Personal finance may seem pretty complex, but it’s actually quite simple if you just follow a few easy-to-remember rules. Personal finance only becomes complex when your debt-to-income ratio becomes seriously out of balance. Let’s be honest, those three open credit cards aren’t helping. Here are five simple rules of personal finance to help you get back on track.
1. Don’t Max Your Credit Limits
Just because you have a credit card with $2,000 available on it in open credit doesn’t mean you should spend every bit of that $2,000. Let’s take a look at why most people get credit cards, to begin with. While credit repair or improving credit history is certainly motives, the real reason you opened the store credit card is likely to finance a material good that you really wanted.
This is all well and good if you can keep spending under control, but most people tend to overspend when they see “$2,000 available”.
This can be incredibly tempting; especially if you’re on the other side of the glass, staring at an item you’d never have been able to afford without a line of credit; or looking at a dream vacation package to somewhere like Texas that you’ve always wanted to take.
The best way to manage your credit limits is to keep your spending far below your maximums. This shows creditors that you’re responsible with your money and with lines of credit, and also prevents you from having a massive credit bill (plus interest!) at the end of the month. Keep spending low and stay under your limits!
2. Only Borrow What You Can Reasonably Afford
When you apply for a loan or a line of credit, your credit history, score, and income are all considered in the decision. However, this, unfortunately, doesn’t prevent people from biting off more than they can chew in terms of large loans or credit lines.
Just because you can be approved for $10,000 doesn’t mean you can actually afford to borrow that much. You’ll want to consider the monthly payment structure, the APR (annual percentage rate), loan terms, and the overall cost of the loan. Many loans have closing fees and other extra costs that come with them, upping the cost of borrowing the money. Let’s not forget the APR, which will accrue extra interest costs throughout the life of the loan; and depending on your credit score and history, you might be looking at a high APR.
3. Always Save Money
While saving on a budget seems nearly impossible, it’s not. Saving money is easy when you understand the value of creating a savings account and take a closer look at where your money actually goes each month. This is where creating a budget is helpful. A budget will allow you a closer look at your expenses, income, and other factors preventing you from attaining financial freedom.
Save money wherever you can, and when you save, put it somewhere you won’t be tempted to use it. Your savings goals should be something along the lines of saving at least three months’ expenses for emergencies (or you can start with a goal of saving $1,000) and then investing in your retirement or saving for a mortgage down payment if you don’t own a home.
Savings goals will differ between individuals, but the bottom line remains the same: save early, save often, and save wherever you can. Even a few hundred dollars can make a huge difference when your car suddenly stops running.
If you’re struggling to create a savings plan or budget, try enlisting a financial advisor or planner to help you figure out where best to start in restoring your financial health. You can compare the best financial advisors on Carefulcents.com.
4. Do Your Research
This includes researching credit cards, APR, comparing loan terms, etc. When it comes to your finances, research everything. Compare rates, lenders, terms, APR, closing costs, everything. Chances are that you’ll find a better rate somewhere else. Working with the right lender is just as important as how much you want to borrow.
Performing adequate research doesn’t just apply to credit and loans, however. This applies to make purchases as well; getting the best price you possibly can for the item to maximize your savings.
If you can get the same item for $30 less, that $30 can go straight into your savings account. Don’t be afraid to price check your favorite items and ask retailers if they’ll do a price match on certain items.
5. Good vs. Bad Debt
Good debt is defined as debt that provides an eventual return on your investment; that is, mortgage loans, student loans, etc. Bad debt is defined as debt that actually loses value over time, such as material items from retail stores and car loans (that’s right!). Did you know that as soon as you drive your car off the lot, it begins to lose value?
That loan you took out to pay for the vehicle? It’s going to be with you for the next few years as your vehicle continues to depreciate in value with each passing day.
Racking up bad debt not only looks bad on your credit report, but it doesn’t serve to better your financial situation. Bad debt can be difficult to pay off, usually comes with high-interest rates, and depreciates in value over time. Why bother going into debt if the item you’re purchasing doesn’t even hold its value over time?
Stay under your spending limits, save where you can, and do your research. Know the difference between good and bad debt, and most of all, only borrow what you can reasonably afford to pay back. By following these simple rules, you’ll be on your way to personal financial freedom.