If you’re like many Americans, you may find money management stressful.
Research shows that many Americans wouldn’t be able to pay for an emergency, such as an unexpected hospital visit or car repair, from their savings account, meaning they’re likely taking on debt to manage any unplanned changes to their finances.
If you find yourself in a similar situation, it’s essential to make changes to lead a healthier financial lifestyle. Luckily, it’s easier than you think.
If you’re feeling stressed about your finances, follow these five steps to get back on track.
Step 1: Track Your Spending for a Month
Use an app or spreadsheet to track each purchase you make for a month. Next to each one, add the date and item category. These notes will help you observe spending patterns and understand where your money is going.
For example, you can see how much money you’re spending on eating out, or for your kids’ extracurriculars. Maybe you’re swiping your card at the local coffee shop a ton or you discover that your spending on groceries is actually much higher than you think.
Tracking for a month (or even better, two!) can help you identify spending patterns and places where you can make improvements.
Log notes about your expenses to track fluctuations and significant purchases. Calculate how much you’re spending in specific stores to help you get an accurate understanding of your habits.
Step 2: Create a Monthly Budget
A budget is a fundamental tool used to manage finances. Without one, it can be easy to lose track of spending.
Use what you’ve learned from your monthly spending tracker to create a budget with real numbers outlining the five major categories: income, bills/debts, living expenses, leisure spending, and savings.
Collect pay stubs, financial account statements, and bills from the past year. List your monthly net pay – what you make after deductions. Review your spending in each category, then list the exact amounts under each column.
For fixed expenses, like your mortgage, budget for the actual amount. For variable expenses, like electric or water bills, budget for the average monthly amount. To find the average monthly cost, add the amounts from the last 12 months and divide by 12.
Can your income support your expenses and savings goals? If not, you may need to make some changes.
Step 3: Cut Back on Expensive Habits and Hobbies
If you want to escape debt, consider changing your spending habits.
Start by identifying your daily, weekly, and monthly recurring expenses. Then, try to either remove just one unnecessary expense, or cut an expense area by half.
For example, do you commute daily to work? Are you close enough to walk or bike, even just once a week? If so, you can save money on gas. Or do you dine out often? The cost of eating out can add up quickly! Try to cut spending by packing your lunch for work or cooking at home with friends occasionally instead of meeting at restaurants.
Again, start small with one expense. Then you can try the same method with additional unnecessary or excessive costs you identify.
Step 4: Identify Ways to Reduce Monthly Bills
In addition to daily spending, it’s important to look at big-ticket items, such as the bills you pay each month, when trying to minimize financial stress. Oftentimes, with a little bit of research, you can find ways to cut the cost of your monthly bills. Review your utility, media, and phone bills. Look for offers from competitors and compare them against your current provider. Many of them are willing to reduce bill costs if you call to discuss your options.
For larger expenses, consider refinancing loans such as a mortgage or car payment with a credit union, like PSECU, that may offer a lower interest rate. Most people refinance loans to save money on interest. If you find a new loan with a better rate, you can enjoy long-term savings. Of course, this is only beneficial if your rates on these products are on the higher end and the economy is in a favorable interest-rate environment. Talking with a trusted financial partner can help you determine if this is a good course of action or not.
Step 5: Create a Plan to Pay Off Your Debt
Many Americans cite debt reduction as a top financial priority.
The first step to paying off debt is to determine how much you owe. List your debts, interest rates, and who you need to pay. Then, choose the best method below.
- Snowball Method: Pay off the smallest debt first to reduce the number of bills and achieve quick wins.
- Avalanche Method: Pay off high-interest debt first to save money on interest.
Once you have a plan in place, you’ll be on your way to paying off your debt.
Depending on how much you owe, you may want to consider a balance transfer. With this tactic, you move outstanding balances from higher interest credit cards to one with a lower interest rate. In addition to saving on interest, you’ll have the added benefit of having only one bill to pay with one due date rather than managing multiple payments with differing due dates.
Our Classic Card is a popular choice for balance transfers, and for good reasons:
- No annual fee
- Purchase APR well below national average
- Low promo rate for balance transfers
- No PSECU balance transfer fee
Want to learn more about how you can use your Classic Card to make a balance transfer? We’ve got you covered!
You can also consider consolidating your debt, which bundles multiple bills – student loans, auto payments, credit card bills, etc. – into a single, easy-to-manage payment and can often save you money on interest over time.
For more money management tips and resources visit psecu.com/learn.
