Not everyone has the best financial health. Many people are barely getting by every month. A lack of finances can cause stress and anxiety as bills mount up. If you have been struggling with your finances, it's time to retake control of them. You can easily make positive changes today that will help in the long run. Check out these five steps to improve your financial wellness.
Step 1: Know Where You Stand
The first step is always the hardest, but it's necessary to look at your current financial situation. This means knowing exactly how much money you have coming in and going out each month. Track your spending for a month or two to get an accurate picture of where your money goes. This will help you make necessary changes in the future.
When tracking your spending, try to be as specific as possible. You can use a tracking app such as Mint, which tracks all your digital expenditures. This will automate the tracking process. If you prefer a more old-school method, you can use a pen and paper. Write down everything you spend in a notebook and calculate the amount for each category at the end of the month.
Step 2: Make a Budget and Stick to It
Once you know where your money is going, it's time to set up a budget. A budget will help ensure that you spend less than you earn each month. Start by evaluating your spending and determining what expenses are necessary and which ones to cut back on. Then, find ways to save money in other areas so that you can free up more cash each month.
There are many different ways of creating a budget. For example, you can use the 50/30/20 rule, which allocates 50% of your income to essential expenses, 30% to discretionary expenses, and 20% to savings. Or you can list out categories and assign a specific amount to each class. You might need to experiment with these to determine which one works best for you.
Step 3: Get Out of Debt
If you have any outstanding debt, now is the time to start paying it off. The sooner you can get rid of debt, the better. Look at each loan you have and determine how much interest is accruing on it every day. Then, work to pay off as much of that debt as possible to free up cash flow for other things in your life.
Due to the high-interest rates on loans, you will want to consider paying more than the minimum amount due. This can help you pay off debt faster and with less interest in the long run. You might also think about consolidating your debt, which can make managing it more manageable.
While starting, you may want to take a hard look at your budget and question if you're receiving value for what you are paying. For example, are you getting value out of your magazine subscriptions? It might be time to cut the cord and use that to pay a portion of your debt.
Step 4: Build Your Emergency Fund
Even if you have a good income and are out of debt, an emergency can still leave you struggling financially. You should build an emergency fund so that any unexpected expenses don't cause problems for you down the line. Try to save one month's worth of income in this fund so that it will be there when you need it most.
The recommended amount of an emergency fund has changed over time. In 2019, the rule of thumb was to have three to six months' worth of living expenses saved. However, with the current pandemic, some experts recommend that you should save up to a year's worth of income. This will help ensure that you can weather any unexpected financial storms that come your way.
It's natural to face setbacks while trying to build an emergency fund. You might need to dip into it for an unexpected expense, or you may have a month where your income is lower than usual. That's okay! Just make sure that you replenish the fund as soon as possible to be there when you need it.
Step 5: Invest In Your Future
Investing is one of the best ways to secure your financial future. When you invest, you are putting your money into something that has the potential to grow over time. It can help you build wealth and reach your financial goals over time.
There are various ways to invest, but some of the most common include stocks, mutual funds, and real estate. Talk to a financial advisor to determine what investment is suitable for you. They can also help you create a plan to reach your specific financial goals.
Include investing in your long-term financial plan. However, if you are currently struggling with debt or don't have an emergency fund, you might want to focus on those things first. Once you handle your short-term finances, you can start thinking about investing in the future.
Building financial wellness doesn't happen overnight. It takes time, effort, and patience. However, following these five steps can boost your financial wellness to achieve greater financial security and freedom for your future.