Anyone can achieve financial wellness, but they need to understand how to reach that goal. It can feel like a challenge to pay off debt, plan for emergencies, save for college expenses and retirement — especially in difficult economic times like these.
Developing a few sound habits can put financial security within anyone’s reach. Here’s how to get there:
USE A BUDGET
Track your income and spending to establish financial goals based on the facts, rather than guesstimates. Developing a budget based on your monthly income, expenses and savings is the first step to living within your means and building a cushion for the future.
TCU’s Director of Financial Wellness and Wellbeing Jeff Sobieralski says the popular 50/30/20 budget has been useful for his family. In it, you spend roughly 50 percent of your after-tax dollars on necessities, no more than 30 percent on “wants,” and put at least 20 percent into savings or paying off debts.
Following such a budget plan over time will reduce debt, sock away funds for unexpected expenses, and keep occasional indulgences within reach. And TCU’s Budget Calculator can help you develop a roadmap to help make your hard-earned income work for you.
BE AWARE OF HOW YOU SPEND YOUR MONEY
Review your purchases and adjust or eliminate what does not align with your budget. Even modest spending can add up, which is why it’s important to track where your money goes. For example, people ages 35-44 spend $1,410 a year on coffee. Imagine the impact of reducing that expense and using the money instead to pay down credit card debt, student loans or car payments. Daily coffee or frequent one-click online purchases, small as they might seem in the moment, amount to significant expenses that could be applied to more important priorities.
TREAT YOUR SAVINGS LIKE ANY OTHER BILL
A useful trick for many TCU members is the zero-sum budget, which, in effect, hides some of your money from you every month. In a zero-based budget, you set up multiple savings accounts — for example, “emergency” and “insurance” account — and assign yourself amounts that you “owe” to each, like bills you pay to yourself every month. That way, savings become another mandatory expense, like any other bill.
BUILD YOUR SAVINGS
An emergency fund is an essential to a solid financial plan. The best way to prepare for a surprise medical bill, costly car repair or temporary loss of income is to set money aside regularly so that, when the situation arises, you’re covered. As a general rule, it’s prudent to maintain enough savings to cover three to six months of your regular expenses. And you can’t put a price on the peace of mind that comes from an adequate emergency fund.
PLAN FOR MAJOR PURCHASES
It’s best to know ahead of time how you’re going to pay for any big-ticket purchase. Buying with a credit card, of course, can add significant expense with interest on debt paid back over time. Establishing a separate savings account for a specific purchase goal can be helpful, allowing you contribute a certain amount each month until you cover the cost. This will help keep the funds separate, and you’ll be able to clearly see how quickly you are approaching your goal.
SAVE EARLY FOR RETIREMENT
Retirement savings should be a long-term project. Start as early as possible, automate the process and forget about it. Even a small, regular contribution has the potential to grow into a large nest egg. If your employer offers a 401(k) plan, take advantage of it, along with the pre-tax savings on your earnings.
A health savings account (HSA) is also worth considering. You can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses.
Arrange a meeting with a TCU Investment Professional, free of charge, here.
HANDLE CREDIT WITH CARE
Use credit cards only when absolutely necessary and pay off credit card balances each month. One way to ensure you meet that goal: set a personal monthly limit and stick to it. Your credit score is another critical part of your financial well-being. Late payments, lingering credit card debt and high balances have a negative effect. The three national credit reporting agencies — TransUnion, Experian and Equifax — are required by federal law to provide you with a free annual credit report. You can receive your free annual credit report from annualcreditreport.com.
KEEP FINANCIAL RECORDS
Develop a system for organizing your financial records. Items like receipts, pay stubs, tax records, banking and insurance information and any other documentation that affects your finances should kept secure but accessible.
ASK FOR ADVICE
Financial planning is essential for everyone, not just wealthy people managing large investments. Among the most important services credit unions like TCU provide are free financial education and advice to members.
TCU is here to help you make sound decisions that will put you on a path to financial independence and peace of mind.
This article is for educational purposes only and doesn’t constitute tax, legal or accounting advice. No material here is a recommendation. Please consult with an attorney or tax professional for guidance.