When it comes to personal finance, there are certain elements that are outside of your control. You may not be able to change how much you make at your day job or how much your basic expenses cost, at least not in the short term. There are, however, plenty of small ways that you can change your finances for the better, by developing good financial habits.
How to manage your finances
Successfully managing your finances can seem intimidating if you’re not sure where to start. When it comes to banking, borrowing, and investing, the options and advice can be overwhelming. But good personal financial habits build on a very simple foundation: spend less than you make. Increasing your income while decreasing your expenses is at the core of a healthy budget. Beyond that, there are other small changes you can make to help you achieve your financial goals faster. These strategies will help you develop better financial habits and take control of your finances.
1. Don’t overspend on credit cards
Overspending on credit cards is tempting, especially when times are tight. But putting expenses on your credit card now and paying them later should be your last resort in case of an emergency. You should make it a goal to always pay off your credit card balances in full each month.
The reason for this is simple: the higher the balance you carry over on your card, the more you’ll pay in interest. This can sap your savings and add up to a mountain of debt that’s difficult to pay down. It’s okay to occasionally use credit cards to finance purchases, especially if you’re interested in building credit or reaping the benefits of rewards credit cards. But you should make every effort to pay the balance off as soon as possible.
2. Decrease your credit utilization
Credit utilization refers to the ratio between your credit card balance and your credit limit. Having high credit utilization is a sign to lenders that you may be a risky investment. If your credit utilization is too high, it can result in a lower credit score, which can in turn make it more difficult to qualify for loans, credit cards, and other financial products. Even if you do qualify, you may be subject to higher interest rates and fees.
If possible, you should always try to keep your credit utilization below 30%. To do so, you can work to pay down the balance on your cards. You can also request a credit limit increase from your card issuer in order to lower your credit utilization. To keep your credit utilization at a reasonable rate over the long term, you should try to keep your credit card balances to a minimum whenever you can.
3. Always shop around
It doesn’t matter what the financial product is, you should always shop around in order to ensure you’re getting the best possible rates. Whether you’re taking out a loan, applying for a credit card, purchasing a home or car, or applying for an insurance policy, it always pays to compare multiple different providers.
It can be tempting to go with the path of least resistance when it comes to applying for financial products, but you should resist that temptation! Even if you already have your heart set on a particular lender or company, shopping around can provide you with valuable information about the rates you qualify for. In some cases, you can even share rates you found with the company you’re interested in working with. See if they’ll give you a better deal!
Sites like BankRate and NerdWallet are great at presenting a lot of alternatives for those interested in comparison shopping financial products.
4. Focus on significant expenses, not small ones
There’s plenty of financial advice that might lead you to believe that your daily latte or avocado toast is to blame for the state of your finances. However, research shows that’s just not true: income inequality, stagnant wages, and the rising cost of living expenses have a far more significant impact on your finances than your expensive coffee habit.
When it comes to costs and expenses that are within your control, it makes sense to focus on the ones that will have the most significant impact: rent, car payments, health insurance, and other big expenses that take a significant chunk out of your monthly pay. Significantly reducing these major expenses is much more meaningful for your finances than reducing small, everyday expenses that increase your quality of life.
Setting Yourself Up for Financial Success
As with many habits, good financial habits take patience and discipline. While small changes to your finances might not seem significant on their own, they can add up over time. Enacting responsible financial strategies when possible may help ensure your finances thrive in the future!
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