In a survey by BadCredit.org, 62% of respondents said that they would be willing to turn to unconventional living arrangements to save money. Respondents said that they would take steps such as moving back in with their parents or co-living with a former partner to alleviate financial pressures.
Even more surprising, 27% of respondents said that they might choose to stay in a relationship for its financial benefits, even if that means remaining in a loveless marriage or staying in a toxic situation.
You don’t want finances to force you into making challenging lifestyle choices. How can you avoid this? By focusing on and creating a sensible household budget, building your savings, and paying your bills on time each month, you can avoid being forced into a financial corner.
Build a budget
Creating a budget and sticking to it is the first step in improving your financial health.
Expenses. First, list your monthly expenses, including such payments as your rent or mortgage, utility bills, cellphone payments, auto loan, credit card, and insurance payments. For payments that fluctuate each month, calculate an average amount.
Also include expenses that vary each month, such as the amount you spend on groceries, transportation, medical care, clothing, dining out, and entertainment. The more detailed your budget, the better.
Income. Next, determine the income you bring in each month. Include your salary, commissions, bonuses, freelance income, gig work pay, disability payments, alimony, royalties, rent, or any other monthly income stream.
It’s hoped that after adding up your income and subtracting your expenses, you have some money left over. This leftover amount is what you want to be able to save.
If you don’t have any money left over each month, you’ll want to reexamine your expenses. For example, you may want to cut down your credit card balance. Examine what is on your credit card bill that is discretionary—things you can cut. Examples are dining out, going to concerts or the movies, or buying new clothes.
The goal is to save money so you have options when a situation changes.
Build an emergency fund
Once you understand your monthly expenses and income, you can set aside any extra money each month to build an emergency fund. This is a fund of money saved in a safe place, such as a savings account, that you can tap easily to pay for unexpected emergencies such as car repairs, broken appliances, or a sudden medical bill. With an emergency fund, you won’t have to resort to paying for these surprise expenses with your high-interest-rate credit card.
Experts suggest that you build an emergency fund with enough money to cover at least three to six months of daily living expenses. With this fund, if you hit a financial difficulty, you won’t be forced to do something you don’t want to do, such as living with an unsuitable roommate.
Pay your bills on time each month
It’s important to pay your bills on time each month. Paying certain bills more than 30 days past their due dates can cause your three-digit credit score to plummet by 100 points or more. If you are stuck with a low credit score, lenders will charge you higher interest when you apply for loans or new credit cards. That leads to higher monthly payments.
If you have a lower credit score, your options can change. For example, renting an apartment often requires a credit check, and some companies may charge a higher rent or ask for a larger security deposit if you have a low credit score.
Pay down your credit card debt
Devote extra money each month to paying down your credit card debt. Credit cards come with high interest rates, meaning that your unpaid balance will grow each month. Eliminating credit card debt is the key to financial health. And once you pay off your cards, only charge what you can afford to pay off in full on or before your cards’ due dates.
Having lots of debt forces you into a financial corner. Try to pay down debt as much as you can to avoid high interest-rate charges, which can drain your savings and make an unnecessary dent in your income.
Invest in your retirement
Finally, once you’ve gained control of your finances, continue to build your savings and invest in retirement accounts. Once you have a financial cushion established, you won’t ever have to consider challenging living arrangements again.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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