The key to avoiding financial problems is understanding your money. Financial literacy, or understanding things budgets, investments, debt, and retirement can help you achieve financial security.
Finances can be complicated, but you do not need to be a CPA or have a finance degree to make smart moves with your money. Implementing just a few simple practices can put you on the right track for financial security. Plus, with time and experience, your knowledge will grow, helping you develop a better understanding of money tools.
Here are five personal finance rules to live by. These simple steps can take even the most money insecure person to a stable financial future.
1. Save Money
Wherever you can, however, you can, make saving a priority. This means having a savings account. It means limiting unnecessary expenses and always shopping for the best deals. Whether you start clipping coupons to save a few dollars on groceries or you download the latest cashback app on your phone, take advantage of every opportunity to save money.
Almost half of all Americans are unable to come up with $2,000 in thirty days for an emergency. You can avoid this financial stressor by having an emergency savings account. A fully funded account should have at least three to six months of living expenses. Aim to save at least ten percent of everything you earn. Build up that emergency savings first, but once it is fully funded, you can direct your savings to other investments for the future if you want. Just make sure you never stop saving.
2. Pay Down Debt. Now
Pay off your debts as quickly as possible and avoid taking on new debt. If you must borrow money, make sure that you shop around for the best repayment terms and make paying off your debt a priority.
Focus on paying off the higher interest loans first, as this will save you the most money over time. However, if you begin feeling discouraged and that your debt will never go away, it may be helpful to switch your focus to paying off an account with the lowest balance. This will give you a quicker result, completely dissolving one bill.
For every account you pay off, your credit score will improve. Maintaining a good credit score is important to your financial health. This determines what kind of interest rates and borrowing terms you can get on purchases you absolutely must finance – like a home.
3. Invest wisely
Get the most out of your money by growing it for your future. Invest aggressively and effectively. Tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, and 401(k)s are a good way to save. Make sure to maximize your contribution to your 401(k) if your employer has a matching benefit to take advantage of essentially free money toward your retirement.
Do your research and know that you do not have to blindly settle for default settings on things like your 401(k). Make the investment choices that make sense for your circumstances and if you need guidance, consult a financial advisor.
4. Live below your means
Revisit your budget regularly. Your income may increase over time, but you should constantly strive to lower your budget. If you are accustomed to living with less, then any extra money can be invested or put into savings. This is an easy way to make sure you always have a back-up should your income decrease.
5. Score the right insurance
If you have someone that depends on you, like a spouse or a child, you need life insurance. However, if circumstances change and no one depends on your income anymore, this is an expense you can eliminate. Only pay for the insurance you need.
You likely have multiple insurance policies on things like your home or car. These policies, especially health insurance, can be a huge expense. Each insurer calculates rates according to different formulas, so it is possible to get very different quotes for very similar policies. Make sure to shop around often to make sure you are getting the best deal.
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