Many Americans, at some point in their life, will struggle financially. That’s because life is unpredictable. Anything from a car-totaling fender bender to a medical emergency can throw you into financial turmoil. You never know what’s going to happen, which is why it’s better to be overprepared than underprepared.
To ready yourself for life’s financial downturns, there are steps you can take to better manage your money. From automating your savings to reviewing your credit report every year, here are six tips to adopt. They will help you keep track of your spending and overall finances so money is less of a worry.
1. Review Your Current Financial Picture
Before you start making any changes to your financial practices, take a good look at your spending and income. We’re not suggesting you spend hours scrutinizing bank statements from 10 years ago. We are, however, suggesting you review your expenses versus income over the last couple of months. You may well find room for improvement.
For instance, if you notice you’re spending over $100 a month at Starbucks, you can begin making coffee at home to cut costs. If you’re spending $200 a month on gas, carpooling or taking public transportation could be easy ways to save.
Some expenses are “must pays” — your mortgage or rent, insurance, utilities, and so on. But your discretionary spending will likely present opportunities to cut back. The better you understand your income versus your outgo, the easier it’ll be to manage your finances.
2. Switch to Online Banking
Even before the pandemic, online banking was growing in popularity. That’s because of how convenient online banking is. If you need to deposit a check or transfer funds between accounts, online banking makes it easy. You don’t have to physically walk into a branch office; all you have to do is pull out your mobile device.
Better still, online banks like Chime can typically offer to check and savings accounts with few or no fees. Because they’re not paying overhead on those brick-and-mortar locations, they can pass the savings along to you.
Online banks also stand out for the innovative money-managing capabilities they provide, like early paydays or round-up savings. The latter feature will round up your daily purchases to the next dollar and send the difference to your savings account. While this might not seem like much, you’ll be pleasantly surprised at how a few cents at a time can add up.
3. Automate Your Savings
Speaking of your savings account, how much money does it hold? If you’re too embarrassed to answer, you probably haven’t been saving money consistently. Don’t worry — that’s pretty common.
According to a Bankrate survey, 21% of working Americans don’t save any of their annual income. The reasons vary. Some people don’t know how much money they should put aside, so they don’t save any. Others simply forget to put money away each month.
Regardless of the reason, automating your savings can encourage you to get into the savings habit. To help with this, download an app that will analyze your finances and come up with a recommended amount you should save. Some of these apps will then automatically move that amount from your checking to your savings account on the date of your choice.
You can also have your employer divide your directly deposited paycheck between your checking and savings accounts. If you choose this option, make sure you’re saving a realistic amount. Most experts, for example, recommend that individuals save between 10% and 20% of their income each month.
4. Create a Budget
Regardless of financial status, everyone could benefit from creating and sticking to a budget. But you know that, don’t you? So what’s keeping you from creating one?
Some people just don’t want to take the time to create a budget. It seems like a drag, and (they believe) they’re doing fine as is. Other people just don’t know how to start. But while budgeting can be challenging, it’s not impossible — and it’s vital to your financial well-being.
One of the easiest ways to budget is by choosing a proven method like the 50-30-20 rule. This popular method asks you to categorize your expenses into three categories: needs, wants, and savings/financial goals.
In this approach, you begin by devoting half of your income to essentials like housing, insurance, and utilities. The next 30% can be spent on wants, whether that’s new suede boots or season tickets. The remaining 20% is earmarked for savings or other financial goals (e.g., debt reduction). What’s nice about this budget is that it’s not too restrictive. If you plan well, you can pay your bills, pay off debt, and still have money to spend on things you enjoy.
5. Review Your Credit Report
Did you know you should check your credit report every year? Not everyone knows that — and even fewer do it. Some people are under the impression that pulling their credit reports will lower their credit score. Fortunately, that’s not true.
Only a “hard inquiry” will lower your credit score, and that only happens when you’re applying for a new credit card or a loan. Pulling your own credit report is considered a “soft inquiry” and thus has no negative impact. That means you can safely review your report to ensure there are no mistakes (incorrect credit limits, erroneously reported late payments, etc.) harming your score.
If you detect any errors, make sure to report them as soon as possible. For any mistake unrelated to identity theft, the credit bureau has 30 days to investigate your claim and make needed changes to your report.
6. Start an Emergency Fund
Don’t get your savings account and your emergency fund mixed up. These two things might seem similar, but do your best to keep them separate. Your savings account should contain money you’re putting aside for a specific goal (buying a house, a new car, etc.). Your emergency fund is money you save for unexpected expenses — things that happen without any plan.
Emergencies can range from the relatively limited, like a new windshield, to major ones like a job loss. That’s why experts suggest you aim to have enough to cover three to six months of your living expenses. Banking this much money won’t happen overnight, but you’ll sleep more soundly once you’ve done so.
There are many reasons — student loans, credit card debt, high cost of living — that you might struggle with your finances. Regardless of the reason, if you don’t have your finances together, you can’t achieve your goals. The good news is, the tips above will help you manage your money well so you can get what you want out of life.