Having your finances in order is important so you can meet long and short-term goals, whether they are creating a household budget, buying a home, retiring early, or some other activity. If you wait until life’s big events come up to worry about your finances, you may find yourself behind in the game. So, what does it mean to have your finances in order?
Build an Emergency Fund
No one can predict what will happen tomorrow, next week, or next year. Building an emergency fund is one way to ensure that you are not too severely affected when life hands you a surprise. The amount of money you have in your emergency fund depends on a variety of things, such as how secure your job is in general, whether you have a partner to split expenses with, and your risk tolerance. Working toward having money for at least six months’ worth of living expenses is a good goal. That may seem unreachable at first. If you have other things, you would like to save for, getting to 3 months’ worth of living expenses, then starting your other savings goals, may make better sense. You can then continue to contribute to your emergency fund, in a lesser amount, until you reach 6 months of savings.
Keep an Eye on Interest Rates
You want to pay as little in interest as possible. Money paid in interest is money that could be directed to your savings. Be careful when using credit cards. While it is fine to put purchases on your card to earn points, cashback, or for the buyer protection benefits, do not purchase more than you can pay off before accruing interest. Keep an eye on any loans you have, and look for opportunities to refinance. Refinancing your student loans is an easy way to lower your monthly expenses or shorten the term of your loan. Either option can save you money. Refinancing your mortgage often costs a little in closing costs upfront, but can save you over the life of your loan.
Know Your Debt to Income Ratio
Your debt to income ratio is the amount of money you owe, compared to how much you make. Debt to income ratio is used by potential lenders to help determine your creditworthiness. While you may not think this number matters much if you are not thinking of applying for a mortgage, it is vital for several reasons. Other lenders, such as auto finance companies, use it, as well as many property management companies. Also, it is easy to let this number get out of control, and you will be left attempting to pay down debt quickly if your life circumstances change.
Save Money for Long- and Short-Term Goals
Your emergency fund should not be the only savings account you have. Regular savings contributions for the future put you in a much more secure financial situation. These savings can be dedicated to things such as purchasing a car, the down payment on a home, and retirement. Think of the long game when putting money in savings. You may not be able to contribute much at one time, but even a little, saved consistently, adds up.