Everyone knows that saving and investing is essential in building a retirement nest egg, but it can be intimidating if you don’t know where to start. And for some people who have accumulated a large amount of debt, it may seem impossible.
As we observe National Financial Awareness Day on August 14th, this is a good opportunity to talk about how people can gain a foothold in their finances and start making the changes that are needed. In my role at Advia Credit Union, I often work with members in Southwest and Eastern Michigan to develop long-term, achievable savings and investment plans.
Here are some of their most frequently asked questions:
How do I create a budget and stick to it? People struggle with this – both getting started and staying committed to a spending plan. One thing I tell our members is that if you find yourself running a little short at the end of the month or between paychecks, it helps to create a spending plan (budget).
When creating it, you need to be as realistic as possible about how you spend your money, both for essential and non-essential purchases. If you like getting your nails done every two weeks, include it. Once you know what you’re spending money on, you can make changes and eliminate some non-essential purchases as needed.
How much money should I put in an emergency fund? This most important step is simply to create an emergency fund. Start with whatever you can afford to cover an unexpected expense, like a car repair. As you save more money, increase your emergency fund to cover three to six months of living expenses.
Is using a money tracker app worth it? Let’s be honest: we live in a culture where things change quickly, and sometimes you just don’t see how the costs add up. Money tracker apps let you see how you are really spending your money. The results might surprise you and even motivate you to change your habits.
Where do I start to invest if I’ve never done it before? Start by meeting with a free financial advisor, who can help you see the big picture for the long haul. Most advisors are salaried employees, so they don’t get paid based on what people invest, allowing them to make recommendations that only benefit the client. Discuss where you want to be at 60 and let this advisor help you get there.
How can I use a credit card responsibly? Some people say credit cards are bad for managing money, but I think they have significant value. A credit card offers another layer of security in the event of potential fraud. When it comes to making credit card purchases, the rule of thumb is to only spend what you think you can afford on a monthly basis. In this way, a credit card can act as a zero interest loan and help you build a strong credit history.
This becomes more important when considering other types of loans such as for a vehicle or a house. Although my credit card isn’t my favorite spending card, I can use it if I need to. If you are disciplined, it may be a good idea to put purchases on a credit card to earn points or cash back, as well as to build your credit score. If you do, make sure you can pay it off quickly.
What’s the best way to reduce debt? Getting out of debt can seem overwhelming, but it can be accomplished in small, consistent steps. First, break down your debt and understand who you owe money to, as well as how much interest you pay on each debt.
Then tackle the smaller debt first and pay it off. Create a budget that includes regular payments to pay off your debt, and stay focused as you start reducing it.
Or, consider a debt consolidation loan – they are great for consolidating multiple loans and credit card balances into one combined loan. You will typically pay a much lower interest rate, only have one payment, and in most cases even improve your credit score.
When is it worth going into debt? Sometimes people have to go into debt because of an emergency situation they find themselves in, like an expensive house repair that they did not expect. Having an emergency fund can help with this.
However, you can’t plan everything. When you take on debt, just make sure you have a strategy in place to pay it off relatively quickly. And don’t beat yourself up and feel embarrassed. Being aware of your financial situation is only half the battle. Stay positive and take small steps to improve your situation. It’s part of life.
Rekeesha Winston is Branch Service Manager at the Parchment / North Westnedge branch of Advia Credit Union.