It is easy to skate by simply knowing that you make more than you spend. However, that doesn't give you a complete picture of your finances and might mean you are left in a tight spot down the road. Use best practices to get a handle on your finances and ensure you are on track for stability.
1. Develop a Budget
One of the first things you'll need to do is to create a realistic budget that helps you meet financial goals. If you haven't already established what your goals are, take time to do that first. Then track your spending over the course of a month or so, gather up your bills and financial statements, and get down to work. If you aren't sure what to include in a budget, the following is a good starting point:
Your total income from all sources (salary, second jobs, passive income streams, interest and dividends, etc.)
Fixed monthly expenses (your mortgage or rent, insurance premiums, car payments, maintenance costs and student loans)
An average for variable expenses, even if you pay them on an annual basis (life insurance, vehicle registration fees, groceries and recreational costs)
2. Establish a Savings Plan
Be sure to leave room for savings when you lay out your spending plan. The 50/30/20 budget system has been used successfully by many folks to balance spending on needs, wants and savings. Look at investment plans that give you flexibility and accommodate your risk tolerance.
3. Prepare for the Unexpected
The right insurance policies will help you plan for the unexpected. There are five types of insurance that most people should consider and purchase: life, auto, homeowners, health and long term care coverage. Each serves its own purpose, but they all help protect you from unexpected costs that can undermine your financial stability.
Life insurance is about more than paying for your final expenses. it can be used to pay off your mortgage, put children through college, or cover medical bills after an extended illness. Some policies, like an IRC 7702 plan, can help you save for the future by offering a cash benefit that accumulated over time. If necessary, you can use that balance to borrow against or to make premium payments.
Auto insurance will help pay for damages and medical expenses in the case of an accident. If your home is damaged in a storm, fire or other disaster, homeowners insurance will pay to repair the damage or rebuild your home. It also covers costs associated with legal claims made against you in the event that someone gets injured on your property.
Health insurance helps pay for routine preventative care, medications and care or hospitalization in the case of illness or injury. With rising medical costs, it can mean the difference between getting treatment early or putting it off. Many people need some sort of care as they get older. That can be an expensive prospect that quickly drains your savings. Long term care insurance will help you manage those costs.
4. Pay Down Debt
Most Americans have at least some debt, whether it is a mortgage, car payment, student loans or revolving credit. Work to get rid of your debt by using a method that has proven effective. Both the debt snowball and avalanche methods are highly recommended. Which one works best for you will largely depend on what drives your motivation. Once you have eliminated debt start using your extra income to build savings. This way you will be able to pay for future purchases upfront instead of financing them.
5. Track Your Spending
Keeping up with your finances is an ongoing process. It is one that takes time to master. You will need to keep up with your spending and savings habits and evaluate them as things change. If your income goes up, decide if you want to pay down additional debt, put it toward a retirement plan or save up for a shorter-term goal. Leave some room for unplanned purchases so you don't feel deprived as you work to get a handle on things.
Be patient as you learn to better manage your finances. Practice forgiveness if you make mistakes, and use them as learning experiences to make your budgeting skills even better.