Poor financial health can linger like a stubborn cold that just won’t go away. Plenty of fluids and rest might get someone back in fighting shape, but there’s no single cure that’ll bring someone’s finances back to good standing. However, that doesn’t mean throwing in the towel.
Staying in good financial standing means a stronger credit score, peace of mind, and often better terms when applying for loans in the future.
Improving financial health takes time, effort, and often multiple strategies. Take a cue from these seven tips below to help kick that financial cold once and for all.
Making a Budget
For most, the idea of budgeting brings a sense of dread. Budgets conjure the image of fewer meals out, clipping coupons, and generally saying “no.” But in reality, a budget is a tool for efficiency.
It could help determine how much to spend and save in a month, and might actually create a sense of freedom. It might help eliminate that stomach ache that arrives each month when the credit card bill comes in the mail. One way to start budgeting is to collect the previous month’s spending in a single place. Think of it like the Marie Kondo method.
Pull everything out all at once into one big pile to get an idea of each month’s spending patterns and income—taking note of multiple bills for rarely used streaming services might “spark” a budgeter to unsubscribe and save a few bucks a month.
This spending information could be found in bank statements or credit card bills or might need to be logged manually depending on how much cash a person uses. Budgeting might include the following financial information, but this is in no way an exhaustive list:
• Credit card statements and debt
• Education loans
• Car loans and additional expenses, including fuel, insurance, etc.
• Health care insurance premiums
• Rent/mortgage, including home or renter’s insurance
• Monthly food expenses
• Child care, child support, or related family obligations
• Additional transportation (excluding a car)
• Savings/investments, such as a 401(k), an IRA, or automatic savings deductions
• Average monthly income from pay stubs or bank account statements
With this information, a budgeter can get a general sense of net expenses month over month. Do months generally net out positive or negative? Is there money left over or is it a close call?
This might be the toughest part of the budgeting process, and once it’s in the rearview, creating a simple budget moving forward could make all the difference. Every budget will look different for every person, but one guideline to keep in mind is the popular 50/30/20 budget.
This budget dictates that:
• 50% of post-tax income goes to essential spending. This includes finances that are required, such as rent/mortgage, groceries, health insurance, and utilities.
• 30% of post-tax income goes to discretionary spending. This is spending that a person could cut if they were in a pinch. It includes things like dining out, Netflix memberships, and fitness classes.
• 20% of post-tax income is dedicated to savings. This money is put toward future spending, whether that be retirement contributions, emergency savings, or larger loan payments.
Sticking close to the 50/30/20 budget at the outset could help illuminate blind spots in spending. It might reveal that a budgeter is spending too much on dining out, going far beyond the 30% discretionary spending.
Or it may show that essential spending, like astronomical monthly rent, doesn’t leave much wiggle room for the 20% savings. Expenses and spending habits might wax and wane with the seasons, but that’s no excuse to keep a person from establishing a budget.
It’s a good idea to start with a budget that’s simple to maintain and easy to stick with but still helps manage money and improve financial health.
Paying Off Debt
The amount of debt a person carries can have a pretty big impact on their overall financial health. Thirty percent of a person’s credit score consists of how much they owe in relation to their credit limits.
To stay in good financial health, it’s a good rule of thumb to use no more than 30% of the credit available.
If a borrower is trending above that 30% limit, they might make paying down debt a top priority to improve financial standing.
There’s no one right way to pay down money owed, but these are some popular strategies that could help eliminate debt faster:
The snowball method starts small and grows as it picks up momentum. Debtors pay the minimum on all loans, regardless of interest rate and amount. From there, they’ll put any surplus cash in their budget toward paying off their smallest debt.
Once the smallest debt it paid, they’ll roll the amount of that monthly payment into the next smallest balance. This method continues, growing monthly payments toward larger loans as the smallest are eliminated. This method makes for wins early on, knocking out the little guys first, and growing toward those large or intimidating balances.
The avalanche method is nearly the reverse of snowball, focusing on interest rates of loans instead of balances. Budgeters ignore the total amount of each loan and prioritize repayment of the highest interest rate loan first.
Like the snowball method, they’ll pay the minimum on each loan every month, but they’ll put the surplus of their budget towards the high-interest bill.
Once the highest interest rate loan is paid down, budgeters will focus on the next highest interest rate, and so on. This method tackles the intimidating high-interest rates, then downshifts to the smaller loans. Like an avalanche, the method starts big, then peters off as it becomes easier to pay off low-interest loans.
