The new year is fast approaching and you’re still in debt. Financial issues can cause some serious anxiety and leave you feeling hopeless.
In fact, a recent study by John Gathergood at the School of Economics of the University of Nottingham established a firm causal link between depression, anxiety, and problem debt.
Clearly, it’s time to get your finances in order, but where to start?
Plan and Budget
The first step in getting your finances in order is establishing a financial plan and budget. The task can seem daunting, but these days it’s actually easier than ever.
Establishing financial goals and a roadmap to achieving them is the first, most basic step in budgeting. Then you need to have a clear picture of your expenses and income.
That way when you make a purchase, pay off debt, save or invest you can have the whole picture in mind and make the right decision. Many people are surprised by just how much money they waste every month once they create a budget.
Thankfully, in this modern era, the need for an old fashioned pen and paper budget has evaporated. There are now hundreds of resources out there to help you get your finances in order.
Finding the right tools is vital, try these budgeting apps to help make things simple:
- You Need A BudgetMint
- Budget Simple
- Personal Capital
Paying off the Right Debt
Paying off debt is the most obvious way to get your finances in order. However, which debt you decide to pay off can mean a difference of thousands of dollars over the lifetime of your loans.
Knowing the differences between ‘good’ and ‘bad’ debt is essential when interest rates range so widely. Depending on the type of loan and credit score of the borrower interest rates can range anywhere from under 3% to well over 20%.
When paying off debt it’s important to remember to pay off debt with the highest interest rates first. That means if you have a car loan with just a 3% interest rate, it may be wiser to pay off your federal student loans instead, which can range anywhere from 5% to 7.6% in interest.
Save More, Invest More
Everyone knows the importance of saving, but actually putting the money in the bank is another matter. Those shoes, that car, it’s difficult to avoid the pitfalls of our materialistic society.
Expensive habits can wreak havoc on your finances. A good general rule for savings is the common 50/30/20 rule. This is where you use 50% of your income for required expenses, then you spend 30% on debt reduction and put 20% into savings.
Of course, this kind of general rule is difficult to follow if you are in dire financial straits. And even worse, it doesn’t include any portion of your income for investments.
As Robert G. Allen, multiple-time #1 New York Times bestselling author, puts it:
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
Everyone has heard ‘a penny saved is a penny earned’, but the reality is, in 2019, a penny saved is just that—a penny. Savings account interest rates have fallen substantially since the days when baby boomers were young.
Even Certificate of Deposits (CD’s) has seen interest rates crash. What used to be the most secure place to keep your money, now doesn’t even cover inflation.
That doesn’t mean you shouldn’t be saving though. In fact, saving is an absolute necessity and it has been proven to reduce stress. However, falling savings account interest rates make the idea of investing in the stock market or in real estate more appealing than ever.
Additionally, with the invention of online investing applications like Robin Hood or E*trade and the expansion of bank-offered programs for investing with no fees, anyone can invest in the markets. Even if you are more interested in the real estate side of things, there are options in the stock market that can allow you to invest in at under $1000.
Real Estate Investment Trusts (REITs) are pure-play real estate stocks that can help you gain exposure to the industry, even if you don’t have hundreds of thousands to spend on rental units.
In this difficult environment for savers, it may pay to take some risk and invest your money.
So remember, save more AND invest more.
Automation: Friend or Foe?
Automating monthly payments for things like rent, your Netflix account, utilities, etc. is a great way to reduce stress. IF you have enough money in your checking account to never cause an automated overdraft.
You see banks love fees, and automation can lead to some serious fees.
When you manually make your rent payments, etc. you would never overdraft your account, rather you might transfer money from your savings or even ask for an extension from your landlord.
However, when you automate your payments if your account doesn’t have the required money, you will be charged an overdraft fee. And just like that, you are in debt to your bank and you’ve hurt your credit score.
Automation can be a double-edged sword, but as long as you keep enough cash in your checking account it can really make budgeting and managing your money simpler and less time-consuming.
Increase Your Credit Score
Perhaps the best thing you can do for your finances in the new year is to increase your credit score. The cost of bad credit is enormous. Auto loans, mortgages, credit cards, personal loans, almost all types of debt calculate borrower’s interest rates based on their credit score.
For example, someone with a poor credit score in the 500-559 range would pay an average of 19.23% interest on auto loans, 23% interest on credit cards, and 5.9% interest on mortgages.
In comparison, someone with an excellent credit score in the 720-850 range would pay an average of just 5.3% interest on auto loans, 4% interest on credit cars, and 4.3% on mortgages, according to Go Clean Credit.
All of this means a poor credit score can cost you thousands annually. Focusing on credit repair is essential to improving your financial situation in the new year.
Many people are confused about how to repair their credit because it can be a tricky process. Luckily there are tools and services to help you get that credit score up in time for 2020.
Whether you need full consultation services or you’d rather do things independently with DIY credit repair services there are a plethora of options out there to help you.
So, don’t wait to get your finances in order. Start now so by the new year you can truly be a new you!