National Financial Awareness Day, August 14, is the perfect time to think long and hard about your current personal finance habits and consider what you want your financial future to look like. With that in mind, Laura Cole, Sharon Pryse/Trust Company Director of the Masters Investment Learning Center at the Haslam College of Business, offers some tips to help you develop greater awareness and acumen about your personal finances.
Create a Budget
A realistic budget is the foundation of financial health. To create one, first calculate your take-home pay for a one-month period, since this is the amount you have available.
Next, review your bills, checking account statements and credit card statements for the same timeframe. Add up your fixed expenses (ones that are the same each month, such as rent, loan payments and subscriptions). Then, total your variable monthly expenses — such as gas, groceries and entertainment — and adjust those as needed to stay within your budget.
“If you are spending more than you make, you need to learn to live within your means or you will fall into debt,” Cole says. “A good tip to lower your expenses is to eliminate one specific item, such as a streaming service that you barely use, a movie night or dining out.”
Account for Inflation
Inflation concerns affect every facet of our lives, particularly necessities such as groceries and gas. Cole notes that in the 12 months ending June 2022, the Consumer Price Index (CPI) — a measure of economy-wide inflation — increased 9.1 percent, with the price of food rising by 10.4 percent and gasoline prices going up by 59.9 percent.
“Regularly revisit and update your budget, since many of your variable expenses have probably gone up,” she says. “It is important to have a realistic budget that reflects current pricing of goods and services.”
Develop Good Savings Habits
To meet your financial goals, Cole recommends getting into the habit of paying yourself first, meaning that you should think of building your savings as mandatory. Each month, set aside about 5 to 10 percent of your income for this purpose.
Create an emergency fund in a separate account to help you cover your expenses during an unforeseen event such as job loss, illness or major car or home repairs. Work on accumulating at least three times your monthly expenses, eventually building up to a six-month cushion. Consider an interest-earning money market account for this cash reserve.
With your emergency fund in place, your next savings goals should be saving for retirement and paying down debt.
“The best way to increase your savings is to cut your expenses, and to do so incrementally,” Cole says. “It’s important to set a reasonable savings goal for yourself, so if 5 percent is too high at first, choose a more attainable amount such as $50.”
Manage Your Debt
Debt is a reality for most people. To keep yours at a manageable level and develop a plan for paying it off, first identify every debt you owe (credit card balances, student loans etc.), noting balances, interest rates and term periods.
Two popular debt payoff methods are debt avalanche and debt snowball. Both involve making at least the minimum payments on all accounts at all times — a must for maintaining a solid credit score and avoiding bankruptcy.
The avalanche method focuses on paying off one debt at a time, starting with your highest-interest debt and paying more than the minimum payment each month.
“This debt is your most expensive debt, so paying it off will save you the most money in interest,” Cole explains. “However, this method takes a little longer, so some people struggle with staying focused on this debt repayment plan.”
In contrast, the snowball method uses investor psychology by having you make extra payments toward the debt with the smallest balance first.
“Once you pay that smallest debt off, you roll the entire payment you were making on that account toward the next lowest balance, and so on,” Cole says. “People generally are able to stay a little more motivated with this method, even though it costs more in interest.”
Utilize Outside Resources
Establishing good finance habits can be challenging, especially if you’re tackling this for the first time or have had trouble staying on track in the past. Fortunately, you don’t have to face this journey alone. Cole recommends using apps such as Mint, which is useful for budget creation and expense tracking, and Debt Payoff Planner, which helps users create a simple, actionable plan to eliminate debt. If you fall behind on your bills, seek guidance from a credit counselor.
“There are formal debt management and consolidation programs you can enter, or your counselor may be able to help negotiate with your creditors and lower your interest rates on your behalf,” Cole says. “To find a certified agency, consult a resource like the National Foundation for Credit Counseling.”
Stacy Estep, writer/publicist, firstname.lastname@example.org