Most working families have experienced some type of financial hardship. In today’s day and age, it’s crucial to have a solid financial plan in order to avoid these hardships. Here are five keys to finding the perfect financial plan for you.
Have a Monthly Budget
Every family and individual needs to have a well-defined monthly budget. Only then can you know exactly what you can and cannot spend money on. Start by writing down your monthly income, and then subtract whatever expenses qualify as necessities: rent, car payments, health insurance costs, etc. What is left is known as disposable income. But don’t make the mistake of squandering your disposable income. You worked hard for that, so spend it wisely! Do you really need a new flat-screen TV? Think about what your most important hobbies or recreational activities are, and devote a reasonable amount of your monthly income to those experiences. Make sure that you leave some amount to be transferred to savings. If you don’t save at least part of your income, your wealth will never grow.
Pay Down Debt
According to Faber Inc, among the most important things that a household can do is pay down its debt. The interest rate that you pay on your debt is a sort of hidden cost. First on your list should probably be any credit cards or other short-term debt, which usually carry an APR of up to 25%. Paying down this debt in the present is saving you interest payments in the future. Timely payments on credit cards also helps build your credit score, which can be important when applying for loans for bigger purchases, like a house.
Beware of Depreciating “Assets”
Certain assets can quickly turn into responsibilities. Are you considering buying a house? Don’t assume that its value will necessarily appreciate, even over the long haul. Thinking about buying a car? Remember that you’ll have to pay for insurance and for repairs and maintenance. If you’re going to buy an expensive piece of electronics, like a TV, remember that its resale value on the second-hand market will be only a fraction of what you paid for it.
Be Careful of Credit Cards
When used properly, credit cards can provide a cheap short-term loan and give you some flexibility over your spending outlays. When used irresponsibly, their enticement of “free money” can lead to silly spending decisions that you may be paying for in future years.
Make Use of Rewards Programs
Certain credit cards allow you to earn points to spend on certain products. Consider what your most prized “luxury” purchases are and find a card that lets you work towards those. Do you like to travel? Many credit cards allow you to earn points that can be used towards airline tickets or hotel stays. If you pick your card wisely, you can use your points to get for free what you would otherwise have to spend money on.
The current financial climate can seem intimidating and unclear. Sticking to these five keys will help you to take control over your finances. If you adhere to them diligently, you’ll find yourself feeling much less stress, and you’ll be able to function independently, no matter what shape the broader economy is in.