Creating a personal financial management plan can seem complicated or even intimidating, especially if you’ve made it less of a priority over the years. But it’s important to identify and understand these financial lessons now so that you can avoid unnecessary, yet potentially detrimental, money mistakes over the long term.
1. You should have a solid get-out-of-debt plan.
The average U.S. household has more than $15,000 in credit card debt, more than $33,000 in student loan debt, and nearly $150,000 in mortgage debt, according to statistics from NerdWallet.com. If you fall into any (or all) of those categories, it’s essential to create a concrete plan to pay your debts in the shortest possible amount of time. The first step is to identify how much debt you have and make your monthly payments on time. Use an online debt calculator to determine how much you should pay each month in order to get out of debt faster, helping you to pay less interest over the long term.
2. Paying the minimum balance can result in monstrous interest payments.
For many people, paying the minimum balance is the only viable option when it comes to paying down debts. But if you’re able, try to pay more than the minimum balance when it comes to something like your student loans. When you only pay the minimum balance due, only a very small percentage is going toward the principal balance, and the rest will go toward interest. When it comes to something like credit card payments, pay off the balance in full each month if you can. If you’ve already acquired large amounts of credit card debt and paying off the balance in full is virtually impossible, try to pay more than the minimum amount due and make the payments on time.
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3. An emergency fund could save you time, money and a headache down the road.
It’s crucial to create an emergency fund to be financially prepared in the unfortunate event of an emergency, such as unexpected medical expenses, a family problem or a natural disaster. While we hope these events will never happen, it’s important to be ready so that you can deal with the situation at hand without stressing about how to pay for it.
4. You can improve your credit by tracking your spending.
So simple and yet so rarely practiced. It’s easy to get into the habit of spending more than you have or more than you should, especially if you’re using credit cards. Try to make a habit of using a debit card or cash when making purchases. Track your spending online or using a bill organizing and account management service, such as a Manilla.com, which helps you manage all of your bills, balances and other personal accounts in one place.
5. Late bill payments come with consequences.
Paying your bills late can result in hefty late and penalty fees and can even lower your credit score in some cases. Use Manilla’s text and email bill pay reminders so that you always pay your bills on time and completely avoid late fees.
6. Even just loosely budgeting will benefit your financial standing.
Creating a budget doesn’t have to involve complicated charts, graphs and spreadsheets. Identify how much money you have coming in and going out each month. Take the total of your monthly expenses and subtract it from your monthly income. That simple formula will allow you to be aware of how much money you can spend each month so you always know where you stand. This will help you avoid overspending, stay out of or lower your debt, and help you increase your savings for short- and long-term goals.
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7. Homeownership isn’t for everyone.
The idea of owning a home is exciting in theory, but it’s not necessarily the right move for everyone. The first step in determining if you should purchase a home is to ask yourself if you are financially prepared. That means you’ll need to have enough saved to put down a 20 percent down payment on the home. Plus, you’ll need to qualify for a mortgage, and in order to do that, you’ll likely need to have savings, a minimal debt-to-income ratio and stable income.
8. Buying a car is sometimes better than leasing one.
Although leasing a car oftentimes costs less money up front, it’s not always the most financially sound option in the long run. Not only will the value of a car automatically depreciate immediately upon leaving the dealership, but leasing can also come with insurance issues, limited mileage and pricy monthly payments that don’t go away. Before deciding to buy or lease, do research to identify the best option for you.
9. Vacations don’t have to cost an arm and a leg.
Even in a dismal economy, it’s important to spend time with family and friends, enjoy life, and treat yourself once in a while. A common misconception is that you need a lot of money to go on vacation. Fortunately for most of us, that isn’t the case. Start planning about three to six months before you go on your trip (or even earlier for bigger vacations). The earlier you start planning, the more time you have to save and the more time you have to get the best rates on airfare and lodging. Determine how much your vacation will cost, and set a savings goal. Take advantage of points and mileage programs that your hotel and airlines offer — they can help you save on your next trip. Finally, try using daily deals sites and third-party travel sites to see any discounted vacation promotions available to you.
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10. Your credit utilization ratio does matter.
It’s important to track the percentage of your credit line that you’re using each month. You should only be using about 10 percent of your limit, according to MyFico.com. Using more than that could result in drastically lowering your credit score.
11. Not everyone retires at age 65.
Not everyone retires at the golden age of 65, but if you’re late to the savings game, it’s still not impossible. The best thing to do is to start saving in your 20s or 30s. But if you’re in your 40s or 50s, contribute as much as possible to your retirement savings as you can by cutting back on other costs — consider downsizing to a smaller home if it makes sense for you, pay off your debts so you’re paying less in interest and lowering your overall expenses, and reduce unnecessary insurance expenses (e.g., collision coverage on an older vehicle).
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