Financial stress doesn’t only hurt your wallet, it’s harmful to your health. But you don’t have to live with it forever. Even if you’re living paycheck-to-paycheck, there are some small (and a few big) changes you can make to significantly improve your quality of life and your financial future. Here’s where you need to get started.
#1: Know your credit score.
This is your starting point. A credit score is a number that represents your creditworthiness. You can obtain a copy of your credit report from each of the three credit bureaus: Equifax, Transunion, and Experian. Be sure the information in your reports is accurate. Then, use a third-party service to get your credit score. Most sites will also tell you what factors are hurting your score. You should not have to pay to access your credit information, so avoid sites that charge you for this service.
#2: Determine your total debt.
Create a simple spreadsheet or break out the pen and paper. List each of your creditors, how much you owe, the interest rate on each debt, and the minimum payment. Include credit cards, medical bills, personal loans, mortgages, and car loans. If you use a digital money management tool such as MoneyDesktop, you can also connect all of these accounts online to track them digitally. Knowing what your debt is can help you to see where you are spending and where you can begin looking for ways to reduce your costs.
#3: Build an emergency fund.
Now that you know what your debt is, you’re within your monthly means until you can pay it off. To do that, you must have a way to pay for unexpected bills when they come up. Establish a basic emergency fund of $1,000 to get started. From there, work on growing your savings until you have enough saved to cover three months’ worth of bills and living expenses. If you don’t have a lot to put aside, that’s okay. Start with whatever you can afford to develop the habit of saving.
#4: Create a budget.
Break out the spreadsheet or pen and paper again. This is another area that a digital money management tool can be very helpful. Create a budget based on your current actual income. Your budget should list every monthly expense, including cost and due date. If you find that you don’t have enough income to pay for your monthly expenses, you may need to consider ways that you might add income or decrease your expenses. The key here is to create a budget that will allow you to live within your means, and to avoid living on credit.
#5: Create a debt payoff plan.
Refer back to your list of debts and prioritize them by highest interest rate to the lowest. Work towards paying off the one with the highest interest rate first, since this is the most expensive debt. When the first debt is paid off, take the money you were paying towards it and apply that amount as an extra payment towards the next debt. Focus on aggressively paying off one debt after another, but make sure to continue making minimum payments on your other debts as well.
#6: Stop making late payments.
Late payments are expensive, and very damaging to your credit score. The best way to avoid late payments is to simply set up automatic payments on each of your debts. It only takes a few minutes and will help you make sure that you always make your payments on time. Automatic payments can typically be set up with each of your billers, or you can set them up all in one place within online banking. It can be helpful to keep a small financial buffer in your account to ensure that there is always enough to cover your automatic payments.
#7: Get on the same page with your family.
Consider this. How much do you pay each month towards credit cards? $500? $1000? If you had that money in hand, what could you do with it? Be sure your family understands your financial goals and what needs to happen to achieve them. When your family works together to realign priorities and reduce spending, you are more likely to succeed.
#8: Reduce your spending.
Track your spending for a month. This includes every dollar you hand to the kids, every meal you eat outside of the home, and the money you pay towards your debts. Track everything. Then, look for ways to trim it back. Where can you reduce spending by 5%? Are there any expenses you can eliminate altogether? Think about utility costs, entertainment spending, and any subscription services or memberships you pay for. I’m afraid of sounding like a broken record here, but tracking is really important in financial management, so I’ll say it — digital money management tools can be VERY helpful when it comes to tracking and analyzing your spending habits.
#9: Consider refinancing.
If your debt feels unmanageable, you may benefit from refinancing or consolidating your debt. As your credit score improves, you can reduce your monthly debt obligation by refinancing loans at a lower rate, or consolidating all of your debts into one loan with a lower monthly payment. Talk to your financial lender about your options. There are options and programs for people with poor credit too, but be wary of hidden costs and fees.
#10. Stick with it every month.
You may have to keep your expenses lean for a while, but try to keep a little money set aside for the things that bring you joy. Whether it’s a coffee, a movie with the kids, or night out with your friends, take the time to appreciate it and celebrate your progress towards financial strength. Small rewards are important for keeping yourself motivated to stick with your budget every month.
It may require some effort, but following these steps will help you understand, organize and improve your finances. Don’t get discouraged if the progress is slow — progress is progress, and you’re building habits that will last a lifetime. Maintain a close relationship with your money, and learn to enjoy every step along the path of financial health.
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