Starting an emergency fund, building savings and paying off debt are some of the key tips to get ahead financially.
Ultimately, the key on how to get ahead financially is to simply to get started. Below are major financial checkpoints you should make sure to do in order to get ahead financially. Here are some tips to help you make a positive financial upgrade.
1. Keep track of spending
In order to start making a financial plan, you need to understand your own financial situation. That means, first, keeping track of your spending. Though this could be a somewhat cumbersome task in the past, there are many apps in the marketplace users can download now that make tracking this type of thing very seamless. Some apps even break down your spending in certain categories, making it much easier to get a clear picture on where your money is going and how much you spend daily, weekly and monthly. In order to make changes here, you first have to understand exactly your spending situation.
Make no changes to your habits for a month so you can get a clear picture of how your monthly picture looks like for your regular lifestyle. After the month ends, you can start making changes to better suit your preferences. Cutting down on some of these non-essential purchases is an easy way to save some money at the end of the month. But keep in mind, reducing your spending is not the only way to get ahead financially, as there are much more tools at your disposal that can save, or better yet, earn you money in the future. Still, understanding your spending picture is the first step in the process to getting ahead financially.
Some quick money drainers, as you’ll soon find out after tracking your expenses, are…
- Dining out/drinks – Though going out with friends and family is a normal part of a healthy lifestyle, keep track of exactly how much you are spending at these dinners or bar gatherings. It is very common to start overspending in these outings and not even know it, and then start making a habit of that. If that is the case, consider limiting how much you spend or how many times you go out to these places where you know you are likely to overspend.
- Subscription services – Though Netflix type subscription fees are generally relatively low compared to other expenses, other subscription fees, such as gyms or membership websites can quickly add up over the months. Keep track and be honest with yourself if these subscription fees are worth it in your personal situation, and don’t be afraid to pull the plug if they are not.
- Clothing – Spending on apparel is a quick way to spend money unnecessarily. Though it is absolutely healthy to reward yourself from time to time, it’s smart to understand exactly how much you are spending here, and make adjustments accordingly.
- Expensive car – Expensive car payments is another quick way to drain your pocket. Though some people have expensive cars for their general appreciation for the vehicle, others pay for one in order to attain the status that comes with it. As a general rule of thumb, you should not spend money to impress others, but rather because you like what you are spending the money on.
2. Keep track of your income sources
Understand where your income is coming from and make sure to document that as well. Similar to keeping track of how much money is going out of your wallet, it is also smart to understand how much money is coming in, and where that money is coming in from as well.Â
Understanding your spending habits and your income sources are the two first steps in creating a budget that fits you, which is number three on this list.
3. Create a budget
Though creating a budget is the third item on this list, you’ll quickly find that tailoring your budget never ends, as you will be constantly updating your budget to fit your lifestyle. In addition, you shouldn’t necessarily use your budget as a hard fast rule to decide what you can or can’t do, but it’s always a good idea to know in what ballpark your budget is in, in order to make smarter daily financial decisions and not get carried away on impulse purchases.
U.S. Senator Elizabeth Warren, bankruptcy expert, recommends adopting the 50/30/20 rule. The plan simply splits your income into three brackets:
- Fixed expenses – 50 percent of your income should go towards fixed expenses. These are your survival purchases. Think rent, utilities, your commute to work, basic groceries, etc. According to Warren’s basic plan, try to allocate half of your monthly income into this bracket.
- Non-essentials – Around 30 percent of your income should go toward non-essentials. This could be your coffee fix in the morning, TV subscriptions, restaurant outings, new shoes, etc. This should be no more than 30 percent of your monthly income.
- Savings – 20 percent of your income should go straight to savings. First, aim to build up your emergency fund, then venture into building up retirement savings and investments.
The above is a simple plan devised by Warren to responsibly cover the important expenses, spend on wants all while saving at the same time. Keep in mind, however, the above should just be the starting point in creating your budget. Some people may be able to save more by spending less on rent, and then allocate that difference into more savings. Other people may prefer to read rather than have a TV subscription. In other words, use the above plan by Warren as a basic template in making your budget, but ultimately, craft your budget to be very personalized to what fits your lifestyle.