When someone can’t choose between the snowball and avalanche method, the debt fireball method may be the answer.
It’s a hybrid between the two strategies above, asking budgeters to sort between good and bad debt and focus on repaying bad debt first. Bad debt, like credit card debt, is debt that generally has a high-interest rate (above 7%).
Good debt, on the other hand, are things like a mortgage or student loans, they generally have lower interest rates and are good investments to make.
The general idea: Rank the bad debts from small to large based on balance. Make the minimum monthly payments on each debt, but use extra cash to pay off the smallest “bad” debts first.
Once the smallest is knocked out, pay attention to the next smallest, and so on until all bad debt is burned up. Then, budgeters need only to pay off “good” debts normally.
Without a plan to properly tackle it, debt can be crushing. However, once a person decides to torch, roll, or overwhelm their loans with a payment method, they’re in control.
Curbing Spending Habits
When spending money is as simple as swiping a card or tapping a phone, it’s no wonder impulse spending is out of control. While a couple of lattes or convenience store trips don’t feel expensive at the point of sale, they add up over time.
Prime orders make it easy to drop $20 here and $40 there, without leaving the comfort of home.
One way to curb these frivolous spending habits is instituting a “hold” period on all purchases.
Instead of hitting “buy now,” shoppers could consider waiting 24 hours, or even 72, before completing the purchase. Creating a waiting period eliminates that instant gratification dopamine rush and allows for logic and reasoning to take hold.
After the allotted waiting period, shoppers can return to the online cart or boutique to reconsider the purchase. They might just realize they don’t need it.
Automating Savings Transfers
Tackling financial health can be exhausting, and it wouldn’t be surprising if some habits fell through the cracks in the process. There’s a lot to keep track of, and that’s where financial automation can lend a hand.
Setting up an automatic transfer each month from checking to savings account means even the busiest budgeter won’t have to remember to do it manually.
Transferring an amount, even if it’s small, into saving each month might mean there’s less of a temptation to spend. Remember, saving a little is better than saving nothing at all. Making it automatic is one less thing for a busy person to remember.
Paying Bills on Time
Thirty-five percent of a credit score is based on payment history—it’s weighted more than any other factor. When it comes to improving financial health, paying bills on time can have a pretty significant impact.
One way budgeters can ensure timely payment is automating bill payment through a checking account or adding bill due dates to personal calendars. Even if a person can’t afford to pay a bill in full, they should pay the minimum amount due to avoid a penalty.
Starting an Emergency Fund
Only 40% of Americans say they’d be able to cover an unexpected expense totaling $1,000 or more. Without an emergency fund, people are forced to dip into their retirement savings or rack up credit card debt when unexpected finances arise.
A savings account could be set up using an automated savings transfer with a goal of saving $1,000 to start. This probably won’t happen overnight, and that’s okay. Even the smallest savings can build up over time.
Once a budgeter has $1,000 socked away in a savings account, they could start thinking big. With an eye on monthly expenses, they could aim to accrue three to six months’ worth of expenses in a savings account. It’s important these savings stay liquid for easy access in the event of an emergency.
Building up a robust emergency nest egg can create a sense of well-being when it comes to financial health. Budgeters can rest easy knowing they have savings set aside for whatever life throws their way.
Staying up to Date on Credit Reports
Checking a credit score is equivalent to an annual check-up at the doctor’s office. While negative factors such as late payments and collections can stick around on a credit report for up to seven years , they’ll impact a score less and less as time passes.
Pros recommended checking on credit scores at least once a year or more to stay on top of financial health. Federal law allows for one free credit report every 12 months, but budgeters looking to go above and beyond can also try major credit bureaus Experian , Equifax , and TransUnion for free annual credit reports, but not scores. You could also use a credit score monitoring tool like SoFi Relay.
Checking in on credit score regularly will give budgeters not only a sense of how their efforts to improve financial well-being are going, but they’ll also make it easier to find and dispute errors if they arise.
Think of regular check-ins on credit like progress reports on a person’s financial health.
Tracking Financial Wellness with SoFi Money®
Tackling all the steps to improve your financial well-being can be overwhelming, but with a SoFi Money® cash management account, you can track all your spending and saving with a single dashboard. You could set up automatic transfers to savings accounts for different goals, all while earning competitive interest.
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