Have you slacked on your New Year’s resolutions? Or maybe you didn’t even get started? If that’s the case, remember that it’s never too late to get a handle on your finances and whip them into shape within the next six months.
Understanding the basics of your finances and what budgeting tools are available will unlock your ability to make smart and educated decisions. Many people don’t understand some of the more complicated topics, such as what goes into a lender’s decision to approve a loan, how to regularly update your 401(k)s and how much to save for a first home. But before you get there, it’s important to nail the basics, such as understanding money management, budgeting and building credit.
Getting a full understanding of your financial profile will help you turn your finances around in the coming months. Read on for tips that help you conquer your financial goals – and problem areas – within a year.
Understand your existing financial profile. The first step to getting a handle on your finances is understanding where you stand. That includes a review of everything from your debt, including your interest rates and monthly payments, to how much you spend on coffee to checking your 401(k). Reviewing everything will help you grasp where you currently stand, identify goals and set – or reset – your budget.
Review your bills. Are you getting the best prices for your electricity, phones, cable and miscellaneous services? Maybe it’s been a while since you last reviewed your cable or cellphone package, so take a look to make sure you’re getting the best possible rate.
Update your financial and insurance plans. Review your bank and insurance plans and policies on a regular basis to ensure you’re getting the best possible deal at all times. Make sure you are only paying for services and coverage you use or need. Always make sure you’ve filed your taxes and set up your 401(k) contributions correctly. For example, experts recommend that you raise your contribution rate by at least 1 percent every year or more when you get a raise or promotion. Since a lot of people have a set-it-and-forget-it mentality with their 401(k), the auto-escalation plan is an easy way to make sure you’re contributing as much as you should without much extra effort.
Check your credit report and score. Review your credit report on a regular basis and report any inaccuracies. You can use the three major agencies to check your credit report, so you can time your check-ins throughout the year. Additionally, you can sign up for various online tools that allow you to easily see fluctuations in your credit score and alert you of significant changes. Your three-digit credit score tells lenders how well you manage your finances and how reliably you make payments. Scores can range from 300 and 850. The higher the number, the better your chance of getting credit, and the better your interest rates will be.
Banish credit card debt. Credit cards can be good for building credit, earning rewards and handling emergencies, but that’s it. Spending more than you can afford makes it easy to carry an ongoing balance. Unpaid debt also means you could be building interest and costing yourself more money than what you spent. When debating whether to pay for something with a credit card, the old adage of “don’t buy what you can’t afford” is a good rule. Tighten your belt to get credit debts paid off and use budgeting tools to help you calculate how much you should pay each month to pay off your credit cards in full.
Know your-debt-to-income ratio. Speaking of debt and credit, make sure to review your debt-to-income ratio. This magic number is a top factor that lenders may look for when evaluating a borrower. This ratio lays out how much of your monthly income goes toward debt payments. A healthy ratio should be 36 percent or lower. Anything higher can impact interest rates for loans and refinancing options. If you have a high debt-to-income ratio or don’t know your number, personal finance apps can help you determine your ratio. You can also calculate your debt-to-income ratio by dividing your monthly debt obligations by your gross monthly income and multiplying that number times 100. If you need to lower your debt, start looking for ways to cut costs so you have extra money to pay off your loans.
Create goals. After you understand where you stand financially, figure out what you want to achieve, fix or plan for. You can’t get to where you want to be without financial goals. There are plenty of tools you can use that help you set goals based on your budget and even track your progress in real time. Whether your goal is to save for a down payment on your first home, pay off your student loan debt or pad your retirement fund, goals are essential to your financial wellness.
Reset your budget. Think beyond your annual salary. Base your budget on your take-home pay (what actually ends up in your checking account) each month. Make sure you’re setting a budget based on how much you’re bringing in, full cost of regular bills and any loan or mortgage payments. And don’t forget to set aside part of your paycheck for fun expenditures such as shopping and dining out so you won’t feel too restricted.
Save. A good rule of thumb is to have at least three to six months of savings for your emergency fund. If you’re not there yet, adjust how much you’re putting into your savings account. It’s important to make sure you have some money tucked away for emergencies in case your car breaks down or you get an unexpected medical bill. Each person’s savings goal will look different based on his or her personal situation.
Check in. Mark your calendar and review these steps at regularly scheduled intervals. If you take the time to do all the legwork, don’t let it all go to waste. Everyone slips from time to time, so these check-ins will also give you the opportunity to get back on track. Whatever the cadence, make sure you’re reviewing your budget and keeping yourself honest with your goals. Using all of these tactics will help you stay on top of your finances.