A New Year’s Resolution You Can’t Afford to Ignore
Step 1: Create a Simple Budget
A budget helps you visualize your income vs. 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: Cut Unnecessary Spending
Track your spending to spot patterns and reduce waste. 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: Start Saving
Make saving a priority – even small amounts count. 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 Debt
Reducing debt frees up income and lowers stress. 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 5: Check Your Credit Score
Your credit score affects housing, jobs, and loans. 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. If you have poor credit, don’t despair.
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 6: Boost 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 cash flow.