A lack of financial education can result in carrying a large amount of debt or experiencing financial instability. Financial decision-making is something that can be taught, but many people lack a mentor and have to figure it out on their own through a process of trial and error.
Here are five great tips that anyone, regardless of their financial situation, can benefit from:
1. Create a Budget Centered Around Saving, Not Spending
Of course you need to ensure your essential expenses like housing, food, vehicle, etc. are covered. But I see it over and over again where people fail to stick to a budget because it’s too focused on categorizing and tracking every single little expense rather than achieving a particular goal. Just like a new fad diet, they’ll stick to it for a while, but it eventually it always lacks long-term direction and simplicity so they end up giving up almost as quickly as they started. Budgeting should be a simple and repeatable process. Determine what your essential expenses are, build an automated savings goal on top of that, and then anything left over at the end of the month is yours to do as you please. (For more, see: Best 5 Money-Saving Tips to Get out of Debt.)
2. Max Out Employer-Sponsored Retirement Plan Before Anything Else
This is super important. I’ve had people tell me they want to open an IRA or taxable investment account to start saving more only to find out once we dig in that they’re not even maxing out their 401(k). IRAs only allow you to contribute up to $5,500 a year ($6,500 if over 50), and have tax deduction and/or income phase-out limits for contributions. Your 401(k), on the other hand will, let you contribute up to $18,000 year. Your employer may match dollar for dollar, often up to 6%, sometimes even more. Before opening an IRA or any other invested savings account, make sure you’re maxing out that employer-sponsored plan if you have one.
3. Refinance, Consolidate Debt With Lower Interest Rate
Take a look at any outstanding balances you have and compare interest rates. If you’ve got a lot of high-interest consumer debt, for example, a personal loan at a lower rate may be a great way for you to save money over the lifetime of paying down that balance. Another option could be a credit card balance transfer from a higher interest rate card to a lower interest rate card.
For student loans, there’s a number of great companies out there that offer reasonable rates and can help you shorten the term of your loan. If you have direct government student loans you have quite a few more repayment options, such as income-based repayment, so going straight to a private company to refinance may not always be in your best interest. A good financial planner will be able to help you determine what's the best fit for you, or if cost is an issue, seek out the help of a non-profit debt counseling organization.
4. Set Spending Limit Alerts on Credit Cards
I get it. There’s lots of benefits to using credit cards such as earning points or miles, having certain protections on purchases or rentals and more. However, don’t let your need or desire to use a credit card allow you the opportunity to rack up debt that gets out of control. A simple way to avoid this is to create a spending alert on your card so you get notified anytime your balance starts to creep towards that number. I generally recommend setting it a couple hundred dollars below your desired limit so you can easily catch yourself before it’s too late. This also assists in being mindful about your purchases.
With the debit/credit cards, it’s so much easier to lose track of what you’re spending versus carrying around a fixed amount of cash when you go out to make purchases. Alerts can help mitigate some of that mindless spending that’s all too common with the flimsy pieces of plastic we love to carry around in our pockets these days.
5. Build a Financial Plan With Professional Help
If you are still struggling to get on track or are not even sure if you are on track with your financial goals, one option is to seek out a financial planner. A financial plan can help you get where you need to go. It can be adapted as your life and financial situation changes.
The Bottom Line
Making smarter financial decisions will help you achieve your financial goals and can provide a greater sense of peace of mind and confidence. Consider taking the steps above to develop a solid plan. (For related reading, see: How the Cost of Debt Affects Retirement.)