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Most people hit financial challenges at some point. Perhaps it’s a bout of overspending, the feeling that you can’t get out from under your credit card debt, or the fact that you can’t balance your budget.
Facing these kinds of situations doesn’t mean that financial security can’t be yours, nor that your money goals are unattainable. Rather, it means that you may need to focus on your finances, reprioritize, and adopt some new habits to get on track.
Here, you’ll learn about five of the most common money challenges, as well as some smart solutions that can help you take control of your finances.
Key Points
• One way to overcome a financial challenge can be to set a budget to control overspending by reviewing financial statements, categorizing expenses, and tracking spending.
• Build an emergency fund by saving a portion of your monthly budget, aiming for three to six months’ worth of expenses.
• Consider using the avalanche or snowball method to repay debts or consolidating credit card balances with a personal loan.
• Manage student loans by paying more than the minimum, applying lump sums to the principal, and considering refinancing.
• Maximize retirement savings by contributing to a 401k or IRA, taking advantage of employer matches and tax benefits.
1. Monthly Spending Exceeds Income
Many people struggle with the fact that their monthly outflow (or spending) outpaces their monthly inflow (or take-home income). The imbalance can cause you to rely on credit cards, and make it nearly impossible to save for the future, or even for a rainy day.
To help get your cash flow into balance, you may want to set up a basic budget. While a budget may sound restrictive, it can actually simplify your finances and make it easier to make everyday spending decisions.
A good way to start is to go through the last few months of financial statements and receipts, then tally up your average monthly income (after taxes) and average monthly spending. You may also want to break down expenses by categories, and then group categories into necessary and unnecessary spending.
It can also be helpful to actually ​track your spending for a month, taking note of every latte and lunch out (or by using an app that tracks expenses). Although you may think you know where your money is going, when people tally up all their purchases for a month, they are often surprised to notice that their spending doesn’t always match up with what they thought their priorities were.
Once you see where your money is really going each month, you can then look at your budget critically and search for areas where you can cut back. For example, you might decide you’ll eat out less often, pack your lunch a few days a week, save on a streaming service you rarely watch (buh-bye), or find a cheaper cell phone provider.
You may also want to think about ways you may be able to grow your income, such as negotiating a higher salary, looking for a new (higher-paying) job, or taking on a low-cost side hustle.
2. Not Having a Financial Cushion
Life can be unpredictable, and unforeseen events, like a loss of income, car breakdown, or visit to the ER, can quickly put you into a hole if you don’t have any emergency savings at your disposal.
Ideally, an emergency fund will have enough cash to cover at least three- to six months’ worth of living expenses, but even a reserve of $1,000 can save you from having to rely on credit cards or take out a personal loan to handle an unexpected expense.
To start building a buffer, you may want to consider dedicating part of your monthly budget to emergency savings. It can be a good idea to keep this fund in an account that earns more interest than a standard savings account, but still allows you easy access to your money, such as a high-yield savings account (typically offered by online banks), money market account, online savings account, or a checking and savings account.
Even contributions of $50 a month can add up quickly, creating a cushion that can come in handy when a rainy day hits.
3. Carrying a Credit Card Balance Every Month
Credit cards can be both a useful financial tool and an incredibly slippery slope. High-interest rates make the price of the charged items significantly more expensive. And, depending on credit makes it more likely that you’ll spend more than you earn.
As you re-evaluate your budget and work to reduce expenses, you may also want to find a way to pay more than the minimum on your credit card balances. If you have multiple cards, you might try the avalanche method of paying off debt. This involves paying the minimum on all your balances, but putting extra towards the balance with the highest interest rate. Once that’s paid off, you put your extra money towards the debt with the next highest balance, and so on.
Another approach is the snowball method. Here, you pay the minimum on all your debts, but put extra money towards the smallest balance. Once, that’s paid off, you put your extra money towards the next-highest balance, and so on.
Alternatively, you may want to consider consolidating your credit card debt by paying off all your balances with a personal loan. You would then only have one balance to keep up with, ideally with a lower interest rate.
4. Being Weighed Down by Student Loan Debt
Having a large amount of student debt can demand payments that limit your ability to buy a home or increase your savings. While it can be tempting to put off payment and keep more money in your checking account, that only results in paying more interest over time.
Instead, you may want to consider paying more each month in order to get out from under student debt faster. Whether it’s paying $20 or $100 more each month, every bit over the minimum payment helps to make a dent in your debt.
You may also want to put any lump sum of cash you receive, such as a tax refund or bonus, towards your student loan debt. When you make extra payments, however, it’s a good idea to make sure that you select the option for the funds to be applied toward your loan principal (otherwise it may go towards interest).
Another option you may want to consider is refinancing your student loans. This means trading in your current loan(s) for one brand new loan through a private lender. The goal with refinancing is to get a lower interest rate while also having the ability to change your loan term (such as cutting the timeline in half). This can be a good option if you have good credit and are currently paying a high interest rate on your student loans. Just be aware that refinancing federal student loans can mean you are not eligible for forgiveness, so think carefully about your decision. In addition, extending your loan term can mean that while your monthly payments are lower, you pay more interest over the life of the loan.
Recommended: 6 Strategies to Pay Off Student Loans Quickly
5. Not Saving Enough for Retirement
Retirement saving can be critical if you want to have financial freedom in your future. And even if retirement seems like a long way off, it can be much easier to amass a comfortable nest egg when you start saving and investing early.
Thanks to the magic of compounding interest (when the interest you earn also earns interest), even putting a little bit of money into a retirement fund each month can help you build wealth over time.
If you aren’t maximizing contributions to a 401k, you may want to consider putting as much tax-deferred money as possible into these accounts. If your employer offers matching funds, it can be a good idea to take full advantage of this perk (which is essentially free money).
If you don’t have access to a 401k or you are able to put any additional money aside to secure your retirement, you may want to consider opening an IRA (keeping in mind that there are annual limits to retirement contributions).
Taking advantage of these savings vehicles can lower your tax burden this year and earn interest for your golden years.
The Takeaway
Many of us have to deal with financial challenges at one time or another during our lives, such as living paycheck to paycheck or accumulating too much debt. Resolving these issues can involve tracking your expenses for a month and setting up a monthly budget. Or you may need to set up a manageable debt repayment plan to regain control of your finances. One simple step that may help you optimize your finances is to find the right banking partner.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What are the main financial challenges?
Common financial challenges include poor budgeting, not having an emergency fund, overspending, racking up credit card debt, living paycheck to paycheck, and not saving for long-term money goals.
What is financial stress?
Financial stress can be defined as difficulty meeting one’s financial commitments and the anxiety that triggers. Money worries are often based on feeling as if one doesn’t have enough money and/or having too much debt.
What are significant financial difficulties?
Significant financial difficulties can be defined as being unable to make necessary payments using one’s disposable income or possibly any other source.
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