Did you know that the average American carries over $38,000 in personal debt? This staggering number doesn’t even include home loans. Home loans and car loans are often unavoidable, as most people don’t have the means to pay for those things in cash. However, nearly 80% of American workers also live paycheck to paycheck, often because of other financing decisions.
The result is that many people become consumed by their debt, making only the minimum payments while their interest grows. This is not a recipe for a strong financial foundation. But don’t despair, all is not lost or hopeless. You don’t have to get stuck in those patterns. The key is establishing good consumer and financial habits. Something that membership in a local credit union can go a long way in helping you with.
Here are nine tips to get your finances moving in the right direction.
Open a Checking and Savings Account
One of the first steps in adulthood is setting up a bank or credit union account complete with both checking and savings accounts. It’s a fundamental part of keeping your money accounted for and organized.
Just like with banks, credit unions enable you to set up automatic payment transfers for things like credit cards, utilities, rent, bills, and more. Some people find it easier to automate the process rather than remember every bill each month. Paying your bills on time helps you avoid late penalty fees while building your credit score.
Establish an Emergency Fund
Next, you need to create an emergency fund. Emergency funds are necessary for paying for things like car repairs, veterinary visits, home repairs, etc. By having an emergency fund for such things, you won’t have to worry about cutting into your regular monthly budget or borrowing money.
We recommend starting with at least $1,000 in a credit union savings account. Once you have built up other savings or are debt-free, you can increase the amount to cover three months’ worth of expenses.
Avoid Borrowing Too Much Money
When getting started in life, you’re most likely going to need to borrow money. This may be necessary for things like college, a car, a home, etc.
However, when taking out loans, be smart, and only take on loans you can comfortably afford to pay each month. Be practical. And keep in mind that credit unions typically offer better loan rates than banks, along with lower rates on mortgages.
Aside from the necessary loans noted above, avoid borrowing money at all costs. The more money you borrow, the more interest you accrue. With a handful of loans, you could be paying hundreds of dollars in interest alone each month.
Limit Your Expenses
To maintain a solid financial foundation, we also recommend limiting your expenses. As we mentioned earlier, a big part of this is cutting back on borrowing money, such as taking out loans, financing things on credit cards, etc.
However, this also includes limiting:
- Dining out
- Drinking at bars or clubs
- Subscriptions and memberships
- Streaming services
- Commercial coffee
- Unnecessary shopping
- And more
Most people are shocked when they examine their bank or credit union’s statement, as well as their credit card statements and learn how much money they’re spending on unnecessary things.
Use Credit Cards to Your Advantage
Just because you need to be careful with credit cards, it doesn’t mean there aren’t benefits to having one. For example, using a credit card responsibly is a good way to increase your credit score. However, there are a few important rules to adhere to:
- Pay the card down to 0$ every month
- Never max out the card
- Never make late payments
Credit cards come with incredibly high interest rates. If you pay it off each month before you’re charged for the interest, you can avoid extra fees and earn valuable points (depending on your card).
Pay Off Debt As Soon As Possible
When you take out a loan or accrue debt, it’s in your best interest to pay it off as soon as possible. The longer you have a particular debt, the more you’ll pay out over time in interest.
For example, if you get a five-year car loan for $15,000 with a 6.0% interest rate, you’ll pay close to $2,500 in interest when all is said and done. If you pay it off early, you can save yourself a ton of money. Just make sure there are no early pay-off penalties.
Consolidate Debt if Necessary
If you can’t pay your debt off quickly but are still seeking to boost your financial foundation, you should consider debt consolidation. Debt consolidation loans typically come with lower interest rates. The loan absorbs your other debts into one.
This is beneficial for multiple reasons. First, you can eliminate high-interest debts like credit cards under the new loan. Secondly, your credit score will improve if you have fewer debt sources, even if your debt amount is the same.
Set Financial Goals for Yourself
No matter what you’re pursuing in life, you can optimize your chances of success by setting goals for yourself. Goals give you a strong direction and a clearer picture of what you want.
Start with smaller, milestone goals to give yourself small victories along your journey. These small victories will help keep you motivated and focused while making sacrifices, like limiting eating out or going out with friends.
Start Investing Early
Finally, one of the best things you can do to build a strong financial foundation for your future is investing early. Many local credit unions have financial advisors you can talk with to get started contributing to your retirement savings while you’re young. The interest builds in your favor, compounding on itself over time.
The sooner you start investing, the more money your investment will earn. You can choose how much you contribute each month. It’s best to create an automatic withdrawal to ensure you don’t forget or make impulse decisions to keep the money each month for this or that.
Looking to Build a Strong Financial Foundation?
If you’re looking to start your financial foundation off right or make your current situation better, there are plenty of local credit unions that can help. Be sure to check out some of our other informative articles about finances and banking before you go for more valuable advice.
When you’re ready to find the right credit union to get you on the right financial path, connect with us today to explore your options.