While credit, income and debt can be scary topics, you don’t need a magic wand to overcome your fear of finances. All you need is a touch of knowledge and a sprinkle of confidence to make those spooky visions vanish. Get both when you read this article – no cauldron required.
Hiding from your finances won’t make them go away. Money concerns can haunt you like ghouls and goblins on All Hallows’ Eve. They continue to linger unless you face them head-on.
Dust the cobwebs off your credit scores
Credit scores are as important as your income for expanding your financial options. Even if you make six figures, a low credit score can cost you more than you want to spend. High-interest rate loans and credit cards are only the beginning. Poor credit can limit your choices when it comes to housing, employment, and access to everyday products and services.
Breathe life into your credit health by paying bills on time and keeping credit balances low. These two credit behaviors have the biggest impact on your credit score. Request free copies of your credit report at AnnualCreditReport.com. Each report comes with an explanation of the credit behaviors negatively impacting your score.
Make debt disappear like magic
Creeping debt eats away at your ability to spend money on other financial goals. Adopt a debt reduction strategy that makes credit card balances, loans and other debt fade away.
Strategy #1: Snowball Method – Pay off your debts from the lowest balance to the highest. Minimum payments are made on all debts except the one with the lowest balance. This debt receives its minimum payment plus any other money available from a side job or by reducing other expenses.
Strategy #2: Avalanche Method – Pay off debts with the highest interest rates first. Minimum payments are made on all debts except the one with the highest rate. This debt receives its minimum payment plus any other money available from a side job or by reducing other expenses.
Using either method, consistently pay down debts until they disappear.
Wake up from the net income nightmare
Your net income is sometimes called “take-home pay.” It’s your hourly wage or salary minus taxes, benefits or other withholdings you designated on Form W-4 with your employer. If you receive a large federal income tax refund each year, you might want to update and reduce your tax withholdings. This money could be added to each of your paychecks and used to pay down debt or increase your savings.
Use the IRS Tax Withholding Estimator to see how adjusting your tax withholdings on Form W-4 will alter your net income.
Do more than eyeball your expenses
Guessing how much you spend each month on groceries and entertainment can prevent you from building a solid financial foundation. While you don’t need to track every penny, you need to know how you’re spending your net income every month.
If creating a budget gives you chills, start with a 50/20/30 budget. It divides your net income into three distinct categories to help simplify monthly budgeting.
Scream “emergency!” funds
An emergency fund can be your financial lifeline if you lose your job or have a large, unexpected expense that would throw your budget out of whack. Financial experts recommend households save at least six months' worth of living expenses. But the time it will take to build that sum can be downright frightful. It’s okay to start small as long as you stay consistent in your efforts. Instead of setting a goal to build a $30,000 emergency fund in 12 months, set a $500 goal over the next six months. Achieve your ultimate savings goal by setting shorter mini-milestones while staying motivated to create a financial cushion.
Facing your financial fears this fall can illuminate your path toward personal financial freedom!