Normally, nobody entertains the thoughts of a tragedy befalling them. But when it comes to your personal finance, it’s important to consider the worst case scenario even when it scares you.
Unfortunately, most people in the US are not prepared to face financial emergency situations. In fact, recent research revealed that more than 25% of the American population doesn’t have an emergency fund to give them a soft landing when tragedy strikes. In addition, most people don’t have valid provisions for their property in the event of a sudden death.
Create a budget
Having an actionable budget is the first step to financial freedom. A budget helps you live within your means so that you’ll have some money available to take care of the long-term goals.
Basically, 50% of your salary should be dedicated to living expenses and 30% should cover your lifestyle expenses like clothes and eat outs. The remaining 20% is what you save for the future. While it may seem little, it can accumulate quickly but you need to be consistent with the savings.
Unlike in the past, these days it’s quite easy to stay on track with your budget thanks to the availability of innovative apps dedicated to personal finances.
Build an emergency fund
Irrespective of your current financial situation, you should strive to have a sufficient reserve fund at all times. While different financial advisors will quote different figures, it’s recommended that you have enough cash stored up to take care of about three to six months of expenses. This means the money should be enough to take care of mortgage payments, car payments as well as food and other financial obligations.
To get started, you need to figure out your exact living expenses in a month. This will give you the amount you need to save to the emergency fund account. Every month, you should save about 20% of your income into the emergency fund until you hit the target.
While it’s good to have a brand new car, it’s not financially sound to pay hefty interests for an auto loan. Instead of buying an expensive car that leaves you struggling to make the payments, you could get a used vehicle that is in a good condition at a cheaper price. This will ensure you are not paying lots of interests on the auto loan and you’ll also clear the nation 21 loans faster.
The appetite for plastic money is quite high in the US and that’s why most Americans are saddled with credit card debt. While a credit card can be a great financial tool, it can wreak havoc on your finances if you are not careful. With that said, it’s your responsibility to make sure you are using your credit card with discretion.
If you already have some debts, you might want to consider a debt consolidating loan. This loan helps you to combine several loans and pay them at once. From there instead of paying multiple accounts, you only deal with a single loan. This is not only easier to track but it can also offer cheaper rates than your previous loan.
To be on the safe side, make a resolution to get rid of most debts and start saving. This will improve your chances of surviving any financial crisis.
Always pay yourself first
When you are surviving from a paycheck to the next, it’s hard to put away some money. However, you must decide to commence your savings plan and do everything in your power to stay on track. Start with a quick review of your income followed by a keen study of where the money is being spent.
There is always a way to save some money on your monthly expenses and you only need to re-evaluate your priorities. If you find out that regular eat outs are taking a huge part of your expenses, then you should limit the frequency to just a few times in a month. While breaking spending habits can be quite a hill climb, it’s always good to think about the freedom that comes with having some extra cash in the bank.
Get some insurance
When you buy an insurance policy, the main idea is to ensure you have some protection when disaster strikes. While it’s common to come across people reciting horror stories of their experience with insurance companies, most insurance policies will pay when a catastrophic event happens. Basically, a good insurance policy will protect you from huge expenses when your car is written off and there have been serious injuries.
Besides having an auto loan, you should have a homeowner’s insurance covering the entire replacement value. This means you can rebuild the home quickly if a natural disaster destroys the property. When you have a family, health insurance is important and should not be left to chance. You can save in the HSA where you can get full coverage provided you meet all deductibles.
When there are people depending on you like children and spouses, life insurance can save the day when disaster strikes. You can buy a 20-30 years insurance policy with about ten times your salary. For instance, if your salary is about $60,000 get a $600,000 insurance policy.
Personal finance is a serious business and as such, it must never be emotional. At times you will be forced to make difficult financial decisions especially when it comes to spending on your family. Emotional detachment is important if you are going to secure the future of your family. This doesn’t mean you should be stingy or mean to your family, instead, make wise long-term decisions that will put a smile on their face.