Improving your financial health is similar to maintaining your physical and mental health — It takes time and effort. Sure, you may feel fine now, but what about 10, 20, or 50 years later?
To that end, you must treat your finances like you should treat your body. You need to make decisions that maximize long-term benefit over short-term interest.
Here’s the good news — with time, effort, and persistence, there are real steps you can take to maximize your financial health. Here’s a look at seven specific steps and strategies to ensure you are planning for your long-term financial health. As you can see, many of these steps involve research and understanding your financial situation. Once you have this information, you can begin to take action to improve your financial health.
1. Know where you are at
You only know your physical health by taking necessary tests and metrics, including your blood pressure, cholesterol levels, weight, and more. Likewise, judging your financial health without understanding your current financial situation is impossible. So, you will need to know the answers to the following questions.
- How much money do you have in your checking and savings account?
- How much have you saved up for retirement? Are you on track to meet your needed financial goals?
- How much debt do you have? How much total debt do you owe, and what is the interest rate?
- What are your regular expenses and sources of income?
This information lets you determine how close you are to meeting your financial goals. It also lets you know if you have any serious financial problems and where those problems may exist.
2. Create a budget
Your budget is your financial guideline. It will allow you to make financial decisions to ensure you can save and spend responsibly.
Creating a budget is relatively simple. First, you track your sources of income and expenses. Once you know how much you make and spend, you can build realistic goals in each spending category. Having a budget gives you a broader perspective about where you are spending money. It may also help you identify and eliminate specific spending items you didn’t realize you had.
Maintaining that requires regular updating to know where your money is going. You can certainly create a manual budget through paper or a spreadsheet. However, this is often error-prone and time-consuming. You can use computer programs like Quicken to update your bank and credit cards. With regular updates, these programs show you where you spend your money and help you categorize these expenses.
3. Check your credit report
Your credit is so much more than a three-digit score. It is the base of your financial health. With a positive credit score, you are more likely to get loans for critical personal milestones — such as a mortgage or a car loan — and ensure those loans have a reasonable interest rate.
A variety of factors determine your credit score. These include:
- Payment history
- Amount owed
- Length of credit history
- Credit mix
- New credit checks
The first two items — payment history and amount owed — comprise 65% of your total score. You can maintain a positive credit score by paying your bills on time and not over-utilizing credit cards. Furthermore, remember that three different agencies track your credit score: Equifax, Experian, and TransUnion.
A low credit score means you are more likely to be denied loans or pay higher interest rates. Fortunately, there are ways to rebuild your credit. However, this process is impossible if you don’t know your credit score. Checking your credit score comes with numerous advantages:
- It allows you to know where you have financial problems.
- You may identify bills you haven’t paid.
- You may also be able to find and dispute charges that you didn’t know existed.
- It allows you to see what the lenders see. Once you identify the data they have, you can better understand what steps you need to take to improve your financial health.
4. Create a debt-reduction strategy
If you have followed these steps in order, you now know your overall financial situation. This should include all of your debt. Most people have debt, which is not bad, as debt is usually necessary to make significant purchases, such as a house, car, or other expensive item. The problem becomes when we have too much debt and cannot manage it. Furthermore, the interest payment on that debt will be financially suffocating and make it impossible to ever get out of debt.
If this sounds familiar, you need to develop a debt reduction strategy.
The first step you take is to list all of your debt. This list should include who you owe, what you owe for, and the financial details of that loan. Information needed here includes the total owed, the minimum monthly payments, and the interest rate on the debt.
Armed with this information, you can begin to take the necessary steps to eliminate this debt:
- Many debt relief agencies can help you identify programs and strategies to reduce debt. In exchange for a fee or a piece of the payments you make, these agencies can call your debtors, find programs, and identify specific methods to reduce your debt. Selecting the right agency can be difficult. As such, you must do your research to find an appropriate partner.
- You can also refinance your debt. Refinancing debt may lower your payment and interest rate. Remember that some refinancing also lengthens the time it takes to pay off your debt. In this scenario, you will reduce your monthly payment but pay more over the length of the loan.
- Finally, you can use two different methods to apply extra money towards debt repayment. In the Snowball method, you pay off your lowest balance as quickly as possible, using the extra money to pay off the next lowest balance. In the Avalanche method, you pay off the highest interest rate first. Both methods can be highly useful, provided you have the discipline to stick to them.
5. Create an emergency savings fund
“Saving for a rainy day” is more than just an expression: It must be a financial reality. You never know when you will lose your job or have to manage a major financial expense.
How much you put away into your emergency savings fund depends on you. Most financial experts recommend saving between 3-6 months of living expenses. You need to calculate this number based on the expenses you need to live, including expenses like your rent, utility bills, and groceries. This shouldn’t include any optional luxuries, as you’d have to eliminate them while unemployed.
For many, saving up this amount of money can be extremely challenging. Fortunately, there are many ways to build your savings. This can include setting realistic goals, automating your savings, and finding the highest possible interest rates. You should keep your emergency savings in a low-risk bank account. You don’t want to risk losing your emergency savings at a time when you may need them.
6. Build a retirement strategy
No one wants to work forever. As such, you’ll need to build a retirement strategy that suits your needs. Preparing for your retirement can mean different things for different people. Are you:
- Taking advantage of your employer’s 401k match or pension program?
- Actively creating savings goals based on your projected financial means, then sticking to those goals?
- Consulting with a financial expert to determine your retirement needs or using retirement calculators to estimate those needs?
Everyone has different retirement needs. The key is to understand what your needs are. From there, you can create a retirement plan that fulfills your financial goals and protects your long-term financial position.
7. Maximize your tax benefits
In most cases, taxes are the largest expense we will have in a year. Fortunately, the right strategies can reduce the significant burden that taxes create.
Everyone has a different tax situation, but you can use plenty of methods to ensure you pay the right taxes. These include:
- Invest as much as possible in tax-reduction vehicles. This includes a 529 plan for college or your 401k.
- Open a Flexible Savings Account (FSA) if your employer offers it.
- Consider a Health Savings Account (HSA) to help reduce taxable income.
- Avoid overpaying your taxes so you get a lump sum at the end of the year. Instead, adjust your withholding so you overpay as little as possible. Use that money to invest in your retirement funds. Doing so lets you plan for retirement and further reduces your tax burden.
Consider using a CPA to develop a tax reduction strategy.
Get the right financial partners
Improving your financial health is possible in any financial situation. Researching your current financial situation and making responsible decisions can help you get there. However, improving your finances means finding the right financial partners.
At Village Bank, we’re here to help. With locations throughout central Virginia, we’re here to meet your needs and ensure you can make positive long-term financial decisions. We offer many services and banking products – including savings, loan refinancing, and mortgages – to help you improve your financial health. Ready to learn more? Contact us today.