It can also assist you verify that your credit report is free of any mistakes that could lower your score. A good credit score is essential in today’s lending environment, whether you’re looking for a rental or a mortgage.
Bank Selection
There is no shortage of banks and credit unions; therefore, it may be prudent to do some comparison shopping in order to locate the one that best meets your individual requirements. Possible options are:
In the banking sense. They provide a wide variety of banking services and often have branches all throughout the country. This choice could be useful if you’d prefer to discuss your financial situation face-to-face.
Financial co-op. Union members own these philanthropic organizations. They function similarly to a conventional bank, except membership is typically restricted and there may be fewer physical branches. However, they might provide better rates and lower costs than a regular bank.
Digital banking. These organizations are exclusively virtual and rarely have physical locations. That’s why it’s common for them to offer low rates of interest and reasonable service fees. If you’re comfortable managing your finances without constant human interaction, an online bank may be a convenient solution.
When deciding on a bank, it can be helpful to look for one that offers a user-friendly website and mobile app, as well as fee-free withdrawals from ATMs in handy locations.
