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The following article is by MPFJ staff writer, Miss T, from Prairie Eco-Thrifter. If you want to learn how to live your dream life in a sustainable, healthy, and money savvy way, check out her site here.
Lately, I seem to be hearing about more and more people who are experiencing financial difficulties. It is a situation I can relate to, because that was me a short time ago. My credit card and personal debt had topped $20,000, I had fallen behind with my loan repayments, my rent was late, and then I had my work hours reduced. It was pretty tough, I can tell you; how I wish I had known what I know now, about how to avoid a financial disaster.
Things are OK for me now, but I still have a long way to go before I can be confident I would be able to cope if anything like that happened again. It got me thinking that there are probably lots of people who would benefit from the same information I was given, when I sought help to get out of my financial predicament. So, I was prompted to write this article; I hope it helps you avoid a financial disaster in your life.
Recent statistics show that almost half of Americans are experiencing some financial hardship, mainly due to personal debt levels. I think we have been programmed to believe that we can have everything we want, that using credit is OK and that everything will be alright in the end. Financial responsibility is not a subject taught in school, and most people learn about managing their money the hard way – after a financial disaster.
The main keys to avoiding financial disaster are managing your debt, limiting your reliance on credit, always spending less than you earn, and consistently tracking your money so you know where it goes every month. Let’s walk through these one by one:
Set a Budget
The most important tool to help you manage your finances is the personal budget. I know; I know; you’ve heard it all before, but have you done anything about it? A budget tells you how much money you have, allocates the cash for essentials like bills, food and transport and tells you how much you have left over to spend on incidentals. Your budget is your friend, not your enemy, but you must create one that balances and then you must keep to it. Most people find they have to adjust their spending in some areas when they first do a budget. The best budget is one that allows for an emergency fund and some savings, no matter how small.
Don’t Spend More Than You Earn
You simply cannot continue to spend more than you earn. This is what I had been doing for years, buying what I wanted without any thought as to whether or not I really needed it. I used credit for nearly every purchase, even food and rent, and only ever made the minimum repayments off credit cards. This meant I was just falling further and further behind. What I learned was that credit cards should never be used for essential purchases as these are included in the budget. Also, if you only ever make the minimum repayment amount, the only advantage is to the credit card company, to whom you are paying stacks of extra in interest. Whatever you have bought with your credit cards is actually costing you many times their original value.
Have An Emergency Fund
An emergency fund is essential in every person’s budget, even if you can only manage to put a small amount away from every paycheck. Your emergency fund is just that – for emergencies only and this doesn’t include that new designer-label jacket you saw on sale. If I had had an emergency fund when I had almost no work, my situation would not have been nearly so drastic. The best way to set this fund up is to have a separate account into which a set amount is automatically transferred directly from each pay. Your budget will help you determine how much this will be, but remember, your emergency fund is more important than things like entertainment and dining out.
Save and Invest
Savings is another important category that you need to have in your budget; you need to save something, no matter how small, from every paycheck. This is the only way you can set yourself up for a secure financial future. As you progress through your career, the amount you save should increase; when you have enough funds, it is a good idea to look for ways to invest your savings to make your money work for you. Compound interest makes your money grow faster.
So, look at your financial situation and see if you have the main key points covered. Do you have a budget that balances and you stick to? Do you use cash for essential purchases and limit your use of credit cards? Do you spend less than you earn? Do you track where your money goes? Do you have an emergency fund to tide you over if you are off work? Do you put some money into savings from every pay?
Put these key strategies into your financial management and you will avoid a financial disaster.
So, have you ever had a financial disaster? What did you do to get out of it? What did you learn from it?