- Budgeting, Financial Advice, Savings
- January 26, 2021
- FCU Team
According to the American Psychological Association, 72% of Americans have reported feeling stressed about money. The stress of money can even beat other major concerns such as health, family and work. So, if the thought of managing your finances stresses you out, know that you are not alone.
The worst thing you can do is bury your head in the sand. Bad financial decisions, just like good ones, have a way of compounding over time.
Luckily, it’s easy to start a financial plan. You can use time-tested secrets such as budgeting and cutting expenses, to save money for emergencies and retirement. Here are five of the best methods to help manage your finances and achieve financial independence.
1. Create a Budget
We will start with the financial management tip most people love to hate─ budgeting. Budgets are an essential part of money management, which is why most successful companies don’t operate without one.
Budgets are great because they give you visibility of your income and expenditure and will help stay in control of your debts. They can also help you identify areas in which you are overspending. By cutting your expenses, you have more funds to put towards goals such as paying down debt, buying a home or going on vacation.
The main objective of budgeting is to ensure that your expenses are not exceeding your income; otherwise, you'll go into debt. A proper budget for your finances should leave you with a surplus of funds at the end of every month. If the word budget has a negative connotation for you, consider calling yours something friendlier like a "spending plan.” This may motivate you to create one and stick to it.
First, you need an accurate understanding of what your monthly income and expenses are. Most people know exactly how much they make each month so the first part shouldn’t be difficult. When it comes to expenses, most people don’t have a clear idea of how much they spend each month. This is the main reason why are caught up in a debt cycle. To get an understanding of your expenses, you will need to track your spending for at least a month.
Track every single item you spend money on ─ even the chocolate bar you buy from the vending machine on your way home. One reason why people give up on budgets is that they run out of their budgeted funds in the middle of the month and then give up on the whole process. That’s why it’s important to create a realistic figure for your monthly expenses in order to avoid this pitfall.
There are modern mobile phone applications that can help you track your expenses. For example, the popular budgeting app Mint allows users to connect their financial accounts to track spending by category (dining, shopping, health etc). Plus, this budgeting tool keeps you up to date on monthly bills and even notifies you when payments are due.
While some prefer to digitally log expenses with a click of a button, others might prefer to track expenses in a pocket notebook or by updating a spreadsheet. The important thing is to find a method that you can stick to for at least a month.
Once you know your monthly expenses you can then match them to your income. If your expenses exceed your income, then you need to cut out any unnecessary expenses. These may include streaming subscriptions, cutting down on dining out, gym subscriptions etc. And if you’re using a credit card to budget, then try these tips to help manage your money.
If you cut out all avoidable spending and your income still can’t cover your expenses, then you may need to find a second source of income. If your income exceeds your expenses, then you are at a better place than many Americans, as you can put the extra income towards paying down debt or saving for your .
For those that have a variable income such as the self-employed, budgeting may be more complex than if you have a regular salary. In these situations, you have to calculate your monthly expenses and pay these off whenever you get paid. Any extra money needs to be set aside to pay for expenses in months where your income is less than expected.
Cutting expenses is a necessary part of financial management, especially if your income is less than your monthly commitments. But how can you cut your expenses if everything you pay for is a necessity?
Tracking your spending for a month is a good place to start. It may surprise you how much money you unknowingly spend during the month. For instance, paying for an Uber or buying a sandwich because you didn’t pack lunch are small expenses that add up over time.
Cutting out these impromptu purchases could save you enough money to pay a utility bill. Speaking of utility bills, another great way to cut your expenses is to check how you use your utilities. You can cut your monthly utility spend through like unplugging appliances that aren’t in use, turning off the heating and air conditioning when not needed and using energy-saving devices.
Another great way to cut expenses is to reduce your housing bill. Rent and mortgages are often the biggest expense you can have. If you have home insurance, look into whether you can get your monthly premiums reduced. You could take out a cheaper policy with fewer benefits or work out a deal if you have other insurances such as motor or health insurance.
2. Pay Off Your Debt
If you're like many Americans struggling with debt, your main priority should be to get out of it. Condense your credit cards into one, which you should use only in extreme emergencies. Luckily, Florida Credit Union can help you secure a lower interest debt consolidation loan to help pay off all your credit card debts, payday loans or any other smaller debts that you may have.
The advantage of debt consolidation is that you pay a lower interest rate on your loans while having only one monthly payment to think about. Debt consolidation also allows you to pay off your debts 3 to 5 years earlier which would save you a chunk of money. Whenever you have extra funds at the end of a month, direct them towards paying off your debt. The smaller your principal gets, the less interest you’ll pay in the long run.
When it comes to debt, another habit you should take up is monitoring your credit reports. A bad credit rating can lock you out from getting loans, mortgages, and in some cases jobs. You can get a free credit report once a year, and you’re entitled to a free credit report analysis if you’re a member of Florida Credit Union!
3. Create an Emergency Fund
If you live paycheck to paycheck, it is easy to lose sight of unexpected expenses such as a big medical bill. This is why it is necessary to have an emergency fund that covers at least three months of your monthly expenses. This way if you lose your job you have time to find an alternate source of income.
Saving money can be a bit of an uphill task if your income barely covers your expenses and you have a lot of debt. Still, some simple tweaks to your could leave you with some savings at the end of every month.
First, you must try to increase your income. You could do so by upgrading your professional skills to get a better paying job. This is easier said than done of course, so you can alternatively increase your sources of income by getting a second job or starting a business. Secondly, you could save money by cutting your expenses as discussed above.
4. Create a Retirement Fund
Another important rule of personal financial management is having a retirement fund. This is a secure investment portfolio that you can access when you are older and are no longer able or willing to work for a living.
To set up a retirement account, you first need to calculate how much you need to save up. For instance, if you estimate that you will need $5,000 a month, you’ll need to have enough funds in your investments and savings accounts that pay you that amount of interest each month. Use a retirement calculator to tell you how much you need to save each month based on your age, salary, and retirement goals.
Financial advisors state that you should be saving at least if you are in your 20’s or 30’s, and more if you are older. Due to compound interest, you will have a bigger nest egg the earlier you start saving.
5. Increase Your Financial Knowledge
The best finance tips will be useless if you don’t understand them. This is why it is important to increase your financial knowledge. Financial information may seem overwhelming which is why most people shy away from financial education. But with a bit of time and commitment, anyone can learn how best to manage their finances.
Start by learning the basics of financial management such as budgeting, choosing a savings account, how taxation works etc. Once you’ve mastered the basics, you will be able to take on more complex endeavors, like investment strategies. Having even the basic level of financial knowledge can prevent you from falling for bad deals such as exorbitant payday loans or pyramid investment schemes.
Saving Money and Cutting Expenses Are Your Keys to Financial Freedom
Having a money management plan is a must for anyone that wants to avoid the financial stress that comes from debt and lack of funds. With all the tools available to you, remember that the best financial plan is one that is simple enough for you to understand and use consistently.
For even more help on creating your own budget, visit our "Creating a Budget" educational module, powered by EverFi.
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 113,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.