10+1 steps to get your finances back on track

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10+1 steps to get your finances back on track

As a young adult, the mirage of a paycheck can throw you in a downward spiral of debt and extra hours which can take its toll on your health, your mental well-being, and even on personal relations. As soon as we are out of college, we don’t only carry a mountain of student debt, but also hopes and dreams. Finding the balance between the two is both a matter of will and one of know-how and planning. Here are 10 steps to help you can follow to either get back on track and make money your friend and ally.

  1. Focus on the numbers

Knowledge is power, and your spending and cash flow should not be left to chance or hope that you will work your way around it. Companies hire CPAs for a reason, and as an individual, you should also take a much more systematic approach to the problem.

Take a look at your banking statements and evaluate how much you spend monthly, including yearly or seasonal expenses. You might have an idea about the amount, but having a look at actual numbers could be just the motivation you need in this endeavor.

Next, evaluate your steady income and possible additional streams like a money-making hobby or occasional gigs. If you work as a freelancer look at the past earnings from low months as well for a realistic evaluation.

  1. Don’t ignore the credit score

Once you know your spending numbers, you need to be aware of the way the lenders see you. That means understanding, accepting, and working on your credit score. This number is independently computed by the three main bureaus (Experian, Equifax, and TransUnion) separately and might be slightly different.

It is wise to ask each of the bureaus to offer you a copy of their computation and compare them. This is the first step in detecting and eliminating possible mistakes.

  1. Make a spending plan (aka budget)

Probably the most boring idea about personal finance, the one that never gets done and sends you back in the whirlwind of impulsive shopping is the budget. It’s much like New Year’s Resolutions, you wish you had done it, but never actually get there.

Use an app to track your spending and most of all to get alerts when you are getting close to your limits for each category. You could also use grandma’s method of taking out the cash, splitting it into envelopes and spending accordingly, at least until you get used to the rigor.

  1. Create a financial file

To make your budget a reality you’ll need an additional tool, also inspired by the way companies keep track of their expenses. Start diligently collecting all your bills and invoices and file them to categories. This will show you just how much you spend on lattes or cigarettes and could be a wake-up call if you compute the yearly amounts.

Also, this habit can help you keep track of your financial obligations and ensure you never miss a payment. In time, you will see patterns emerging and be ready to face expenses much more lightly.

  1. Clean-up your accounts

Make a list of all your credit cards, loans, and other debt. Add the APR and fees next to each of them to have an overview of what you are paying for each and rank them accordingly. Get into a negotiation mindset and contact the issuers of the least profitable and ask for an APR decrease or just change banks.

One of the best ways to get rid of some debt and get all your financial ducks in a row is to apply for a personal loan and consolidate all your credit card debt in one place. This helps you have a lot more control over your debt and even get a way better rate than you would have if you used the credit card, provided that you have a high FICO, usually over 720. To get more info about how this works, visit https://aaacreditguide.com/personal-loans/payoff/.

Also look at all your other accounts such as recurrent subscriptions. Evaluate the need for each of them and take a decision based on your usage. If you haven’t used it as frequently as planned, maybe it is time to unsubscribe and move on.

Make a tally of all the money you are saving from the APR changes and the subscriptions. Sent that amount automatically to your savings account, since you won’t miss it anyway.

  1. Audit your house

After you’ve cleaned out your immaterial belongings, it’s time to start tracking down and eliminating those items that are just a burden and have no added value to your life. Unless you are a minimalist already, most likely, you are in a sea of things that could be turned into cash. Use the Kon Mari method to de-clutter and organize your life.  Put off for sale the items that hold some value and donate the rest. Make a pledge not to buy more similar things to those you get rid of.

Next, look at items around your house that could be money drainers like lightbulbs, large home appliances, and unfixed pipes. Invest the money you got from the other things to make your house as energy efficient as possible.

 

  1. Put bills on auto-pilot

Automating payments is one of the smartest moves you can make. First of all, it can prevent the unwanted situation of having extended overdue payments which can negatively impact your credit score for over seven years. Secondly, making on-time bill payments from your credit card can, in fact, help improve your score significantly. The FICO score consists out of 35% payment history, so adding positive input in this area can result in fast changes in the overall result. It just takes one monthly bill to make a difference, but why not add everything and get it off your mind?

 

  1. Negotiate your salary

Sometimes the only things holding us back from the life we imagine are fear, laziness, and contempt. If you are striving to make ends meet, maybe it is time to reevaluate your inflow streams and your general outlook on earning. Start by making a list of reasons why you should be paid more based on your added value, not your immediate needs.

Take some time and meet with your boss and manager to discuss company’s growth and future plans. Identify those areas that could benefit from your input and try to see if there is also a chance of getting a higher payment for these new tasks.  

  1. Start saving

A rule of thumb states that you need to have an emergency fund that would last you for three to six months. This could be used if you suddenly lost your job, have a medical emergency or need some quick cash for other necessities.

Before investing in retirement or more long-term plans, fill-up your savings account with enough money to make you feel comfortable about leaving your job if the situation requires so or being able to upgrade your knowledge for a better position. The advantage of a savings account is that you can access money right away without too many penalties.

  1. Think about investments and retirement

Even if your gray-hair days are more than 30 years ahead, it doesn’t hurt to do some planning right now. The power of composite interest can make you a millionaire if you start young and are consistent with your retirement plans. Even if you are already in your early 40’s there is still time, you just need the right tools and about $800 extra a month.

The tools we are talking about are a 401 (k) plan or a Roth 401(k) which are offered by the employer, and you have to match the contributions. If you have already paid all your other debts, except maybe for your home, you can put some extra money in a Roth IRA, which is not tied to your employer. The Roth savings accounts are created from money which has already been subject to tax, so when you take it out, you will not pay anything else, while for a regular 401(k) you will pay taxes after retirement.

 

Bonus-Have a financial date

Our relationships define out economic behavior much like they influence other areas of our lives, like health, eating right, and the way we spend time. It is more difficult to achieve your financial goals if your partner is not aware of them or is not supportive and each of you has a different vision regarding the way money works.

Once you have made your mind about your goals and desires, it’s a good idea to share them with your significant other, especially if you share the household and the mortgage. For more casual relationships it’s enough to agree on more substantial expenses like holidays, while married couples should go more in debt and make some tax-related computations. Filing the taxes jointly or separately can have a significant impact on deduction and cuts, so you need to make some simulations and choose the best option for your situation.

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