The economy is abysmal, the unemployment rate is holding above 9% and many companies are not hiring. It is times like these when having some personal finance skills can help you keep your bank accounts in good health. To successfully maneuver the waters of budgeting, debt and savings is certainly easier said than done. While understanding personal finance is an essential life skill, many Americans do not have the opportunity or take the time to learn about it. This can lead to the mismanagement of money. Thankfully there are some simple steps you can take to help you feel a lot better about your monetary situation.
Budgeting: Mom do I have to?
The answer to the above question is unequivocally, yes. It’s a non-negotiable aspect of having good personal finances; you must create a budget and stick to it. Simply put, the amount you set your monthly budget to must be less than the family’s monthly income. You should estimate a dollar amount for various categories where you know you will spend money such as groceries, utilities, car payments or rent. You can minimize these costs by doing things such as couponing, paying your car off or setting the thermostat a little higher during the summer months.
You may want to set a recurrent monthly budget for your common expenses if they can be easily forecasted. However, it may be more practical for others to redo their budget every month because their financial commitments vary. Whatever preference you have, you need to establish a reasonable budget that doesn’t create debt at the end of the month. You can choose to do this on paper or online with various web based services and software like Quicken.
Debt: Get out and stay out!
Many Americans operate under the false pretense that debt is a tool. Debt is like a hammer that will leave your thumb purple and the nail still sticking out of the wall. In the end it is a necessary evil to make certain dreams come true like home ownership. What you should not do however, is welcome it into your personal finance world with open arms. Cardweb.com reports that the average American household carries a staggering $10,700 in credit card debt. Most credit cards charge from 19-30% interest on every dollar they lend you which can crush the aforementioned budget. When you combine that with student loans and car installment payments, the interest really adds up.
You want to avoid credit card debt altogether if you can; or if you can avert the interest by paying it off monthly, it’s okay to stick with that. Pay off the student loans as soon as your budget will allow; many of them have five, eight or ten year terms and never seem to go away. Don’t forget about the car either. The sooner you can pay that off, the better your budget will feel. Once you kiss the vehicle debt goodbye, pay cash for the next one, and make it a certified pre-owned car. A legitimate used car will run just fine.
Saving for an Emergency: You’ll be glad the spare tire has air in it.
A surprising amount of Americans live paycheck to paycheck and don’t have a safe place to turn to when life throws them a curveball. According to a recent survey conducted by HSBC Bank, only 39% of Americans have enough savings to cover three to six months of costs. It’s absolutely essential to have at minimum three months total expenses stashed away in an easily accessible location, preferably a traditional savings account. Yes, you won’t be earning much interest there, but you can tap into it quickly the next time your transmission blows, the air conditioner breaks, or you get slapped with a hefty medical bill your insurance “didn’t cover.”
At least three months is recommended, because most people should trend toward having six months saved; that way if disaster strikes twice simultaneously, you can pay cash to take care of it. The purpose of the emergency fund is to keep the debt out once you’ve gotten rid of it. You do not want to borrow money at 30% interest in a time of need.
So what’s the overall message to keep in mind? Protect your assets. That doesn’t mean protect your money. Your family, your home and your pets are examples of assets. If you don’t have sound personal finance skills then it’s difficult to provide for and protect the important things in life. When you have a formal budget in place, you can take comfort in knowing and understanding where all your money is going. This is in turn allows you to keep debt out and accumulate enough savings to weather the next storm that comes your way. The peace of mind that comes with being financially secure is something you just can’t put a price on.