If you’re like most people, your relationship with your money is complicated. It’s not always easy being in control of your bank account, so your finances may be a major source of anxiety.
Maybe you’re worried you don’t have enough savings to cover an unexpected household repair. Or perhaps you’re wondering if you started saving for retirement at the right time.
Whatever keeps you up at night, don’t let your fears paralyze you any longer. Now’s the time to get a handle on your finances. And there’s no better way to start than by checking out this guide.
Here are some tips that help you improve your financial independence and security.
Create an Emergency Fund
Everyone knows they need to save money. But just how much do you need in an emergency fund?
Well, the answer changes depending on who you ask. Most financial advisors suggest saving anywhere between three to six months’ worth of expenses.
It may sound like a lot, but this would help you recover from an illness or temporary leave from work. You would still be able to cover all your bills for up to six months, even while you don’t make money.
Other financial advisors take a more conservative approach to your emergency fund. Suze Orman tells her fans to sock away as much as eight months’ worth of expenses.
David Bach, author of The Latte Factor, has two years of expenses in his personal emergency fund. He admits he’s overly cautious because he wants his fund to be able to withstand long-term unemployment.
How much you end up saving depends on your risk tolerance, income, and living expenses. But generally, when it comes to your savings, more is always better.
Regardless of your goal, you should keep your cash in a separate account from your chequing, so you won’t dip into it for normal, everyday costs.
Have a Safety Net
Saving more isn’t always possible. Maybe your money is tied up with bills or other living expenses. You might be making smaller contributions as a result, so your emergency fund may take longer to grow.
Ideally, you won’t encounter an unexpected bill or repair until you’ve collected six months of expenses. But your financial luck may run out.
A series of bills can empty out your savings, leaving you with nothing the next time you have to bring your car into the shop or purchase an unexpected prescription.
A line of credit can be your safety net in a tight spot, letting you take on these necessary purchases without delay. As it’s revolving credit like your credit card, you’re free to borrow and pay back as you need it.
Save for Retirement
An emergency fund represents just one facet of savings. Your retirement makes up another important pillar of your finances.
For a long while, $1 million was the popular benchmark for retirement. But today, most financial experts realize there’s something wrong with this advice.
It paints your personal retirement plan in broad strokes and doesn’t account for younger people who plan on retiring decades down the line.
What you actually need depends on your unique situation, including how long you have until you stop working, your debts, and your goals. These will impact how much you need to save to retire comfortably.
If you aren’t sure what that means, a retirement specialist at your local credit union can help. A local credit union offers a small-town approach to big banking, so you can expect tailored counselling for your individual needs.
A credit union’s retirement specialist can help you start planning for your retirement at any step — whether you’re close to the big day or decades off.
Rein in Spending
Overspending is your emergency and retirement fund’s biggest enemy. When you indulge in every passing whim, you might not have enough cash leftover to set aside in savings. This habit may even make paying necessary bills challenging.
Take the time to look at your budget and prioritize your spending. As a general rule, you want to split your income into three categories:
- Financial Needs: You should spend 50 percent of your income on the necessities. Rent, groceries, and other essential bills belong in this category.
- Savings: Roughly 20 percent of your income should go towards savings, splitting it between your emergency fund and retirement plans.
- Fun Spending: That leaves 30 percent to use on your financial wants — things like takeout, concert tickets, and nights out on the town.
If your budget reveals you’re spending too much on the fun stuff, you should see what you’re willing to give up. It will be hard to sacrifice these things but stick with it. Limiting these expenses will help you reach your goals easier.
Financial security is within your grasp. You just have to take the first leap into money management now, rather than later. Figure out how you can reduce your spending and commit to those changes. Once you improve your money management skills, everything else will slide into place.