Feeling anchored down by debt is defeating. You’ll have a hard time setting aside money into savings, purchasing your dream home or embarking on enthralling vacations. Instead of spending decades weighed down by debt, start working toward financial freedom now.
Assess the Situation
To begin, you must know where you are. Personal finances are like a bucket with holes: the money you earn is poured into the bucket and what you spend trickles out the bottom.
While most people know what they make, they are a bit hazier on where that money is going. They often don’t have much wiggle room on how much money is coming in, so the only thing that can be influenced is the flow of money out of that bucket.
Determining what you spend on is key to plugging up the holes. This will give you the freedom to spend that money on what’s more important to you. Little purchases add up very quickly and by assessing your situation, you’ll be able to identify where most of your money is going.
The realization you can get out of this could be both very surprising and enlightening. Many financial institutions can make tracking your spending habits easier through their online banking system. You’ll be able to categorize and filter by type of expenditure.
Create a Budget
Once you know where your money is going, it’s time to analyze. Many people feel that creating a budget is a scary, insurmountable or difficult task. Some of them don’t even know how to make one.
Budgeting is merely creating a plan for how you’d like to spend your money in the future. It’s simply a process of deciding if what you spend is reasonable or superfluous. If there is an area you feel you might be overspending, you can cut back and allocate your financial resources to a different area. Maybe instead of spending so much on entertainment, you’d like to save for a trip.
There are many websites and apps designed to make budgeting easier. Most of these sites and apps are free. Budgets are highly personal and customizable, so make sure to create one that’s workable and sustainable for you and your circumstances. If it’s not, you won’t be able to stick to it and your budget will be pointless.
After about a month, reassess your spending to see if you are within your budget. Make adjustments to ensure your spending is not keeping you from your financial goals and that your budget is not unnecessarily restricting.
Financial discipline can be challenging, but it should be viewed as a tool to help you ultimately reach your financial goals. Skipping the step of reassessment will result in your budget’s failure. You can end up returning to your previous spending habits and neglecting your finances. You need to keep yourself accountable, but this doesn’t need to be negative.
Many people feel shame or guilt for not being able to stick to their budget, but it doesn’t need to be that way. If there’s a consistently large discrepancy between your spending and your budget, make some adjustments. Personalization is essential for a budget to work.
For example, if you realize that your spending estimate in a certain category, like food or fun, wasn’t very realistic, you can adjust your budget, spending or both. This adjustment is critical to your financial success.
Changing how you spend can be a difficult habit to break and changes usually occur slowly, so don’t get frustrated if it’s taking a while. Continue to reassess every month or two to ensure progress.
Meet with a Professional
Trying to handle a mountain of debt alone might leave you feeling more frustrated than when you began. Many financial institutions offer professional financial counseling with little or no cost to you. They can assist you in creating and sticking to a budget as well as in identifying a course of action that will be helpful for your financial future, such as how to repair or build your credit score. They can also assist you in finding other options you might not be aware of, like refinancing a loan to get a lower interest rate or payment.
Speaking with a professional can help you to gain a heightened understanding of what your specific struggles are and how to overcome them. An outside perspective, especially one from a financial consultant, can help you develop the right approach.
Address Credit Card Usage
While credit cards are not inherently bad, they are also not right for everyone. Some people have difficulty controlling spending with credit cards since a card is so easy to swipe. They can get into the habit of mindless swiping until the card is declined.
Fixing this requires a shift in mindset. You need to restrict yourself to make purchases only if there is sufficient cash available in your bank account to afford the expenditure. Knowing yourself is crucial in developing financial health and if credit cards are too much of a temptation to overspend, then perhaps they are not for you. It might be best to stick to debit cards or cash.
The best way to use credit cards is to pay them off by the due date every month, which prevents a rollover balance the next month. This will avoid interest and late charges. By paying them off monthly, you can basically use the card for free. Automating your payment can make it effortless and ensure you don’t pay extra.
If you still have debt you’re working to pay off, experts recommend paying off the card with the highest balance first. Also worth considering is checking to see if you qualify for a lower interest rate or if you can transfer your balance from a higher interest card to a lower interest card.
However, beware of extra fees that could be charged by doing this and make sure you are aware of all the terms. Keep in mind how your credit score will be affected if you decide to apply for interest rate changes. Ask a professional consultant specific questions about what would be best for you in your current circumstances.
See Also: 4 Ways to Start Building Great Credit
Managing finances doesn’t have to be overwhelming or intimidating. Support is available whether through speaking with an expert or utilizing websites and apps. Living within your means and sticking to a budget can allow you to keep your “bucket” full. Much like physical healthy living, financial health and independence require effort, but it pays off and can enable you to live more freely.
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Author: Claire Stewart
Claire Stewart is a freelance writer and blogger focused on writing about health, travel, banking, and business among other topics. She graduated from Washington State University with a Bachelors in Women’s Studies and currently lives in Seattle with her goldfish, Merlin.