Want to get your financial life under control? Here are 10 tasks you must check off your to-do list.
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Do you ever feel like your financial life is out of control? If you do, you aren't alone. So much goes into managing your money in a responsible way that it can be hard to know where to start when it comes to taking care of your personal finances.
The good news is, figuring out how to get a handle on financial management doesn't have to be complicated. There's just a few must-do tasks you need to accomplish to take control over your financial situation once and for all.
To help you get started, here are 10 essential tasks you should do if you want to get your personal finances in order.
1. Figure out who you owe money to and make a debt payoff plan
Do you know the total amount of debt you have? If you're like most Americans, you probably have student loans, credit card debt, and maybe a mortgage, personal loan, or medical loan. Far too many people have lots of different lenders they owe money to and just make minimum payments on each debt without looking at the big picture. If you do that, you could be in debt for a very long time.
Instead of just living with your debt, take control over it. Check your credit report to get a complete list of lenders you owe, and check with each lender to find out the outstanding loan balance and interest rate. Then, make a plan for how to tackle your debt.
You may not want to pay off mortgages or student loans early because the interest rate on these types of debts is usually lower than the rate of return you can earn from investments -- but you should focus on paying off higher interest debts such as credit cards.
You can adopt either the debt snowball or debt avalanche payoff method and should focus on sending extra payments to either your debt with the highest interest rate or the debt with the smallest balance. Calculate how much extra you can send to your debt each month, and see how long it will take you to become debt free if you follow your planned repayment schedule.
If you get serious about debt repayment and monitor your progress, hopefully you can quickly pay off what you owe and stop wasting so much money on interest.
2. Check your credit report and correct any mistakes
According to the Federal Trade Commission, around 1 in 5 Americans have mistakes on their credit report. If your report has errors that hurt your credit score, you could be denied for loans or might have to pay more when you borrow. You don't want someone else's negative info on your report to cost you money so you should make a point to check your credit regularly.
Checking your credit report on a regular basis also helps you spot identity theft and track your debt payoff plan. It's something everyone should do if they care about their personal finances -- especially since checking your credit is free.
You can just visit AnnualCreditReport.com to obtain one free copy of your credit report each year from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion).
3. Find out your credit score and work to improve it
Checking your credit report will allow you to monitor what creditors are reporting about you -- but it won't reveal your credit score.
Your credit score is one of your most vital financial numbers. You're scored on a scale of 300 to 850 and want a score above 700 to have at least good credit. Obviously, the higher the score, the better. You can check your credit score for free using services such as Mint or from credit card companies such as Discover.
Unless your score is well above 700, you have room to improve and should work on improving it. You can do this by:
- Making on-time payments on all debt. Payment history is actually the most important factor in determining your score, so you always want to pay all your bills on time. If you have a late payment on your credit report, you might also want to contact the creditor by sending a goodwill letter and asking if they might be willing to stop reporting this negative info. If you've generally paid on time and been a responsible borrower, they might be willing -- and this could give your score a big boost.
- Paying off your debt: The second most important factor in determining your credit score is your credit utilization ratio. The ratio is calculated by dividing credit used by credit available to you. If you're using $2,000 in credit on a credit card with a $10,000 line of credit, you'd calculate your ratio by dividing $2,000 by $10,000. You'd have a 20% utilization ratio in this case. The lower the ratio, the better -- but ratios above 30% can have a big negative impact on your credit.
- Limiting new credit you take on: While having a mix of different kinds of credit is important to earn the highest credit score, opening new credit cards or taking out new loans can also hurt your score. Opening new accounts reduces your average age of credit, while having a longer average age is necessary to earn the highest credit score. Applying for new credit also results in an inquiry going on your credit report, and too many inquiries can cause your score to drop. To avoid the undesirable consequences of taking out a bunch of new loans, limit the credit you apply for.
When you work to improve your credit score, it will be much easier for you to borrow at an affordable cost when you need to.
4. Make -- and live on -- a budget
If you hope to accomplish many essential personal finance goals, you need to be in control of your money. The only way you can do that is to give your money a job by using a budget. When you create a budget, you can decide how much money to save, can see how much money you have to spend, and can make sure your combined spending and saving doesn't exceed your income.
There are different approaches to budgeting. If you don't like feeling constrained, you could make a 50-30-20 budget. This simply involves limiting spending on needs to 50% of income and spending on wants to 30% of income while saving the remaining 20%. This works for some people, as long as you actually save 20% and don't overspend on the other categories.
Others will need a more detailed budget to make sure their money is going to the right place. You could allocate every dollar, specifying how much will go to rent; transportation; eating out; savings; clothes; and other routine expenses. If you take this approach, the goal will be to have your budgeted funds -- including spending and saving -- add up exactly to your monthly income. That way, you can make sure you know how your cash is being used and make sure it's being used wisely.
5. Save an emergency fund with three to six months of living expenses
If you're living paycheck-to-paycheck, you'll never really have your financial life under control because a single emergency could send you into debt. Emergencies are inevitable and unexpected expenses crop up all the time for everyone. You need to make sure you have money set aside for these surprise costs you'll definitely incur.
Ideally, you should save enough money to cover three to six months of living expenses. This should be kept in an accessible savings account you can access if you need to -- but that you leave alone if you don't.
