If you consistently struggle to get control of your finances, you are not alone. Financial stability is an enigma for many, regardless of income. It doesn’t have to be that way. You can regain control, rebuild your credit score, and create a financial future that looks significantly brighter than the present. Here are five tips to get you on track for financial stability:
Avoid/Eliminate High-Interest Debt
Nothing will undermine your fiscal efforts faster than high-interest debt. So, the next time you are looking down the barrel of an unplanned, significant expense, consider reaching for cash loans with low interest instead of your credit cards. Credit card companies have an algorithm they use to assign higher interest rates to individuals with riskier credit history, which tends to drive the indebted only deeper into debt.
If your debt feels overwhelming, look for companies and nonprofits that offer free financial counseling to not only help you understand your debt but also to work with creditors on your behalf to reduce it.
Follow the 50/30/20 Rule
How do you know what you can afford to pay towards debt payments? The first step to finding that number is to create a budget. There are plenty of resources online to help you learn how to create a household budget following the 50/30/20 rule. According to this rule, your household income after taxes should be divided up and spent as follows:
- 50% Necessities
- 30% Discretionary
- 20% Savings/Investment
Necessities are items like housing, transportation, food, and utilities—the things you must have to function on a daily basis. Your Discretionary bucket is comprised of things like gym memberships, dining out, clothing, gifts, and hobbies. Your Savings/Investment dollars will be what you use to pay off debt, create an emergency fund or invest in your future through things like retirement accounts.
Create an Emergency Fund
An emergency fund is typically 3-6 months of living expenses kept in a separate account to ensure that it won’t be used for anything short of emergencies. In the short term, one more major cost could undermine any financial progress you have made. To combat this issue, experts recommend creating a “baby” emergency fund and work on growing your buffer gradually over time.
Auto-Pay Your Bills
One big way you can improve your financial stability and increase your credit score is to pay your bills on time. Banks and service providers make it very easy to pay bills with auto-pay options, some companies even offer discounts if they can withdraw directly from your checking account. One 30-minute session on your banking website could set up a recurring monthly payment for all of your bills. One cautionary note: make sure that you set up the withdrawals to occur after your paycheck is deposited each month.
Take advantage of Pre-tax Accounts
Unless you are self-employed, your company most likely offers some type of pre-tax accounts. These accounts move money directly from your paycheck before taxes are assigned to it, into funds for retirement, healthcare expenses or care for your dependents. When you utilize these funds to pay appropriate bills, you are spending money on which you will never have to pay taxes. This can be an incredible deal for those in higher tax brackets.
Financial stability is within your grasp. Start first by identifying your debt and create a plan to eliminate it using the 50/30/20 rule. Protect yourself against unforeseeable catastrophe with an emergency fund. Improve your credit score and create peace of mind by auto-paying your bills and don’t forget to take advantage of any pre-tax savings your employer offers.