When 2020 began, the unemployment rate was the lowest it’s been since the Great Depression. Then COVID-19 struck. Due to the pandemic, businesses closed and many employees were either furloughed or fired.
But the good news is that 2020 is over. With the coronavirus vaccine now being distributed, people can begin to see the light at the end of the tunnel. As a result, the economy is seeing a significant rise. Now, all that’s left to do is get your own finances under control.
1. Gain a Deeper Understanding of Your Finances
You hear all the time about the importance of budgeting. There’s no denying it has its benefits, but to budget effectively, you need a good understanding of your finances first.
According to a Mint survey, 65 percent of U.S. consumers are unaware of how much money they spent the previous month. If you don’t know how much of your money is going where, how can you possibly budget? It’s important to spend time going over your bank statements, credit card bills, 401(k) statements, etc. Make sure you understand where a majority of your money is going every month. Once that’s done, create a budget for yourself.
2. Create a Realistic Budget
If there’s one thing this pandemic has taught us, it’s that anything can happen. And it’s crucial to have money set aside in the event of an emergency. Budgeting is a good way to stay on top of your finances so you’re prepared for anything.
Adopting a budgeting method like the 50/30/20 rule works well for those who don’t like restrictive budgets. This method suggests you put 50% of your income into essentials, 30% into your wants, and 20% into your savings.
Keep in mind, there are many different budgeting methods out there, some of which might not work for you. The trick is to create a realistic budget that complements your spending habits while still holding you accountable.
3. Pay Down High-Interest Debt
For many young people trying to get their financial footing, paying down debt is a priority. While that’s a great instinct, you’ll make the most gains if you pay down the right debt.
In January, the U.S. Department of Education extended pandemic relief for about 41 million federal student loan borrowers. Student loan payments are suspended until Sept. 30, and the interest rate will stay at 0%.
So while paying off your student loans should remain a long-term goal, use this temporary reprieve to prioritize higher-interest debt. Begin your journey toward a debt-free future by knocking out an auto loan or credit card balance first.
4. Don’t Be Scared of Credit Cards
While credit card debt can be detrimental, you shouldn’t be afraid to touch credit cards altogether. After all, credit cards offer many necessary benefits. If you use a credit card and pay your balance on time — ideally in full — you build a credit history. This is something you’ll need later on in life when applying for a mortgage or other loan.
Debit cards, in contrast, don’t help build your credit. While you’ll avoid paying any interest on your purchases, you won’t achieve much of a credit score. This means it will be difficult for you to find lenders willing to take you on at a low interest rate.
Furthermore, credit cards can come to the rescue should you find yourself in a financial jam. An Edeleman Intelligence survey found that 42% of respondents considered the greatest benefit of a credit card is having a cushion for emergencies. While you don’t want to carry a credit card balance, it’s a comfort to know you can in a pinch.
5. Take a Look at Your Retirement Fund
If your employer offers to match your 401(k) contributions, you should definitely take advantage. If you don’t, you’re essentially losing free money. Do you have an individual retirement account (IRA)? Determine whether you can increase what you’re adding to it. Contributing as little as an extra percentage of your paycheck can really add up later.
If you aren’t currently saving for retirement, now’s the time to start. If you’re earning a paycheck, you should be putting some of that money away for the day when you won’t be. The sooner you start, the quicker your nest egg will grow and the more you’ll have when you’re ready to retire.
6. Keep Investing
You might not think it’s a wise time to invest. After all, the market has been fluctuating, to say the least. You might even be considering taking the money you have in stocks back out. Don’t!
The truth is, the stock market will always go back and forth in the short term. As we’ve seen in the past, though, it will eventually recover. If your portfolio has taken a hit, remain patient. Take it from investment authority Warren Buffett, a buy-and-hold strategy is the best path to wealth creation. By leaving your money in the stock market, or investing more of it, you’ll do well over the long run.
Getting your finances in order isn’t necessarily easy, but it’s a good way to avoid financial hardship later in life. No one wants to find themselves in debt, struggling to make ends meet. If you don’t take charge of your finances, that could be you. The six tips above will help you manage your money so you can improve your financial future.