Whether you have a ton of it or just enough to get by, money can be a huge source of stress. According to the American Psychological Association, 72% of Americans reported feeling stressed about their finances in the previous month.
Some financial stressors, such as rent, can’t be avoided. But with a little planning, a surprising number of them can be.
The key is to take control of your budget. In the long run, taking an “out of sight, out of mind” approach will only create more headaches for you. If you’re ready to simplify your financial life, here’s how to do it:
Pay Down Your Debts
Debt can be a huge source of stress. Although new cars and home upgrades can be tempting, remember that loans must be paid back. Always ask whether what you want to buy is worth years of monthly payments.
Living debt-free gives you freedom. Not only does it give you relief from monthly payments (with added interest, of course), but it lets you put your cash flow toward something else. Perhaps you want to go back to school, or maybe you dream of owning your own home.
There are two popular methods to help you achieve your dream of a debt-free life:
The first is the debt snowball method, popularized by Dave Ramsey. This method encourages the debtor to pay the minimum monthly payment on all of their debts, then devote any leftover money to paying more on the debt with the smallest balance.
Once the debt with the smallest balance is paid off, allocate the monthly payment for that debt (as well as any extra money you have) toward your next smallest balance. The idea is that you pick up steam as you work toward paying off increasingly larger debts. Once you get to your biggest one, like a home or student loan, you have a large sum of money available each month to pay down that debt.
The debt avalanche method works a little differently. Start by listing out your debts based on each debt’s interest rate, rather than its balance.
With the debt avalanche method, you make the minimum payment on each of your debts. With any remaining money, you pay down the debt with the highest interest rate. As you pay off each debt, you free yourself to put its minimum payment toward the debt with the next highest interest rate. This method allows you to pay the least amount in interest, rather than letting it stack up on you.
Every financial guru has their own take on debt repayment, but you have to find what works best for you. The important thing is discipline: If you’re paying down your debts, don’t ruin your progress by taking out another loan. Spend less where you can, save more, and chip away at your debts consistently.
Technology makes our lives easier in all sorts of different ways. There’s no reason not to use it to get a grip on your financial life.
We’ve all done it: A big purchase here and a few more there scrape the bottom of our bank account. Overdraft protection is an easy way to automate away the risk of overdraft fees.
Do your homework when opening a new bank account. Look at local banks, those online, and nontraditional financial providers. You might be surprised at which offer overdraft protection.
Always be sure to read the fine print. If an overdraft occurs, what does the protection actually do? Does it mean the transaction is declined with no fees? Does it go through, but the bank puts a hold on your account until the difference is paid back? Are there other restrictions or fees, such as account minimums, you might incur with a low balance?
Everyone knows the importance of saving. When there’s money in your account, though, it can be hard not to spend it. The best way to start building your savings is to automate the process.
Some bank accounts have this feature built in. With Chime, for example, every debit card purchase rounds up. The difference between the purchase price and the next dollar is automatically deposited into a linked savings account.
Credit cards are practically unavoidable. They can be great financial tools if you want to book a hotel or need to fill a gap in income in a given month. However, when you use credit cards in the wrong ways, they can make your finances even more of a headache.
When using credit cards, here’s how to be financially responsible:
If you have a favorite store — or if you just like to shop a little too often — you’ve probably been faced with a tough decision at the register.
The cashier asks if you want to open a store credit card. He or she promises big savings on your current purchase and services like layaway for future ones. What he or she probably doesn’t tell you is the steep interest rates these cards come with.
The bonuses, reward points, and special deals associated with store cards are not worth the squeeze. The average APR on store credit cards is about 26%, compared to the average 21% APR for all credit cards. A few hundred dollars on a store card can quickly turn into a thousand or more.
Store cards can also cause the credit card user to sacrifice or overlook the benefits of using their traditional card. Maybe their traditional card offers cash back or airline miles, which could negate the store discounts being offered.
Finally, these store credit cards have lower credit limits. Although being debt-free is a good goal, it’s important to have credit available if you need it in the future. Like any other type of credit, store cards affect your credit utilization ratio, which impacts your ability to get financing in the future.
Having multiple credit cards might seem like a good idea in the abstract. More cards means more flexibility around rewards, a larger total credit limit, and more bonus offers. But carrying more credit cards makes your financial life more complex.
For every credit card that you hold, there is a different balance, minimum payment, and due date. Not only do you have to keep track of all of the physical cards and all of the charges, but you also have to be sure you’re making payments on time. The best way to stay on top of your cards is to have fewer of them.
Remember, too, that most bonus offers require you to spend a minimum amount of money. Trying to collect on multiple offers at once tempts you to spend money frivolously just to reach those thresholds.
The right way to manage your credit cards is to always think through your reason for opening a new one. Is it because you need a backup way to pay? If you have an American Express card, for instance, it may not be accepted by some small businesses. That’s a good reason to get a Visa or Mastercard.
Talking about money can be hard because we all use and save it in different ways. Think about your goals, and adjust your financial habits accordingly. You might not see big results right away, but you will sooner than you think.