Are you ready to join us on a journey toward financial wellness?
Each month, Pueblo Government Agencies Federal Credit Union will focus on one step of a journey of financial wellness. We’ll tackle the topic in detail and help you learn all you need to know about this step. Follow along, and at the end of the year, you’ll have mastered the tools for a life of financial wellness.
An excellent credit score is the ultimate goal of the financially responsible consumer. Those three magic digits tell a story of accountability, good financial sense, and the ability to spend mindfully. A great credit score also unlocks doors for large, affordable loans; employment opportunities, and more.
It’s significance notwithstanding, achieving and maintaining an excellent credit score easier said than done. There is no quick and easy way to dramatically boost your score over a short amount of time, but you can start amping up your credit score today.
- Pay your bills on time
Your payment history is the single most important factor in determining your score. It can account for up to 35% of your score. A missed payment can significantly impact your score and it can take months to recover. Set a reminder a few days before your bill is due to ensure you never miss a payment.
- Reduce your credit utilization ratio
Another crucial factor in your score, your credit utilization ratio refers to the amount of available credit you use. It’s best to keep your utilization under 30%, or even 10% if you can swing it. This means, if you have $5,000 of available credit, try to keep your usage below $1,500 at most and ideally, below $500.
It can also be a good idea to accept offers of increased credit or to request an increase, which can instantly bring down your credit utilization ratio. However, only go this route if you know you are not at risk of overspending.
- Use your cards
Taking a pair of scissors to credit cards can seem like the perfect way to increase your credit score, but you need to use your cards to keep your score high. A great way to make sure you use your cards on occasion but don’t overspend is to charge fixed expenses, such as monthly subscriptions, to your card. Just be sure to pay the balance before the credit card bill is due.
- Work to pay down outstanding debt
If any of your cards are carrying a balance from month to month, showing that you are working to get rid of this debt can do wonders for you credit score. See our tip below from March regarding different methods to paying down debt. Or you may also consider consolidating credit card debt with a personal loan from Pueblo Government Agencies Federal Credit Union, which will help you get rid of multiple credit card payments and debts and leave you with one low-interest payment to make each month.
- Look for errors on your bill and credit history
Review our tip from April about how to get your credit reports for free. It’s also important to review your transactions regularly through online banking or looking at your monthly statement. A fraudulent charge on your credit card can bring down your score without your knowledge.
- Become and authorized user on another cardholder’s account
If you’re new to the world of credit, and you’re looking to thicken your credit file to build your score, becoming an authorized user on another cardholder’s account can be a great way to get results quickly. Team up with someone who has excellent credit and never misses a payment. Your partner’s responsibility will reflect well on you and help build your credit history.
Credit scores are a crucial component of financial wellness, but achieving and maintaining a high score can be challenging. Putting these tips in use can start growing your score today.
Check Your Free Credit Reports Throughout the Year
Our next tip to stay on the path towards financial wellness is to check your credit reports. It’s important to check your credit report at least once annually to monitor for signs of identity theft or fraud, as well as check for any errors.
The Fair Credit Reporting Act (FRCA) requires each of the nationwide credit reporting companies – Experian, Equifax and TransUnion- to provide you with a free copy of your credit report, at your request, once every 12 months. But don’t order the reports directly from the companies. They are providing free credit reports only through annualcreditreport.com, 1-877-322-8228. If you prefer to mail in your request, you can download the request form at https://consumer.ftc.gov/articles/free-credit-reports… and mail it to the address on the form.
To take full advantage of these free reports, instead of ordering all three at once, order a report from a different company every four months. That way you can spread out these freebies and check your report throughout the year.
Tips and methods to Paying Down Debt
To pay down debt, first you have to save. When you want to pay off debt fast, that impulse often means to depleting your savings. So how do you pay off debt AND save money?
Mathematically, based on the interest rates of your loans vs. your savings account (or other savings products), your debt is likely costing you more money every month than your savings is earning. Thus, looking simply at the highest net impact of your dollar, it would make sense to use the extra income to pay off debt rather than save the money.
But this strategy usually results in more debt. Crazy, right? But think about it. If you’re taking all your spare dollars and diverting them to your credit card or other loans, completely neglecting your savings account, what will you do when an emergency comes along, things like car repairs, vet bills, etc.?
Life happens, and since you don’t have a savings account, you’ll probably have to slap these expenses onto your credit card. You know, the one you’ve been working so hard to pay off?
Here’s how to get out of this cycle.
- Put away the credit cards and stop adding to your debt.
- Set a goal for your savings account that you’re comfortable would cover most emergencies, for instance, $500.
- Pay at least the minimum payments on your loans while you build your savings account until you reach $500.
- Then dedicate more money to paying down debt.
- If an emergency comes along that takes your savings below $500, switch back to paying the minimum on debt and put extra money into savings to build that back up.
This leads us to review different methods to paying down debt.
Snowball Method vs. Avalanche Method
Ready to crush that debt for good? Choose your method:
List your debts in the order from lowest balance to largest. Don’t pay attention to the interest rates here. Maximize payments on the smallest debt. But, do make the minimum payments on your other debts! When you’ve paid the smallest one off, move on the the next smallest until you’ve worked through your list.
