If you're looking to improve your finances, it can feel like a tall order. Taking on any challenge is daunting and the first step is usually the hardest. Knowing where to begin is hard enough and sometimes we can be our own worst enemy. When it comes to our finances, it can be difficult to know where to focus first.
Don't let analysis lead to paralysis. It can be easy to get overwhelmed and that often results in inaction. If you can take things one at a time and at a reasonable pace, you'll be amazed at how much you can improve your finances.
If you've neglected your retirement savings and finances in general, don't try and repair the damage all at once. Take some easy steps. If you try and take on too much, you risk burn out and the inevitable feeling of biting off more than you can chew. If you haven't exercised in a while, don't start by running a 5k. Build up to it by starting out with some achievable milestones.
Improve Your Finances – Take 5 Easy Steps
Easy Step 1: Increase your retirement account contributions.
Increase your 401(k) or other retirement account contributions. After all, don't you deserve a raise? Contact your payroll or retirement plan department and increase the amount your're contributing. Even if it's only a 10% increase, do it now and when you're ready to tackle more, increase it again. Get in the habit of gradually increasing your retirement contributions. It can be hard to hit the annual 401(k) maximum of $18,500 each year. If you make it your goal and take gradual steps, you will be there before you know it.
Don't underestimate the power of small increases over time. When the budget is tight or you’re starting out at your first job, it can feel like there isn’t enough left over to make investing worth it. This article 5 MISCONCEPTIONS PUTTING YOUR FINANCES AT RISK includes a chart showing how regular increases in your savings can improve your finances.
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5 Critical Finance Concepts to Increase Savings and Reduce Debt
Easy Step 2: Start an education or college savings account.
Many 529 College Savings Plans can be started with as little as $25 per month. These accounts have special tax benefits, similar to Roth IRAs. Money you sock away will grow tax deferred and withdrawals for qualified education expenses are tax free! Type 529 into a search engine and you can be opening an account with a major financial institution within a few clicks. If you need to do a little more looking, research which plans might be right for you.
Student loan debt is on the rise and the numbers are staggering. Total student debt is approximately $1.38 trillion and is second only to U.S. mortgage debt. As college costs continue to rise, the impact of borrowing is increasingly significant. Start saving early with a 529 plan to improve your finances and be less reliant on debt.
I discuss student loan debt in more detail here on my YouTube channel:
Easy Step 3: Update your retirement account beneficiaries.
Make sure to check the beneficiaries on your account. If you have any type of IRA or company retirement plan like a 401(k) or 403(b), make sure your beneficiary elections are up to date. Calling your investment provider or contacting your retirement plan administrator can be an easy way to see who is listed as a beneficiary. Also, many retirement accounts allow you to choose a contingent beneficiary in case something happens to you and your primary beneficiary at the same time. A quick phone call can make a big difference for your loved ones financial future.
IRA beneficiary designations are of major importance and should not be neglected. As our lives change, we need to be diligent in making sure our records are up to date and reflect our current goals and objectives. Failing to do so may result in major problems that could negatively impact relationships with family members. Improve your finances and get up to speed on designating your IRA beneficiaries.
Easy Step 4: Pull your credit report for free!
You are entitled to request your credit report at no cost once a year from the three major credit reporting agencies. Monitoring your credit is critical to your financial success. Unresolved or incorrect issues on your credit will result in higher borrowing costs at least and denial of credit at worst. If you don't have a 720 credit score, start taking steps to improve it.
Not all debt is created equal and there are no set standards as to what is considered too much debt. What is manageable for one may not be for another. Credit is inherently a good thing but racking up the credit card debt can get ugly quick. To be fair, credit cards aren’t the problem. Nor am I suggesting that debt is bad. How we manage and monitor our credit is what matters most.
Easy Step 5: Start an emergency fund.
Credit cards are not an emergency fund. Start saving a portion of your pay to handle the unexpected expenses that inevitably pop up to help you avoid the credit card trap. If you don't have a rainy day fund, start one. If you have one, give it a boost!
Consider saving six months worth of your living expenses and don't gamble with the funds in the stock market. An emergency fund should be invested in stable and liquid accounts like money market or an FDIC insured bank savings account. If you are investing with a longer-term time horizon, it would be completely prudent to allocate a portion of your investments to stocks. While money market and savings accounts are very low risk, they may not be the best bet for returns over the long term.
You don't need to tackle all of these steps at once. Take them one at a time. Once you do, you'll be ready to take on more and you'll be amazed at what you can achieve.
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2022 Financial Planning Cheat Sheet
Your guide to 2022 tax rates, retirement contributions, and Social Security.