Note: This post was submitted to Student Caffé by Clay Pitsenbarger. We would like to thank him for his submission and credit him as the author of this blog post.
Many Americans struggle with keeping track of their personal finances, which is part of the reason why there is such rampant debt. Data from 2017 show that 80% of households have some form of debt, reaching a peak of $12.84 trillion in the United States. Taking charge of your personal finances, then, can mean the difference between an unplanned expense becoming a minor inconvenience and becoming a major problem. The key is finding what’s efficient and avoiding what’s not.
Before tackling personal finances, one must first establish financial goals and prioritize them. You may have long-term goals, like paying off a loan and buying a home. But don’t forget short-term goals, like avoiding using your credit card and decreasing your spending. One mistake financially inefficient people make is trying to copy someone else’s style of spending and investment. Everyone’s goals and ability to take risks are different, so what worked for one person may not work again or work for your lifestyle.
Keep track of your spending.
Many financially inefficient people have no idea how much they spend each month. Buying a cup of coffee every day may seem small at first, but it can add up to hundreds of dollars by the end of the year. Kick this habit by detailing what you spend every month in a spreadsheet or through a banking app. Some apps make it easy by grouping your spending into categories including utilities, clothing, toiletries, or entertainment. Looking at the charts to determine where most of your money goes can make it easy to decide where to cut back.
Cut back on extras.
Another way to avoid overspending is cutting unnecessary services. For example, thousands of people sign up for a gym membership every January only to quit using it by June. Other people get caught after forgetting to delete a service once the free trial is over. There are also hidden fees that get tacked into a cable or cell phone bill. By keeping track of your spending month after month, you’ll notice any unusual jumps in costs and can talk to your utility providers to change the service. Set phone reminders for days you need to remember to cancel any free trials, and go through your bills line by line each month to determine if you’re paying for anything you don’t use.
Manage your budget.
Financially efficient people group all of their bills together, either with technology or on paper, so they can clearly see where their money is going every month. Keep track of what comes in (paychecks, birthday money) and what goes out (utilities, food, tuition) and try to keep the amounts balanced. Even better, keep the amount that goes out less than the amount that comes in. Knowing exactly what you’re working with allows you to accurately budget and make plans for any larger expenses that may be coming up.
Look for benefits.
Take advantage of job or student benefits (e.g., investing in a 401(k), enrolling in a work-sponsored commuter program, using your student ID to get free or discounted tickets to events or on public transportation). Take it a step further and increase the contribution rate for your 401(k) or open an IRA. Different retirement accounts have different tax benefits. A commuter program works similarly; you may be given a stipend for transit or parking, but this benefit isn’t taxed, saving you money. Having a student ID, of course, can save you money on everything from amusement park tickets to train rides. Do your research to maximize your savings.
Avoid late and overdraft fees.
When you make a late payment, companies charge you extra because you’re not fulfilling your terms of the payment agreement (namely, to pay at least the minimum balance due each month). Avoid late fees by paying your bills on time, every time. (You can set up automatic bill pay if you don’t want to have to manually pay each one of your bills.) Furthermore, data from the Consumer Financial Protection Bureau shows that U.S. consumers paid $15 billion in overdraft fees in 2016. Overdraft fees are charged when more money is pulled from your account (to pay a bill, for instance) than is in your account. Avoid those fees by making sure to keep a minimum balance in your checking and/or savings account at all times.
Another mistake people make is only paying the minimum balance due on their debt. This habit only benefits the banks and credit card companies, who make money off of the interest still left on the balance. Avoid this practice by paying most—if not all—of the balance due each month, or plan variable payments where you can chip away at more than just the minimum. You could also talk to your bank or loan servicer about refinancing a loan or grouping loans together to help lower high interest rates.
Have a back-up plan.
People who are good at managing their finances always have a contingency plan. Research from the Federal Reserve Board in 2016 states that 46% of Americans couldn’t cover a $400 emergency expense, but true emergency expenses may be much higher (medical bills, car repairs, home repairs, etc.). Open a savings account and set money aside each month just in case you have to pay for something unexpected.
Save for large expenses.
This one is easy; the more you save, the more financially stable you’ll be. Set aside a percentage of your paycheck each month and transfer it straight to a savings account. You’ll be grateful when it comes time to buy a car, move across the country, or take a vacation. Planning for these large expenses well in advance, too, will help you save money. Online tools can help you break down how much you would pay for insurance, gas, maintenance, and repairs in the first five years of owning a car, for example, and the Hopper app can help you find the lowest cost plane tickets available. When you have savings available to draw on for these purchases, you’ll reduce your chances of going into debt and you’ll reduce your monthly payments should you have to take out a loan.
The last thing financially efficient people do is ask for help when they need it. A professional financial planner will be able to help you manage your budget, pay down your debts, and find ways to reach your financial goals, even starting your own business if you want. If hiring someone is out of reach, consider taking a personal finance class through a community organization. Many banks offer financial literacy classes as well.
Keeping a close eye on your budget for several months can help build healthy financial habits that last a lifetime.