List your debts in order from the highest interest rate to the lowest. Don’t pay attention to the balance. Maximize payments to the debt with the highest interest (while making minimum payments on the others). When you’ve paid it off, move on to the next-highest interest debt until you’ve worked through your list.
With these tips, you’ll be on your way to better finances.
Now that you’ve tracked your spending and kept a careful record of where your money goes over the course of a month, you’re ready to move onto the next step of financial wellness: creating a budget. Budgets play a crucial role in promoting financial awareness, which then helps to facilitate more responsible money choices. This discipline will benefit you individually, as well as all who are part of your household.
Let’s get started by taking a look at how to create a budget and review some popular budgeting systems and how they work.
Create a budget in 5 easy steps
- Track your spending and income. This includes all your financial documents, such as your account statements, bills and pay stubs. If you’ve followed Step 1, you’ve already completed this step–nice work getting ahead of the game!
- Tally up your totals. Calculate the totals of your monthly expenses and all your streams of income. If your income exceeds your expenses, you’re in a good place. However, if your expenses exceed your income, or the numbers are too close for comfort, you’ll need to trim some discretionary expenses to make it through the month without falling into debt if an unforeseen big expense happens.
- List your needs. Your needs include anything that is essential for living and basic functions, such as rent or mortgage payments, savings, food and clothing. Needs always take priority in a budget. As you list each need, write down its corresponding cost. Sum up the total of your needs when you’ve finished.
- List your wants. This includes anything that is not essential for living, like entertainment costs, brand-name clothing and eating out. Here, too, note the monthly cost of each item on your list and add up the total when you’re done.
- Assign dollar amounts to your expenses. Open a new spreadsheet and copy your list of expenses, starting with fixed-cost needs, then non fixed-cost needs, and finally, your wants. Assign an appropriate dollar amount for each of these costs, making sure the total does not exceed your estimated total for monthly expenses.
- Review and tweak as necessary. You will likely need to adjust the amounts in each expense category at least once a year to keep your budget relevant. Likewise, you will hopefully be able to increase the amounts in the income column as you move upward in your career path or find additional income streams.
While every kind of budget involves tracking expenses and committing to a maximum spending amount each month, there is a wide range of budgeting systems to fit every kind of personality and money management style.
The traditional budget doesn’t involve much more work than the steps described above. After working out a number for every expense category, you’ll simply need to track your spending throughout the month to ensure you’re sticking to the plan. You can use a spreadsheet for this purpose, or utilize one of the popular budgeting apps, like Mint, and do it digitally.
The money-envelope system works similarly. However, instead of simply committing to sticking to your spending amounts for each expense category, you’ll withdraw the amount you plan to spend on all non-fixed expenses in cash at the start of the month. Divide the cash into separate envelopes, using one for each of these expenses. Then, withdraw cash from the appropriate envelope when making a purchase in that category. There’s no way to blow your budget with this system; when the money in the “Dining out” envelope runs dry, that’s all for this month!
The 50/30/20 budget is simpler, but requires more discipline. Set aside 50 percent of your budget for your needs, 30 percent for wants and the remaining 20 percent for savings. Of course, you’ll need to make sure your income and expenses will work with this kind of budget. Does 50 percent of your income cover your needs? If yes, this budget allows for more individual choices each month and less accounting and tracking of expenses.
A well-designed budget can provide its creator with a sense of financial security and freedom. When you stick to a budget, you’ll always know you have enough to get through the month and save for the future. Start budgeting today!
Tracking your spending is the first step toward greater financial awareness and overall financial health. But, mastering this skill is easier said than done. How can you track every dollar you spend when you make multiple daily purchases?
We’ve outlined how to track your spending in 3 easy steps.
- Choose your tools
Tracing every dollar’s journey isn’t easy, but with the right tools you can make it quick and simple. Choose from one of the following money-tracking techniques:
- Budgeting apps. If your life happens on your phone, download a budgeting app like Mint to help track your spending. The Mint app allows you to allocate a specific monthly amount of money for each spending category and enable you to track your spending with just a few clicks.
- Transaction alerts. Not everyone has the time to check their accounts each day, but anyone can set up a transaction alert. Receive a notification when your debit card is used with MobiMoney. Or you can set up a daily balance alert from your PGAFCU Online/Mobile Banking and receive a text each day, it’s like having your personal banking assistant!
- Spreadsheet. If you like to see everything spelled out clearly, a spreadsheet might be a good choice. You’ll need to record every transaction, but if you prepare the sheet with all the spending categories you think you’ll need, it shouldn’t take long. You also have the option to download your transactions from online banking as a spreadsheet.
- The envelope system. If you’re a big cash spender, consider withdrawing the cash you think you’ll spend in a month and keeping it in an envelope for each category. When you need to make a purchase, just use money from the envelope.
- Pencil and paper. Recording each purchase the old-fashioned way can help you make more mindful money choices throughout the day.
- Review your checking account and credit card statements carefully
Along with one of the tools listed above, you can track the purchases you make with plastic by reviewing your monthly checking account and credit card statements. You can access these online by logging into your account and downloading.
- Review and categorize your purchases
At the end of the month, use your chosen tool to review all the purchases you’ve made throughout the month. When completing this step, don’t forget to include any automated payments you rarely think about, such as subscription fees and insurance premiums.
Use the tips outlined here to successfully master the skill of tracking your spending.