By Curtis Dawson
It is difficult - if not impossible - to predict crises that impact every aspect of your life to the point of distress; yet some of these circumstances can be alleviated if you have financial well-being, and these situations address the need for having a strong personal budget.
There are numerous traumas: bankruptcy, job loss, reduced income, debt, divorce, taxes, food insecurity, and housing uncertainty. How do you budget when you’re already living paycheck to check? Some financial experts suggest that your budget utilizes the 50/30/20 strategy.
This means you should allocate 50% of your income for necessities such as rent; 30% on things that you want but don’t necessarily need such as dining out; 20% should goo towards savings. There are other budgeting strategies, but this one places enough emphasis -20% - to make emergencies and retirement manageable.
Debt – leading to poverty – can cause financial stress that impacts your psychological health, so don’t hesitate to ask for help in the form of a hardship loan from your financial institution. While some lenders don’t require a minimum income standard, they will require that you show some source of income such as child support or social security payments. Some financial institutions will request a minimum income around $10,500 to qualify for the loan.
While hardship loans can cover unforeseen crises such as medical bills or motor vehicle repairs, these funds can also be used to pay for essentials such as food and shelter. The annual percentage rate (APR) for this type of loan ranges from around 7% to 35%. This is generally a better option than putting significant debt on a credit card.
Once you get through this hardship, you will want to create a personal budget that tracks your monthly expenses to determine where you are and where you want to go. When tracking expenses, you must create a financial plan that allows you to pay bills on time, create an emergency fund, and purchase a car or home. The goal is to increase your FICO score so that you can get a lower interest rate on a loan.
You can improve your FICO score by building your credit file – this involves, for example, the opening of credit cards and the paying of utilities and cellphone bills – to become eligible for a credit-builder loan that will further enhance your financial well-being for big ticket items such as a home at a low interest rate.
Financial institutions use your FICO score to determine the risk of a loan, and this benchmark allows lenders to offer you lower interest rates. Credit cards are a valuable tool for establishing credit, and they can be used to pay for everyday expenses such as groceries; this demonstrates to the lender that you track your payments and are responsible enough to qualify for larger lines of credit.
The purpose of these tools determines the reality of qualifying for loans that, in turn, allow you to set financial objectives that address creating an emergency fund or building a retirement fund. Remember the 50/30/20 strategy? This is an essential tool for planning your budget.
Financial objectives comprise earning, spending, saving and investing; these goals align with your short-term and long-term plans. Focus on long-term goals that allow you to put money into an account such as a 401(k), an Individual Retirement Arrangement (IRA), or a Roth IRA. A financial planner can tell you how much money you should put into your 401(k) and which IRA best meets your needs.
Financial planning is a process that starts with an assessment of your existing financial situation where you set goals, create a plan for the present and the future, and fund your savings and investing plans; this also includes investing in yourself by attaining a college degree or working hard to get a promotion at work. Essentially, you should fund these plans by earmarking the 20% for savings and investing.
To be effective, you will need to list, prioritize, and determine your motivations for creating your financial plan. Your financial goals need clarity for confidence in your future, and once you see the effectiveness of your financial plan, you will see the unfolding of new opportunities.
After you determine your financial plan, to achieve financial security, you need to address the financial basics that includes building an emergency fund, paying off debt, and saving for retirement. Once your financial basics are solidified, you will have created a strong foundation to build upon to achieve other objectives such as purchasing a home.
It is important to create a financial plan that considers long-term goals. Considering finances, you need to determine what you want and what you need and how much time it will take to meet that objective. To do this, inventory your income and expenses. For example, if you want to purchase a new car, you’ll need to determine when you want to make that purchase and how much will it cost. Do you need more money to attain that goal?
Finally, you need to revisit your financial plan. There can be a crisis or you could get a better paying job. These factors can impact your budget. You should also revisit your plan to determine your financial progress and to decide whether your priorities have changed. Instead of buying that pricy new car, would you be satisfied with purchasing a used vehicle? If so, this will free up extra money that can be used for different purchases or investments that impact your personal budget.