According to Forbes.com, 44% of Americans don’t have enough money to cover a $400 emergency. In order to have a financially secure future, you need to manage your finances well today. Unfortunately, way too many people don’t know how to manage their finances.
How do you improve your finances? It can be difficult to navigate the saving rules while still affording your necessary expenses. But there are actions you can take now to achieve better financial health.
Here are 7 ways to improve your financial health.
1. Recognize Lifestyle Inflation
No, we’re not talking about economic inflation. Lifestyle inflation is the act of spending more money when you earn more money.
This is common when someone gets promoted, receives a bonus, or garners anything that results in increased earnings and/or a higher salary. Many people even fall into lifestyle inflation actions every time they receive a generous tax return.
Most believe the more money they earn or have, the more they should be able to spend.
Unless your spending goes toward something beneficial, such as contributing more to your 401k, lifestyle inflation will limit your potential to ever reach a comfortable retirement and better financial security.
So, what should you do with that raise, bonus, or tax return? Ideally, save and invest it.
2. Develop a Personal Budget
Everyone should have a personal budget. A budget can be a simple spending plan for your money, so you tell your money where to go, rather than wondering where it went.
A personal budget is the cornerstone of excellent financial health, for many reasons:
- Reduce expenses and overhead
- Better financial planning
- Spend wisely and avoid unplanned irrational spending
- Improve your savings
- Better plan for emergencies
Developing a personal budget doesn’t mean you need to be frugal.
Let’s say you want to start saving for retirement but want to continue paying for some favorite luxuries, such as shopping or eating out. Developing a personal budget will actually help you afford these luxuries even more so while continuing to save and pay your regular bills.
To make your budget, decide how you want to divide your budget. Most people find it easier to budget by each pay period; for example, if you’re paid biweekly, budget for that pay period until you receive your next paycheck.
Take any bills or expenses you have for that pay period and subtract them from your pay period’s earnings. With that amount, subtract a percentage you’ll put into savings. We recommended you save at least 20% of your earnings.
The amount you have after subtracting your expenses, bills, and savings is how much you can spend on luxuries until you get paid again.
3. Spend Less Than You Earn
Do you find it difficult to develop a specific budget? If so, just remember to spend less than what you earn.
This advice isn’t biased toward your wealth — no matter how little or how much you earn, you should never spend more than what you can afford.
Even cutting out simple spending, such as giving up a gym membership because you can jog around the local park instead, can result in tremendous savings.
If you stick to this simple spending strategy alone, you can easily differentiate between necessary expenses (bills, groceries, savings) and luxury expenses (shopping, entertainment).
4. Start Saving as Early as Possible
The younger you are when preparing for retirement, the more financially secure you’ll be when you retire.
That’s because your investments will have the chance to grow more over longer periods of time. In addition, saving early means you don’t have to save as much later in life for retirement.
What if you’re older and haven’t started saving? It’s never too late to save for retirement. Keep in mind, you may have to save more to sustain your same lifestyle after retirement.
5. Identify Needs vs. Wants
Sure, you may want that new iPhone release. But do you really need that new iPhone the week it hits the marketplace? One of the reasons we see most as to why people aren’t financially secure is they can’t identify their needs from their wants.
There are some situations where spending money is necessary. Groceries are the perfect example; everyone needs to eat food and buying groceries is generally more affordable than eating out every day.
A want is a luxury item that you don’t need for survival, such as brand new cars every three years instead of purchasing an affordable, well maintained used car.
6. Build Your Emergency Fund
You never know when an emergency will happen — or how much it will cost.
Common examples include health issues and home or auto repairs. Your emergency fund will offer peace of mind knowing you will have the money needed to cover these expenses if your regular funds can’t.
How much should you keep in your emergency fund? We typically recommend six months worth of expenses, or more if it’s possible.
Keep in mind, a small emergency fund is better than no emergency fund at all. So start saving as much as you can — it will come in handy one day.
7. Pay Off Your Debt
The average American has $38,000 in debt. Debt is a huge financial obstacle to overcome when it comes to building wealth. Debt interferes with the ability to save money and it also impacts your credit score. This can end up costing you higher interest rates when buying a home or financing a car.
If you have significant debt, you should make it a priority to pay off that debt.
Develop an action plan to pay off your debt. First, make a list of your debts, how much you owe, how much you should put toward your debt repayment, and how long it will take to repay your debt. Stick to this plan until you eliminate your debt.
Just because you’re paying off debt doesn’t mean you shouldn’t find a way to continue saving. You may not be able to save the full 20% of your income but a little in your savings today can result in no future debt tomorrow.
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