If you often feel worried about money, or you tend to wing it from one month to the next without much of a plan in place, you might benefit from taking a few steps to improve your financial health and habits.
While being financially healthy means different things to different people, it generally refers to a state in which you can meet your monthly financial obligations, are on track to achieve your financial goals, and have enough cash in the bank to be able to absorb a financial setback.
You might feel that achieving optimal financial health is a long way off. The good news, however, is that implementing just a few good financial habits–such as tracking your spending and saving at least something each month–can boost your financial well-being right away, and even more so over time.
Here are some simple strategies that can feel calmer and more in control of your money.
1. Making a Monthly Budget
When it comes to money in and money out each month, many of us leave it to chance–and hope that the numbers work out.
Taking some time to actually crunch the numbers, however, can help ensure that you are living within your means, spending in line with your priorities, and working towards a healthy financial future.
While the idea of a monthly budget may evoke images of fewer meals out, clipping coupons, and generally saying “no,” a budget can actually ease financial stress by making spending decisions easier.
One way to start a budget is to collect the last few months of financial statements and receipts in a pile. You can then sort through and make a list of all the money coming in (income) and all the money going out each month (spending).
You may want to sort expenses into categories and then divide them in “essential” (such as rent/mortgage, utilities, groceries, insurance premiums, childcare, transportation, loans) and “nonessential” (such as entertainment, restaurants, clothing beyond what you need for work).
Next, you can come up with your average monthly income (after taxes) and average monthly spending, subtract the latter from the former, and see what you get.
If you’re spending more than you are bringing in, or it’s so close there is little left over for saving, you may want to take a closer look at your spending.
One possible guideline for setting a spending budget that can be helpful is the 50/30/20 budget. With the budgeting model, the breakdown works like this:
• 50% of post-tax income goes to essential spending. This includes expenses you are required to pay, such as rent/mortgage, utilities, groceries, insurance, and minimum debt payments.
• 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, travel, and fitness classes.
• 20% of post-tax income is dedicated to savings and investments. This money is put toward future goals, such as paying off debt beyond the minimum, retirement contributions, emergency savings, or saving for a home or a car.
Trying the 50/30/20 budget could help illuminate blind spots in spending. It might reveal that you’re spending too much on dining out, and going far beyond the 30% discretionary spending.
Or it may show that essential spending, like high monthly rent, doesn’t leave much wiggle room for 20% savings. In that case, you may need to set a more realistic saving target, such as 10% of income.
2. Paying Off Debt
Credit cards and similar high-interest consumer loans can drag down your financial health by making it harder to meet your monthly expenses–and even harder to save for future goals.
There’s no one right way to pay down high-interest debt, but these are two 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 is 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 focuses 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 with this approach, they’ll put the surplus of their budget towards the bill with the highest interest.
Once that loan is paid down, budgeters will focus on the balance with the next highest interest rate, and so on.
Without a plan to properly tackle it, debt can be crushing. However, once a person decides to knock down their loans with a payment method, they’re in control.
3. Putting a Stop to Overspending
When spending money is as simple as tapping a card or your smartphone, it can be all too easy to overdo it.
And while a couple of lattes or convenience store trips don’t feel expensive at the point of sale, they can add up over time. Prime orders make it easy to drop $20 here and $40 there, without even leaving the comfort of home.
One way to keep spending in check is to institute a “hold” period on all purchases. Instead of hitting “buy now,” you might want to consider waiting 24 hours before completing any online purchase. Creating a waiting period eliminates that instant gratification dopamine rush and allows for logic and reasoning to take hold.
For larger purchases, like a new couch, designer bag, or flatscreen TV, you may want to institute a 30 day waiting period. During that time, you may realize that you don’t really need it after all.
4. Automating Savings
Tackling financial health can feel overwhelming, and it’s not likely something you want to be thinking about all the time.
Fortunately, it’s easy to put one of the best financial health-boosters–saving at least something each month–on autopilot.
This simply entails setting up an automatic transfer from your checking to your savings account on the same day each month. And, if you set it to happen right after your paycheck clears, you won’t even have a chance to spend that money. Chances are, you won’t even miss it.
And, it’s perfectly fine to start small. Saving a little is better than saving nothing at all, and if the transfer is happening every single month no matter what, those small deposits will add up over time.
5. Paying Bills on Time
Thirty-five percent of a person’s credit score is based on payment history, according to FICO . In fact, it’s weighted more than any other factor.
When it comes to improving your financial health, paying bills on time can have a pretty significant impact. Being prompt with your payments can also save you money by helping you avoid late fees and interest.
One way to help ensure timely payments is to add bill due dates to your personal digital or paper calendar. Another option is to automate the process by setting up automatic bill payment through your checking account or the service provider’s website.
Even if you can’t afford to pay a bill in full, you may want to set it up so that you pay the minimum amount due each month to avoid steep penalty fees.
6. Building an Emergency Fund
According to a recent Bankrate survey, fewer than four in 10 American adults could afford to pay for an unexpected expense of $1,000.
Without an emergency fund, people may be forced to dip into their retirement savings or rack up credit card debt in order to handle an unexpected bill. That’s why having at least three- to six-months worth of living expenses in the bank can be a key part of financial health.
This cash reserve could ease you through a financial set-back, such as a loss of income, trip to the emergency room, or expensive car or home repair.
You may want to keep your emergency savings in an account that earns a higher interest rate than a standard savings account, but is still accessible so you can tap the funds quickly if you need them. Good choices include: a high-yield savings account, online savings account, money market account, or a cash management account.
7. Periodically Checking Your Credit
Checking your credit is equivalent to an annual check-up at the doctor’s office. Credit reports contain a large amount of information about your financial life and payment history. Credit card issuers and lenders pull and review these reports in order to determine your creditworthiness.
Fortunately, consumers can also pull these reports for free by going to AnnualCreditReport.com . It can be a good idea to check the reports from all three national credit reporting agencies–Equifax, TransUnion, and Experian–at least once a year to stay on top of your financial health.
Checking in on your credit will not only give you a sense of how your efforts to improve your financial well-being are going, but the reports will also make it easier for you to find and dispute errors if they arise. They can also alert you to fraud or identity theft.
Just as with your physical health, good habits are key to achieving good financial health.
Some habits that can significantly boost financial wellness include setting up and following a simple budget, curbing impulse spending, putting savings and bill paying on automatic, monitoring your credit, and building and maintaining an emergency fund.
Making these habits a regular part of your routine can help you feel more in control over your money, and move you closer towards your financial goals.
Tackling all the steps to improve your financial well-being can feel overwhelming at first. With a SoFi Money® cash management account, however, you can track all your spending and saving with a single dashboard.
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