While this can be hard to do, you can work up to this amount by saving over time. When you have a big emergency fund, you'll have the peace of mind of knowing you can cover major car or home repairs, keep paying your mortgage after a job loss, or cope with serious illness. You'll be in much better financial shape and you can avoid borrowing when something goes wrong.
6. Open a retirement account -- and start putting money into it
You need to save not only for emergencies, but also for the long-term. You cannot live on Social Security alone, as Social Security is only designed to replace around 40% of pre-retirement income while most experts suggest you need around 70% to 80% of the income you had while still working. And, most people don't have pensions from employers any more, so it's up to you to save enough for retirement.
Make sure you're putting aside money right now so you don't end up destitute when you cannot work any longer. If you have a 401(k) at work, sign up for automatic contributions if you haven't already. If you don't, open an IRA and set up automatic contributions from your bank account on payday.
Ideally, you should aim for saving at least 15% of your income, but you may have to work up to this amount. A 401(k) and IRA both provide you with tax breaks for saving since you can invest with pre-tax dollars. Not having to pay taxes on funds you put into your 401(k) or IRA can make investing cheaper and easier.
7. Open some savings accounts to save for other big goals
Finally, if you want to get your personal finances in order, you'll also need to save for other short-term and long-term goals.
Everyone has things they want that they cannot afford to buy outright. This might be a downpayment for a house, college for your kids, or even just a vacation. If you don't save for these goals, you'll have to go into debt to achieve them -- or may not be able to achieve them at all.
It's a good idea to open a few different savings accounts so you can allocate funds to different objectives. You could have a car repair account you put money into, for example, as well as a vacation fund, a down payment fund, and a 529 to save for college for your child.
When you make your budget, you can decide how much money you have available to put towards each of these goals -- and you can and should consider setting up automated contributions to each account so you'll know you'll always hit your savings milestones.
8. Learn how to build a diversified portfolio of investments
When you've saved an emergency fund or are saving money you'll need within five years, the money should be kept in a savings account where it can be easily accessed. But, if you're saving for the long-term, you'll need to earn a better return on your investment than a savings account can provide. Otherwise, your money will grow really slowly and it may not even keep pace with inflation -- which would mean it continually loses value and your buying power drops.
Historically, the stock market has provided the best returns on investment over time. So, you should put some of your money into the market. But, you don't want to do this until you know how to build a diversified portfolio. Diversification helps to protect you from loss because you spread your money around into different assets. That way, if some investments perform poorly, others will hopefully do well.
Building a diversified portfolio doesn't have to be hard. Using exchange-traded funds is one of the easiest ways to do it. Exchange-traded funds (ETFs) essentially allow you to pool your money with the funds of a whole bunch of other people and gain exposure to lots of different assets.
There are ETFs meant to track the performance of the U.S. market, emerging markets, small companies, large companies, bond investments, real estate investments, and more. If you pick a few different low-cost or commission-free ETFs that give you exposure to different kinds of investments, you should easily be able to build a diversified portfolio to minimize your risk while giving your investments a good chance to grow.
9. Get the insurance coverage you need
Once you've started building wealth, you have to protect the assets you're acquiring. This means you need to insure against risk.
Obviously, you need auto insurance to protect you from loss in case of a car accident -- and because the law requires it. You also need health insurance so an illness doesn't bankrupt you, and homeowner's or renter's insurance in case your home or possessions are damaged, destroyed, or stolen. And, life insurance can protect your family in case of your death while a disability policy ensures you won't lose everything if you get too sick to work.
You may also decide to buy an umbrella policy, which provides additional coverage on top of your auto and home insurance. An umbrella policy provides strong protection for your assets because if you're sued for more than your auto or homeowner's policies provide, the umbrella policy pays and your personal assets aren't at risk.
If you aren't sure what kinds of insurance you require, an insurance agent can help you. You should evaluate the risks you face and consider purchasing insurance to share that risk with insurance companies to protect your own financial life.
10. Start tracking your net worth
Your net worth is the most important financial number. It tells you how you're doing with your money.
It's calculated by adding up all you own and subtracting all of the money you owe. So, if you had a house valued at $300,000, $100,000 invested across all your bank and investment accounts, $20,000 worth of personal property, and a $20,000 car, you'd own $440,000 worth of property. If you owed $250,000 on your house, $50,000 on student loans, and $15,000 on your car, you'd owe $315,000. Your net worth is calculated by subtracting $315,000 from $440,000, so your net worth would be $125,000.
Many people start out with a negative net worth because they graduate from college with debt and don't own much of anything. But, as you take these other steps to get your personal finances in order, your assets should grow and your debts should shrink. You should move into a positive net worth and hopefully one day will have a very high net worth so you own far more than you owe and can be considered wealthy.
By monitoring your net worth over time, you can see if you're moving in the right direction -- and will hopefully become more motivated to pay off debt, save, and acquire valuable assets.
Do these 10 things and your personal finances will be in great shape
If you can accomplish the 10 tasks on this to-do list, you'll be in a great financial position and should feel in total control of your financial life. Start checking these tasks off your list today. You don't have to do them all at once, but after you've accomplished them all, you'll be very glad you made the effort.
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