A New Year’s Resolution You Can’t Afford to Ignore
When you think of New Year’s resolutions, you probably think about losing weight or giving up a bad habit like smoking or eating too much sugar, but the beginning of a brand new decade can also be an ideal time to hit the reset button on your personal finances. Financially speaking, January can be a tough month to get started with carryover from the holidays, but the longest journey starts with the first step. The good news is that you can take some small, basic steps to improve your personal bottom line without making big adjustments to your standard of living.
Step 1 – Budgeting
Planning (and sticking to) a budget can go a long way in keeping you on a solid financial path. A budget is a visual of your personal finances using your monthly income and your monthly expenses. To start an easy budget, create a spreadsheet or simple T-Chart and list your income on the left and your expenses on the right. For expenses, start with the must-have expenses like housing, utilities, food, water, prescriptions, auto expenses, insurance, etc. Create a separate section on the expenses side for things that are nice-to-haves like entertainment, cable/internet, phone service, etc. After totally up your expenses, compare to your income to find out what is left to spend. If you find that there isn’t much left after subtracting your expenses from your income, review step 2.
Step 2 – Review your expenses
It is easy to overspend and blow past a monthly budget, which means it is time to tighten up your expenses. The first thing to do to get your spending and saving under control is to understand where your money is going, which helps you identify areas where you are overspending. If you want to lose weight, you may keep a food log to track calories. Taking inventory of your finances is no different. Once you see spending patterns of excess, you can begin making adjustments. For example, if a $5 morning coffee is a habit, consider making coffee at home for a month and see the savings add up. Small purchases like coffee add up and can put your monthly budget in the red.
Step 3 – Become a saver
Now that you know where you can trim expenses, make savings a priority by setting realistic savings goals. If you are like many people, you may not have enough in your savings account to cover an emergency expense such as a job loss, brakes for the car, a health event, etc. Saving money gives you a cushion and reduces reduce the stress that come with these events.
Since a large percentage of your monthly take-home pay goes toward living expenses, car payments and paying on credit card balances, it may be difficult to know where to begin. Start by paying yourself; take the money you’ve saved by cutting back on everyday expenses and deposit those funds into a savings account. Many banks and credit unions offer interest-bearing savings accounts that can help you grow your balances.
Step 4 – Pay down your debts
Paying off credit cards will free up additional income as well. List out your credit card balances in order of smallest to largest and start paying as much as you can on the smallest account. Once that account is paid off, you can either take the minimum payment and add it to your savings account each month, or you can combine that payment with the minimum payment of your next lowest balance and pay that account down faster. Continue this until all of your credit card balances are zero, and then you can take the monthly payments for those cards and apply them to your savings account. It’s really easier than you think, and once you get the momentum going, you’ll feel a huge sense of relief to see the credit card balances shrink and your saving account balance grow.
Step 4 – Know Your Credit Score
Your credit score factors into your daily life; it can affect your ability to own or rent a place to live, buy a car, open a cell phone account, and in some cases, get a job. If you have poor credit, don’t despair. In most cases, you can access credit, but it comes with a price tag in the form of high interest rates, which means the sooner you can clean up your credit history and start building your score, the better for your short and long term financial health.
The three major credit reporting agencies are TransUnion, Equifax and Experian. Credit card companies, banks and other lending institutions regularly report to these three entities. Late payments, bankruptcy, and accounts in collections all factor into your overall credit score. Timely payments, making more than the minimum payment, and paying off balances, all help to increase your credit score. You can obtain your credit score from TransUnion, Equifax, and Experian, or from other sites where you can receive a composite of all three — there are plenty to choose from. KEMBA offers free debt counseling for our members, which can help you analyze your credit report and create a plan to improve your credit score.
Step 5 – Maximize your income
The other side of the financial equation is your income. As you work on reducing expenses and paying down debt, the fastest way to accelerate your financial goals is to earn more income. This can be done through your existing job, finding another job with better pay and benefits or increasing income with side jobs and gigs. Adding even a few hundred dollars each month can help you boost your income and help you achieve your financial goals faster. For gigs and side jobs, look for skills that can be used to earn extra money. Dog walking, computer work, and ridesharing are all side jobs you can do in your free time to add income each month. If you are an hourly employee, ask for additional hours, and for jobs that pay shift differential, pick up some evening or weekend hours. For salaried employees, talk to your boss and discuss the next step in your career, create a plan and work toward the promotion that will increase your income. If an opportunity does not exist, explore other full time or part-time jobs to boost your cashflow.
Start 2020 off on the right foot
Getting your finances back on track isn’t an easy task, but a rewarding one, once you start seeing results. While it might be difficult to tighten your belt at first, you will feel a sense of relief once you’ve paid off debt and built up a healthy savings balance. You can find tips and ideas for managing your money in the KEMBA Learning Station. If you have questions about your personal finances, our experienced KEMBA Member Service Representatives can help. You can stop into one of our Central Ohio branches, view our financial counseling resources at kemba.org, or call us at 800.282.6420, option 4.