Following a few simple principles can reduce your money-related stress and create a higher quality of life through happiness. According to Everyday Health, “90% [of adults] reported that money was a source of stress.” By better managing your finances, you can significantly reduce your stress and increase your overall well-being.
Create a Budget
One of the most straightforward money management exercises can make the biggest impact on your financial health. Creating a budget can help you and your partner accomplish several things. Most importantly, it will help you create financial goals, increase your communication and openness, and hold you accountable.
The Importance of Budgeting
If you constantly find yourself over drafting your account or dipping into your savings to cover monthly expenses, a budget is the best and easiest way to gain a clear picture of your overall spending. By seeing the totality of your monthly expenditures in select categories, you can get a quick reality check regarding how your lifestyle may be impacting your financial health and well-being.
How to Start Budgeting
- Track Your Income: Begin by determining all sources of income, including your salary, bonuses, and any side hustles. It’s essential to understand your total monthly income.
- List Your Expenses: Document all of your fixed expenses, such as rent, utilities, insurance, and loan payments. Then, account for variable expenses, like groceries, entertainment, and dining out. Don’t forget to include irregular expenses, such as annual subscriptions or holiday spending.
- Categorize Your Spending: Break down your expenses into categories, which can help you identify where your money is going. Categories may include housing, transportation, groceries, and leisure activities.
- Set Goals: Establish specific financial goals, such as saving for a vacation, paying off debt, or building an emergency fund. These goals can guide your budgeting decisions and keep you motivated.
- Review and Adjust: Periodically review your budget and make adjustments as necessary. Life changes, and so do your financial needs and goals. A flexible budget will help you stay on track.
Save for a Rainy Day
Life is full of ups and downs, and you never know when you’re going to slide from an ‘up’ to a ‘down.’ Rolling off of our budgeting conversation, adding a category for emergency savings is a great idea. Did your transmission go out this morning? Did your HVAC unit break on a 90-degree day in July? Having funds available for unfortunate events like those can significantly reduce your stress. Yes, it’s still frustrating—but now you don’t have to sweat during the middle of the night, or you don’t have to worry about how you will commute to work.
Importance of an Emergency Fund
According to Fortunly, 70% of Americans have less than $1,000 stashed away in their accounts. That’s a lot of people that are unprepared for a ‘rainy day.’ And that type of money management can have a significant impact on your happiness. An emergency fund acts as a safety net, providing you with the financial cushion needed to handle unexpected expenses without derailing your budget.
How to Build Your Emergency Fund
- Set a Goal: Aim to save at least three to six months' worth of living expenses. This amount can help cover essential costs in the event of a job loss or unexpected expense.
- Start Small: If saving several months' worth of expenses feels overwhelming, start with a smaller goal. Aim to save $500 or $1,000 and gradually build from there.
- Automate Savings: Set up automatic transfers from your checking account to your emergency fund. Automating your savings can help you build your fund without even thinking about it.
- Keep It Separate: Open a dedicated savings account for your emergency fund. This separation can help prevent you from dipping into the fund for non-emergencies and can earn interest over time.
Build Your Credit
Credit is not given; it is earned. And earning (building) your credit can be easier than you think. Paying your utility bills on time can sometimes help build your credit history and credit score. Having a parent co-sign on a credit card with you can help you establish credit while responsibly using it each month and making a minimum (or more) payment.
Some banks or credit unions will also have credit builder products specifically designed for individuals with no credit or damaged credit. UK Federal Credit Union offers the CreditSMART loan which allows members to help build their financial future. After fully paying the amount back, you receive your deposit returned, and you’ve had several months of loan payment history reported to the credit agencies.
Importance of Credit
Who’s tracking your credit? There are three major credit reporting agencies monitoring U.S. consumers: Equifax, TransUnion, and Experian. They track your loan amounts, payments, and other activity. The credit reporting agencies will assign credit scores ranging between 300 and 850. The threshold for having a ‘good’ credit score is typically 720. Most agencies allow you up to one free credit report per year, which is recommended to ensure the information is accurate. An additional incentive is to check for any fraudulent activity, which would signal identity theft.
Tips for Building Credit
- Pay Bills on Time: Timely payments are one of the most significant factors in determining your credit score. Set reminders or automate payments to ensure you don’t miss due dates.
- Keep Credit Utilization Low: Aim to use less than 30% of your available credit on credit cards. High utilization can negatively impact your credit score.
- Diversify Your Credit Mix: Having a mix of credit types (such as credit cards, auto loans, and student loans) can positively impact your score. However, only take on new credit if you can manage it responsibly.
- Monitor Your Credit: Regularly check your credit report for errors or inaccuracies. Disputing incorrect information can help improve your score and overall creditworthiness.
Plan to Retire – You Deserve It
Everyone should hopefully have the goal to retire at some point. Even if you love your job, scaling back as you get older can be a wise decision as your focus may shift from business to family or simply enjoying life at a slower pace.
Importance of Retirement Planning
Most experts recommend investing at least 10% of your annual income towards your retirement. The most traditional retirement vehicles are a 401(k) and IRAs. Depending on your situation, a traditional IRA may be the way to go, while Roth IRAs provide alternative benefits for others. Many times, employers will offer a 401(k) match based on your contribution—make sure you don’t miss out on those free contributions.
Tips for Retirement Savings
- Start Early: The earlier you start saving for retirement, the more time your money has to grow. Take advantage of compound interest, which can significantly increase your savings over time.
- Maximize Employer Contributions: If your employer offers a 401(k) match, contribute enough to take full advantage of it. This is essentially free money and can substantially increase your retirement savings.
- Diversify Investments: When choosing investments for your retirement accounts, consider diversifying your portfolio across various asset classes. This strategy can help manage risk and improve potential returns.
- Review and Adjust: Regularly review your retirement savings and investment strategies. As life circumstances change, so may your financial goals and risk tolerance. Adjust your contributions and investment allocations accordingly.
Build Equity
Depending on your specific situation, renting may have far greater benefits in terms of flexibility and location. But in terms of value, purchasing a property where you can begin to grow equity—purchasing will always create more value than renting.
Now, not everyone is always in a position to purchase. Home prices are constantly rising, which is another reason why making the decision to purchase a property is smart. Interest rates have risen since their all-time lows around 3% in 2020; so it may not be the best time for everyone to purchase a home. However, if you would like to grow your net worth, purchasing a home and building equity should be one of your goals.
Understanding Equity
Equity is the difference between what you owe on your mortgage and the current market value of your home. As you make mortgage payments and your home appreciates, your equity grows. This asset can be tapped into later for various financial needs, such as home improvements, education expenses, or retirement funding.
Saving for a Down Payment
This goal should be factored into your budgeting process. How much are you saving each month to put towards a down payment? A down payment can be a scary term for many, but be smart and do your research before pulling the trigger on purchasing a property.
Depending on the property type, where it’s located, and what lender you choose, there are several special programs designed specifically for first-time home buyers that can offer no or little down payment options. Researching these opportunities can help ease the burden of saving a large sum upfront.
Conclusion: Your Path to Happiness
These principles are not the only way for someone to improve their financial well-being and find happiness. However, they certainly contain valuable viewpoints that can create positive impacts on an individual’s life. By prioritizing budgeting, saving, credit building, retirement planning, and equity growth, you can create a solid financial foundation that leads to greater peace of mind and overall happiness.
For more information on products and services from UKFCU that can create a strong financial foundation for you or even make your banking easier, give us a call.
