Your bank balance is low; your bills are high, and so is your anxiety. Here’s a bombshell truth we all need to hear: managing personal finances is an essential life skill. For some people it’s a matter of satisfying both wants and needs, and for others it’s a matter of survival. Besides being able to keep a roof over your head, here are some reasons why you should care about managing your finances.
Why you should care about your personal finances
Your health and well-being
Over a thousand American adults were asked to discuss their feelings about their current financial situation. One of the main findings of this report is that Americans are worried about their financial future via The Mind over Money Study.
68% worry about not having enough money in their savings to retire 56% worry about not being able to meet the cost of living 45% feel stressed about managing their debts Survey respondents also admit that financial stress affects other aspects of their lives.
43% feel tired, 42% find it hard to concentrate at work, 41% say they don’t sleep well because of their financial burden.
Additionally, financial stress can have a huge impact on relationships. According to a survey by The Cashlorette, 48% of American respondents who are married or living with someone say they argue over financial matters. As a result, one of the main contenders for failed marriages is disagreements over money.
TD Ameritrade backs this up with data showing that 41% of divorced Gen Xers and 29% of Boomers say they ended their marriage because of disagreements over money.
Not worrying about personal finances will have a negative impact on your long-term health, your relationships, and your ability to take care of yourself and provide financial security for your family.
Your credit score
Maintaining a strong credit score and a good credit report can help you pass a rental credit check to rent a nice place to live, secure a lease, mortgage, or finance. Monitoring your credit card debt is just as vital as it helps you establish your credit score. Factors that affect your credit score and credit report are:
A history of not keeping up with regular payments with multiple accounts over several years may indicate irresponsible credit behavior.
Having large debts, especially relative to your gross income, will hurt your credit score.
Other financial issues
Accounts sent to collection agencies and filing for bankruptcy are just a few financial issues that will kill your credit score.
Of all the factors, payment history is the most critical factor to consider as it accounts for 35% of a credit score.
Another reason you need a good credit rating is to take on more debt if you need to. With a low credit score, you can expect any mismanagement of your finances to show up on your credit report. This can close the doors to favorable loan terms and credit cards to help you get your home, car, and other needs.
Achieve financial goals
A survey of 1,000 American adults asked respondents what their top financial goals were. The top five responses were:
20% answered: “Buying my own house or my own apartment”. 19% answered: “I have enough to finally be able to retire”. 14% answered: “Payment of credit card debt”. 6% answered: “Building my credit score”. 7% of respondents felt they would never reach their financial goals. When asked why they didn’t think they could achieve this, 20% said their expenses were too high and they had no discretionary income to use for other things. 14% said they had too much debt to pay off.
These are all common goals that people dream of achieving. Unfortunately, not meeting these goals is also a common problem for people who don’t care about managing their finances properly. A solid financial plan can turn your dream of achieving your financial goals into reality.
Ways to manage personal finances
Create a budget
According to a Penny Hoarder poll, about 55% of Americans don’t use a budget to manage their money. Penny Hoarder also determined that people who don’t track their spending tend to owe $5,000 or more in credit card debt. On the other hand, those who use a budget to track their money are more likely to know how much they are spending and are less likely to splurge.
To create a budget, you can sit down with a pencil, notepad, and your stack of bills and get started. You can also use a spreadsheet like Excel or download a budgeting app to your phone. Any of these methods of tracking your expenses will work.
Calculate your monthly fixed and variable expenses once you have determined your net income, your net salary after tax. Variable expenses such as groceries and gas are more difficult to determine, so consider using a 12-month average from the previous year as the monthly expense for your budget.
The old saying “Live within your means” still holds today. Do your best to ensure that your expenses do not exceed your income.
Monitor discretionary spending
Discretionary spending is money used for non-essential items and entertainment. A review of consumer spending in 2018 found that the top three areas where discretionary spending was highest were:
Food is consumed outside the home. Entertainment equipment and services such as sports equipment and hobbies such as photography. Clothing products and services. There are many ways to plan your spending in this area. One is the 50-20-30 rule, where 50% goes to necessary expenses, 20% to savings, and 30% to everything else.
But if you live in an area with a high cost of living, have large debts, or have a low-paying job, 30% of your income for entertainment and non-essential expenses is excessive. Make a judgment based on your financial situation.
Another way to budget non-essential expenses is to rank them in order of importance. Think about the top priority expenses and set your discretionary spending budget for the amount of those expenses.
You should also assess your recurring costs, such as monthly subscriptions. We often continue to pay these types of expenses without any consideration as to whether the product or service is still of value to us and worth the cost. Cancel any non-essential recurring expenses that you no longer need or no longer value.
Pay your bills on time and pay off your debts
Late fees are expensive and can add up. As already mentioned, late bill payments will also have a negative impact on your credit score. Pay your bills on time and pay off your high-interest debt.
It’s best to pay your credit card debt straight, or at least more than the minimum. Otherwise, you will continue to accrue interest charges, and paying off the loan will take longer and cost more.
To keep debt at manageable levels, try not to spend more than you earn, unless you’re acquiring an asset like a mortgage to buy a house.
Start an emergency fund
An emergency fund is a separate savings account used strictly to cover unexpected expenses. A rule of thumb is to save three to six months of your regular monthly payments to cover an unexpected cost.
This way, you don’t have to dip into your savings and stray from your financial goals, and you don’t have to further increase your debt at high interest rates.
Creating an emergency fund is a necessary part of the budgeting process. If you have significant debt that you’d like to focus on paying off, keep doing it, but set aside even amounts as small as $5-10 a week for emergencies.
Automate savings and invest
Set up automatic transfers from your checking account to your savings or investment account, preferably when your paycheck hits your account. This way, your savings can continue to add up without thinking about it.
Even though this survey found retirement to be the second most important goal, more than a third of Americans don’t even see it happening. Additionally, 36% of Americans believe they will never have enough money to retire.
It’s never too late to start investing to save for your retirement. A 401(k) is an employer-sponsored plan. First, check with your employer to see if they have an employee contribution matching program.
You would agree to have a percentage of each salary paid directly into an investment account in this program. The employer can match part or all of the contribution. If you are self-employed and have no employees, you can contribute to a solo 401(k) plan.
33% of private sector workers in the United States do not have access to an employer pension plan. Unfortunately, people often don’t save for retirement without access to a 401(k) plan. But if your employer doesn’t offer a 401(k) retirement plan, a great alternative is to invest in an Individual Retirement Account (IRA).
Again, automate transfers from your checking account to your IRA to continue building your retirement savings.
The importance of financial autonomy
83% of people who set financial goals feel better about their financial situation even after one year. Create a budget, be consistent with your tracking, and commit to your plan. Automate your savings and build an emergency fund. You will pay your debts before you know it and your savings will increase. Not only will your financial health improve dramatically, but also your health and peace of mind.
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