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The Beginners Guide to Financial Survival

Many people never learn how to use money properly. This creates a dangerous situation that often leads to heavy debt. It can also have a negative effect on your quality of life.

Learning about a few key concepts will help you make the most of your money. Use this basic financial survival guide to learn about those concepts, get out of debt, and start saving for the future.

Setting a Budget

Setting a budget helps you stay in control of your money. Unfortunately, a Gallup Poll from 2013 shows that two-thirds of Americans do not budget their money. Those people have no idea how they spend their money. That may work for some people, but most find themselves in precarious financial situations until they create a budget that guides them towards success.

Your budget should include three major categories:

  • Fixed costs
  • Financial goals
  • Flexible spending

Fixed costs include anything that you have to pay monthly or annually. These costs usually include:

  • Rent or mortgage
  • Car insurance
  • Utilities

You should spend about 50% of your income on these fixed costs.

Financial goals include anything that will improve your household's financial health, including:

  • Paying off existing debt
  • Contributing money to a retirement savings account
  • Saving money for an emergency fund

Expect to spend about 20% of your income on these goals.

Flexible spending includes any expense that changes from month to month. Common expenses include:

  • Clothing
  • Entertainment
  • Gasoline
  • Hobbies
  • Groceries
  • Going out to eat

You don't want to spend more than 30% of your income on these things. If possible, spend less so you can dedicate more money to reaching your financial goals.

The typical U.S. household as an income of $53,046 per year. After taxes, that amount probably comes to about $37,000. If you make the average income, you should expect to spend about $18,500 on fixed costs, $7,400 on financial goals, and $11,100 on flexible spending.

If you do not have enough money to meet your current level of spending, then you either need to find a better source of income or reduce the amount of money that you spend each month. If you don't do one of those things, then you will start to accumulate debt. Once you have debt, you may find it very difficult to get free. It is a burden that drains away your money.

Checking Your Credit's Health

Federal law lets you get a free copy of your credit report from each major bureau per year. The three major credit bureaus are TransUnion, Equifax, and Experian. You should take advantage of this opportunity by spreading out the reports over the year. Planned correctly, you can view your report every four months.

You may think you know what is in your credit report. The truth of the matter is that you have no idea until you look. Even people who make payments on time may find that they have negative information on their reports. This information can make it difficult to secure low-interest loans. It can also raise the cost of your car insurance and other common bills.

One investigation showed that one in five Americans has a mistake on his or her credit report. Those mistakes could cost you thousands of dollars a year.

Checking your credit report will also help you identify ways that you can improve your score. It's usually most helpful to repay existing debts. Companies compare the amount you owe to the amount of credit you can access. If you have a credit card with a $5,000 limit, but you only owe $500, then you're in good shape. If you owe $4,500 on that card, companies will want to avoid you or charge considerably higher interest rates.

Repaying Debt

If you have debt, you want to repay it as soon as possible. This is especially true of credit card debt, which usually has high interest rates that make prolonged repayment very expensive.

The average household owes $7,283 in credit card debt. If you just look at indebted households, the average goes up to $15,611. This doesn't include money owed on student loans, vehicle loans, mortgages, and other forms of secured debt.

Credit cards have an average interest rate of about 15%. Accounts intended for people with bad credit have an average interest rate over 22%.

Never make the minimum payment on your credit card bill. Doing so can make it nearly impossible to get out of debt. If you owe the average $15,611 on a credit card that charges 22% in interest, it will take you about 17 years to repay the full debt. Perhaps even worse, you will end up spending over $28,600 repaying the $15,611 debt.

Minimum payments are usually 4% of your total credit card debt. Increasing your payment to 10% makes it possible to get out of debt in about 5.5 years. You will spend about $19,000 in total payments. This credit card minimum payment calculator will help you determine how long it will take for you to repay your debt.

Getting out of debt takes commitment and sacrifice. The more you can devote to repaying high-interest debts, though, the sooner you can start using your money to grow wealth.

Debt Consolidation

It makes sense to focus on repaying accounts with the highest interest rates. You may be able to consolidate your debts to get a lower interest rate. Consolidating debts can also reduce the total number of payments that you make each month. Instead of giving money to several credit card companies, you only make one payment.

If you choose to consolidate your debt, you will get a loan to repay existing accounts. At that point, you will not have any credit card debt. You will, however, have to repay your loan. Since the loan usually has a lower interest rate, many households find that they can save money and get out of debt much more quickly by choosing this route.

Creating an Emergency Fund

Emergencies happen, and they are expensive. Creating an emergency fund helps protect you from the lure of high-interest debt. For instance, if your car breaks down, you can use the money from your emergency fund to pay for the repairs instead of charging it to your credit card. You will also need your emergency fund if you lose your job or suddenly face high medical bills.

Don't think that having a couple thousand dollars in the bank counts as an emergency fund. Realistically, you need enough money to pay for three to six months of your household expenses. If you lose your source of income, this money will keep you afloat while you look for a new job. Without the emergency fund, you could lose your home or accumulate tremendous debt that will take years to repay.

Investing for the Future

About 30% of non-retired U.S. households say that they have not saved any money for retirement. Considerably more people do not have enough money saved to continue their current lifestyles for more than a couple years after retirement.

Many employers offer retirement savings as part of their employee benefits packages. Common retirement accounts from employers include:

  • IRA
  • 401(k)
  • Simplified Employee Pension (SEP)

If your employer matches a percentage of your contribution, you should take advantage of that opportunity. Some will match up to 5% of your salary. That may not sound like much, but it adds up quickly.

You can also start your own retirement savings account. Most people who open non-employer accounts choose IRAs. There are a number of IRAs to consider, though, so you should speak with a financial planner to find one that matches your unique circumstances.

The great thing about investing is that the money builds on itself. It's basically the opposite of credit card debt. Let's say you contribute $300 to an account that gives you a 5% return. In ten years, that $300 will become $488.66. If you contribute $300 every month for ten years, you will spend $36,000, but your account will have a $47,544.42 value. That means you earn over $11,000 just for setting a few hundred dollars aside each month.

You can use this investing calculator to see how much money you will make by saving whatever you can afford.

This is how people save money for retirement. If you do not take advantage of these opportunities, you may find that you never get to retire or that you have to make significant cuts to your spending to retire.

Conclusion

Getting your finances in order can take a lot of work at first. Once you set a budget, though, you just have to follow it. As long as you focus as much money on repaying high-interest debt and saving for the future, you should find that your financial health improves quickly.

Making the most of your money will probably require some sacrifices. Eventually, you will adjust to these changes in your lifestyle. The benefits of following this basic financial survival guide are well worth the short-term discomfort of changing your habits.

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