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The first step to becoming financially empowered is to understand the way financial institutions work and how you can make them work better for you. How to make smart financial decisions is not something typically taught in school, which in turn, can lead to some making poor financial choices as adults. If left unattended, this can impact you for the rest of your life.
It’s important to educate yourself on financial literacy to overcome these systems and have them work to your advantage. In honor of April being National Financial Literacy Month, here are four areas you can educate yourself in while working towards financial freedom.
Creating a budget is the first step toward your financial freedom and empowerment. First, evaluate your monthly income and how many times per month you get paid. Next, calculate your monthly expenses that don’t fluctuate like your rent or mortgage, car payments, and any subscription services. Then figure out how you might be able to condense some of those costs, like cutting unused subscription services or refinancing a mortgage.
Also with Federal student loan payments being temporarily suspended, you should still consider putting your average payment aside to pay in a lump sum once they resume. This is ideal since your principal isn’t accumulating interest at the moment. Next, create a plan based on expenses that can sometimes fluctuate monthly such as, eating out, groceries and traveling. Putting a limit on the amount you spend in these miscellaneous categories will help you keep better track of your monthly expenses. Over time you can make small adjustments based on your needs.
After calculating that, you can look at the remaining amount you have from your monthly income and divide it up amongst different savings goals, like something broader you’re saving toward and your retirement accounts. There are a plethora of premade budget templates online and dedicated journals. If you’re having trouble coming up with your own budget, refer to those to make the process easier.
Credit is something that most people don’t fully understand but can be a hidden barrier to financial empowerment. The first step to literacy is building credit – if you don’t have any credit, chances are you’ll have difficulty securing good terms on loans or other payments. Building credit can be done in two ways, by becoming a co-signer on someone else's credit card or by opening up your own line of credit. However, if you become a co-signer on someone else's credit, you’ll adopt their credit score so if they have bad credit it’d probably be better to start from scratch.
Your credit score is determined by your payment history, amounts owed, the length of your credit history, any new credit, and your credit mix. So the best way to build credit or to improve a poor credit score is to pay your bill in full every month instead of the minimum payment. Also, keep in mind there are no quick fixes to raising your credit score, so be wary of online companies overpromising as they’re likely scams. Credit is a huge part in determining where you can live, whether renting or purchasing a home as your score is evaluated in landlord background checks and the mortgage preapproval process. Your credit score will determine
whether you need a cosigner and how the terms of your mortgage shake out including the state of your home finances.
Existing debt can be a huge barrier to your future financial success and to achieving your current goals. Working to reduce your debt quickly will save you money in interest over time and will make you a better candidate for financial institutions when it comes time to apply for a loan or a mortgage. One tip for reducing debt is to consider debt consolidation, meaning if you have multiple loans or credit card debt you take out one loan to cover all of those payments. That way you’re only making one monthly payment instead of many.
If you can secure a low-interest rate this can be a good way to save money as it’ll be easier to pay down as it accumulates less interest over time. Overcoming debt can be a difficult thing to do for anyone, especially when you’re balancing different kinds of debt. Lean on your budgeting strategies to pay this off aggressively.
While savings goals can change over time, it’s important to consider saving for your future. Think of it as investing in all the things you’ll need post-retirement. Consider using a 401(k) or a Roth IRA to compound your savings over time. The sooner you can start saving your money in one of these accounts, the more interest you’ll accumulate by the time you retire.
You can maintain these must-have savings goals while supplementing them with others like a travel savings account, or maybe a savings account to reach a monetary threshold before trying for children. Some of these accounts won’t need as high of a yield in terms of savings and are rather goals to hit before planning something like a trip or paying for a downpayment on a house.
Once you’ve determined your budget, see what’s leftover from your monthly income to divide up into your savings goals. It’s better to have percentages of your income go directly into your specific savings accounts corresponding to these purposes. That way you know the money is going directly to your goals.
Consider these articles for further reading:
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The Best Way to Invest 10k in Your 50s
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