To say you probably had a lot on your mind last year is an understatement. With the pandemic and politics running amuck, your finances may have been placed on the back burner. Now that a fresh new year has arrived, it's time to review your finances to ensure you're on the right track.
Consider these steps to improve your financial health.
1. Review your credit report
Did you know that your credit score affects more than just loan rates? Your credit standing is taken into consideration for things such as car insurance rates, job offers, or being approved for an apartment rental.
As you review your credit, you'll see a breakdown of what is strong as well as weak on your report. For example
Your balances on credit cards compared to the limits may be too high
You may have opened too many credit lines recently
You may have late payments reported
This will give you direction as to where to improve upon.
You may also come across incorrect information on your report. From incorrect balances and credit limits to erroneous late payments, these inaccuracies can damage your credit score. If you aren't proactive by reviewing your credit report periodically, these could go unnoticed, causing problems down the road.
If you think errors aren't common, think again. A recent study by Consumer Reports found that 34% of people found a mistake on their reports. Being proactive with your credit is essential to your finances. You can get a free credit report once a year at annualcreditreport.com.
2. Set up a budget
The word budget can make some people cringe, but to be in charge of your money, you need to know where it's going first. It will help you pay down debt, increase your emergency fund, and identify places you are bleeding money. It's about setting spending limits and assigning direction towards your goals.
It can be eye-opening when you review where your money is going.
You may be spending more than you thought on groceries and dining out. Once you see what you're actually spending versus what you thought you were spending, you can work on cutting down in those areas. Maybe you hadn't realized how many monthly subscriptions you have. Those can quickly add up, although, in your mind, it seems more like $10 here and there.
When you have a set dollar amount to focus on, you may be motivated to make changes like preparing your lunch for work rather than spending money at a local restaurant every day. And maybe, just maybe, you don't need six different streaming services to watch TV.
Once you create your budget, make sure you have a hard copy saved so you can return to it and make changes if needed. Your budget is fluid, so when anything related to money changes, you need to review your budget again. Your debt may have changed, your income may have changed, or you may have paid off a loan leaving you with monthly funds that can be applied elsewhere.
3. Create an emergency fund
The pandemic taught us that emergencies will happen, and being financially ready can dramatically help your situation. Unfortunately, it also taught us that Americans are not sufficiently prepared to cover emergencies. In a recent emergency fund survey by Bankrate, more than half of the Americans polled couldn't cover emergency expenses for three months.
Don't just say that you're going to save up for an emergency fund – that's too vague. Have specific steps to take to get you to that end goal. Having a budget set up will help guide you, as it shows where you can cut spending in certain areas and reallocate that money into your emergency fund. To get started, you have to take action, not just hope to do something.
As an example, if your goal is to save $2000 in one year (because a goal of "saving money" isn't specific enough – remember?), break it down into smaller steps, so you have guidance:
Goal = Build an emergency fund with $2,000 in one year. Okay, that's nice and specific:
That's $166.67 a month
That's $38.46 a week
That's $5.48 a day
Now that you've broken it down into smaller amounts, it becomes easier to work towards. Review your spending to identify ways you can reach your goal:
Do you spend about $5 on fast food/coffee/cigarettes each day?
When you go out to eat/have drinks on the weekends, do you spend under $40?
If you answered "yes" to either of those questions, then you can afford to build your emergency fund in a year, but you will need to choose to forego or cut down on spending elsewhere.
See how it's easier to identify areas you can cut spending from once you have a dollar amount to focus on? Having a financial safety net in place is vital to your financial health.
4. Use automated services
Make things easier on yourself-set it and forget it. You have too much going on, and let's face it, life happens. Don't let a bump in the road cause a domino effect on your finances and credit.
Not only will automatic transfers and payments help you avoid late fees, but you may also receive a discount for services or loans when you sign up for automatic payment. It saves you time and hassle, checks won't get lost in the mail, and prevents you from talking yourself out of saving or investing-telling yourself you'll handle it later.
Paying yourself first is healthy money management. Rather than depend on memory, motivation, and consistent self-discipline, set up an automatic transfer to your 401k and emergency fund to help you succeed. Emotions have a way of getting intertwined with our finances, so automating prevents any hiccups or backpedaling from getting in the way.
Along with automatic payments and transfers, it's in your best interest to set up low-balance alerts through your online or mobile banking. This will alert you if your balance gets below a set amount you are comfortable with. That gives you time to make a deposit, cut back on spending until you get paid, or review possible unauthorized purchases. You should be checking your bank account regularly already, but you don't have time to watch it 24/7.
5. Reconsider where you keep your money
Where you keep your money matters. Are you being charged for your checking account? If so, find somewhere else to bank. There are so many financial institutions (especially credit unions) that offer truly free checking accounts.
Do you solely use a checking account, or do you have a savings set up as well?
Opening separate savings accounts for specific goals can simplify your plan of action. When you only use one account but have three different reasons for saving, you have to calculate how much money is set aside for each goal, leaving you frustrated.
With separate savings accounts designated with a purpose, you can title each account with your specific goal.
Down payment (car, home)
Seeing your progress towards each goal can be motivating.
6. Assign a beneficiary to your bank account
To help save your family from even more stress- assign a beneficiary to your accounts. This is not the same thing as having a joint account holder. A beneficiary does not have access to your information or your money unless you pass away, so there is no risk of account takeover. If you pass away, they can avoid probating a will to get the funds.
The required documents and steps may vary depending on the financial institution, but in many cases, can be as simple as providing the death certificate and an ID. If you aren't comfortable with setting up these types of services online, contact your bank/credit union so they can walk you through how to sign up properly.
Give these financial areas your attention
While financial goals are still fresh in your mind for the new year, be proactive and take steps to improve your financial health:
Review your credit report
Set up a budget
Create an emergency fund
Use automated services
Reconsider where you keep your money
Assign a beneficiary to your bank accounts
Stefanie is a freelance content writer and blog owner with over 20 years of experience in the banking industry. She writes about personal finance and wellness, as she believes both topics are intertwined.