With the current situation worldwide, the majority of people are struggling to make ends meet.
Student debt in the U.S. is at a staggering record high of $1.6 trillion. And the average debt for US citizens is $51,900. Those are high numbers, and it is a no-brainer that 50% want to save more money and pay back their debt.
If you want to achieve financial wellness and save more from your money, take the pledge to change your habits. The following baby steps will help you to achieve your goal.
“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate.” — Robert Kiyosaki
Commit to change
The first step to adopt a new habit is committing to change. Reaching financial wellness also requires your commitment to develop and follow a financial plan. What are you planning to achieve? List the goals that you want to achieve by changing your money habits.
Remember, saving money without a clear goal in sight feels pointless. Therefore, set short-, mid-, and long-term goals. In general short-term goals are priorities that can be achieved within two years. Mid-term goals are the ones that can be achieved between two to five years. And long-term goals are goals that require more than five years to accomplish.
Assess your finances
Please get to know your strengths and weaknesses when it comes to money and its management. How are your spending habits, and what are your most money-consuming expenses?
The first steps are always the hardest. Do not get anxious to dig deep into your financial paperwork. Create an overview of your credit cards, bank accounts, debts, etc.
Also, do not hesitate to ask for your credit reports. This gives you an insight into your overall financial situation. Examine your reports and if you found an error, take actions to fix it.
Side note: Reviewing your credit reports might help you in flagging out fraudulent activities done under your name, e.g., identity theft.
While you assess your finances, calculate your net worth. Basically, compare what you own (assets) to what you owe (liabilities). You can use this online tool to calculate your net worth.
Finally, develop an accurate picture of your income. Are you planing your financial wellness based on the same income source? Or are you planning to build and generate new income sources?
Review your debt situation
Take an honest look at your existing obligations and debts. One of the most effective ways to pay back debt fast is the avalanche method.
In this method, you list your debts from highest to lowest by interest rate. Pay the minimum balance on each, and dedicate as much money as you can towards paying back the debt with the highest interest rate.
When the debt with the highest interest rate is paid back in full, move to the next one with the now highest interest rate and so on.
Create a budget
Now it is time to create a budget to be successful track your expenses and spendings. This will help you gain awareness about your spending habits. By tracking your expenses, you answer the famous question — where did my money go?
Follow the following steps to create a budget and to maintain it:
- Identify and document fixed monthly expenses.
- Identify and plan for periodic expenses.
- Allocate the necessary money to pay back your debt.
- Start budgeting for the most important categories first.
- Consider special occasions like birthdays, back-to-school, vacations, etc., in your budget.
- Keep and buffer in your budget.
- Review, maintain and change your budget if necessary. Identify possibilities to reduce spending if possible.
- Give every dollar a purpose.
- Use an app or online tool for your budget. Better yet, you can create your own budgeting and expenses tracking tool.
Save money on groceries
No, it is not a hard job to save money on groceries. Small adjustments can help you saving plenty on your groceries.
We have the luxury to live within walking distance of five grocery stores. Every Sunday, we get mail with each grocery store's offers, and we plan our groceries accordingly.
We also benefit from cashback programs offered by our grocery stores. We pay our credit card bills immediately, so we don't have any credit card debt and don't pay unnecessary interest rates.
Learn to Invest and to use the power of compound interest
My parents always asked me to save money, but they never taught me how to invest my money. I had my savings in a saving account. Sadly, I learned about investments and the stock market in my early 30s.
The following diagram explains the power of compound interest. In this example, 50 dollars are going towards investing. In 40 years, 96K dollars are coming from compound interest (interest on interests).
It is never too late to start investing. The internet is a great source of information for financial literacy. Also, there are plenty of great books to improve financial literacy, such as Rich Dad Poor Dad, The Intelligent Investor, and The Millionaire Next Door are great books to read.
Do not be afraid to learn new things too. Cryptocurrencies literacy is important in the current time. You don't have to invest in cryptocurrencies, but at least cover the basics.
Understanding your finances is the first step towards your financial wellness. Get rid of unnecessary debt, and you will stop feeling that the bank is always looking over your shoulder.
Small changes in your money habits are more than enough to achieve financial wellness.
It is never too late to take the first step.
This article is for entertainment purposes only. It is not intended as financial or legal advice. Consult a financial professional before making any major financial decisions.