4. Eliminate any debt
After setting up a budget, make sure to start eliminating any debt you may have accrued over the years. Make this a priority, as paying extra dollars in interest should be avoided at all costs. However, keep in mind to check the terms and conditions of paying down debt, as some institutions have maximum repayment limits within certain periods and additional fees associated with paying it down faster.Â
If you have the financial ability to, make sure to focus on paying down and ultimately eliminating this debt as fast as possible. Â
5. Set up an emergency fund
After creating a budget and eliminating all your debt, start focusing on building up your emergency fund. A rainy day fund is a major part in any sound financial plan, as it provides much needed security in case unexpected monetary issues arise, such as costly repairs or a loss of employment. An emergency fund is exactly what it sounds like. It is an account you can tap into when emergency events occur. In other words, this fund should not be treated as an account to reward yourself after a year’s long work, or a fund you can tap into to finance a vacation, but only an account you should use you in case of costly unforeseen expense. That is to say, you should set up an emergency fund, but hopefully you should never have to use it.
Try to aim for around three to six months worth of expenses saved up in your emergency fund. Since you already know exactly how much you spend in a month since you have tracked your expenses, you should know exactly how much you need to save in your emergency fund account. This number, obviously, is very personal and will be different from individual to individual. Keep in mind, saving up to this number could take months to reach. For example, say you spend $3,000 in a month, if you are able to save 20 percent of that, per Warren’s plan from above, it will take you five months to save one month worth of expenses. Therefore, saving three to six months worth of expenses clearly is a long term goal for many people. Still, building this emergency fund is putting yourself on solid ground to make sure you get ahead financially. It is also building savings habits right from the get to go.
Since emergency funds are cash you need immediately in case of an emergency, you will want to put this money into online savings accounts, money market accounts or certificates of deposits. Don’t invest this fund into stocks, as the market could be down in the moment you need the cash in hand. A high-yield savings account will arguably be the best option for you, just make sure to sign up for one with no monthly fees or balance minimums.
6. Increase your income
After creating and constantly tailoring your budget, paying down debt and setting up an emergency fund, you should now focus on finding ways to increase your income. Contrary to belief, the best way to save is not to reduce spending, but is in fact, to increase income.
There are many ways to increase income, one of which is to ask for raise. If you add value to the company and your income has not been adjusted in a while, asking for a raise will be the quickest and most effective way to increase your income. Rehearse why you bring value to your company and be ready to negotiate.Â
Another way to increase income is to start a side hustle. Having multiple streams of income is a great way to not only increase income, but to make sure you always have money coming in just in case of an unforeseen job loss. Some professions might have an easier time finding side gig work, but if you can, this is a great way to earn extra income on top of your regular job.
Getting a second or third job are other ways to increase income. This will most likely take time away, but is still an obvious way to increase income.Â
7. Plan ahead for taxes
You will want to maximize deductions in order to save the most money come tax day. Make sure to keep organized records in order to claim all your allowable income tax deductions and credits. Make sure you’re aware of these documents now, so you’re not scrambling to find them when tax season comes around.
8. Monitor your credit scores
Having a great credit score will make life much easier, so it very important to start monitoring and building your credit score as early as possible. Having a great credit score will impact things like:
- Ability to qualify for a mortgage or a loan
- Ability to qualify for the best credit cards on the market
- Interest rate you will pay on your debt
- Rental applications
Make a habit to not only build up your credit score, but to also check your credit score. There are many services that allow for users to check their credit score for free, so make sure to use those to get a clear picture of where your credit stands, and whether you need to file a dispute with the credit bureau in case of any signs of identity theft. Also, keep in mind, you are entitled to a free copy of your credit report from each of three major credit bureaus, Equifax, Experian and TransUnion, once every 12 months.
9. Set savings goals
If you have followed the above steps, you have already been developing savings habits. Whether following Warren’s financial advice or setting up the emergency funds, saving from here on out is as simple as keep on doing what you have been doing. Always keep tailoring your budget, as that will fluctuate with your changing lifestyle as well as any changes income. But even if you start spending more in the future and have built up a reliable emergency savings fund, always remember to have savings goals. Along with being just a smart financial choice to save for the future, setting savings goals and putting some money away every month will make it easier to venture into any investments you have in mind.
Automating your finances is a smart financial choice because it takes away the decision to save, plus it will save time. You can set automatic contributions to your savings account or investment account that will automatically take out a chunk of your check and deposit it directly to those accounts.Â
10. Invest
There are many ways to start investing, and if you have created a budget, paid down debt, set up an emergency fund, and started saving, the next step in getting ahead financially is to start investing for the future. Here are a few specific options to start investing:
- Contribute the maximum amount to your 401(k) plan
- Open a Roth IRA
- Invest in real estate
- Create an account with a robo advisor
Investing in an index fund is straightforward way to reap the gains of the stock market. You can also look into hiring a financial advisor or using a robo advisor if you are more attracted to a hands-off type of investment.
