Looking to get your finances in order? From budgeting and saving to paying down debt, discover 5 ways to improve your finances.
Every January 1st, you set goals for the next 365 days. Maybe you want to start an exercise habit. Or perhaps your house needs decluttering.
Whatever your goals, seizing the opportunity to get your financial future in order can free up money and mental space to help you achieve them. The new year is an ideal time to set financial goals and take control of your debt.
We know—personal finance can be a daunting task to approach. That’s why we’ve put together this guide on how to improve finances so you can start 2022 on the right foot.
Tip 1: Design & Stick to a Reasonable Budget
One action everyone can take to improve their finances is to set and, most importantly, stick to a reasonable budget. Budgeting and saving money doesn’t have to be a pain. In fact, it’s an excellent way to reduce the stress that comes with overspending in your financial life.
In five quick steps, you can have a workable personal finance budget that helps you get your finances in better shape:
- Pick your goals – Do you want to set money aside every month? Are you trying to pay down debt? Do you simply want a better sense of where your money goes? Understanding the why behind developing your budget will make it easier to design one that works for your financial life.
- Determine your income vs. living expenses – First, figure out how much money your household brings in every month. Then, calculate how much you spend on fixed living expenses such as your rent, mortgage, retirement plan, or car loan. Variable expenses, such as groceries, gas, and electricity, change each month, but how much do they cost on average? Discretionary expenses make up the remainder of your spending habits.
- Analyze your spending habits – Now that you have a list of what you spend your money on, look at discretionary spending. Are you buying too many morning coffees from the neighborhood cafe? Are you shopping for things you don’t need? Identify opportunities to cut back on your discretionary spending.
- Set your budget – Add the fixed and variable expenses to get a rough estimate of the amount you need to plan for each month. Consider the difference between your income and the sum of the fixed and variable costs. How much is left over? From this amount determine what you’d like to use for discretionary spending and how much you can set aside into a savings account.
- Hold yourself accountable – A budget is only helpful if you stick to it. Track your spending each month to ensure that you’re meeting your savings account goals in your financial plan.
Tip 2: Make a Savings Plan
A savings plan differs from a budget. Your budget is your plan for how to manage your money. In contrast, a savings plan is your method for setting aside and saving money for a specific purpose. This can include:
- Major purchases
- Family vacations
- Home repairs
- Emergency fund
- Retirement plan
Once you’ve established your budget to improve your finances, take a peek at the money you have leftover. After your fixed and variable expenses are taken care of, how much money remains?
Then, consider what you’d like to save money for. Let’s use a family vacation as an example. You want to take your family on a special trip next year around this time. You expect the trip to cost $5,000.
If you have 12 months until your trip, you’ll need to save around $417 each month to have the funds for your vacation. Planning well in advance in this manner allows you to enjoy special time with your family while also ensuring it can fit into your budget.
Tip 3: Consolidate Your Debt
Is your debt making a dent in your budgeting and savings goals?
Debt consolidation is the process of taking multiple debts and combining them into one debt, usually to help improve finances. That means you’re responsible for a single monthly payment instead of multiple payments.
There are several methods of debt consolidation you can consider, such as:
- Debt consolidation loans – A debt consolidation loan takes several higher interest debts and combines them into one. Typically, the new debt has a lower interest rate than those that were combined. These loans can be secured (for example, with your house or car) or unsecured. You can even look into a debt consolidation refinance.
- Balance transfer credit card – If you have multiple credit cards, consider transferring those balances to one card. Balance transfer cards usually have very low-interest rates, although you’ll need a high credit score to obtain one.
- Home equity loan – A home equity loan allows you to access the equity you’ve established in your home. You can use the money you borrow to pay off other debts. Home equity loans often have low interest rates and some tax perks if you can qualify. However, if you can’t qualify, you can always look to home equity loan alternatives.
What Are the Benefits of Debt Consolidation?
There are several benefits to consolidating debt—assuming you meet certain criteria. Typically, you’ll need to have decent to excellent credit and be in good standing on the debts you currently owe. If this is the case, debt consolidation can benefit you by:
- Lowering your overall monthly payment
- Streamlining your monthly bill -payment process
- Saving you money on interest with lower rates
- Extending the terms of your loans
- Improving your credit score over time
These are all important factors to help you improve your finances. However, debt consolidation isn’t right for everyone.
Is Debt Consolidation the Answer for You?
Before you decide to make the leap into debt consolidation, ask yourself the following questions:
- Will you pay less each month after consolidation?
- Is the new interest rate lower?
- Will consolidating give your credit score a boost?
If consolidating your debt won’t help you improve your finances in these three areas, you may want to consider other financial planning tips.
Tip 4: Consider How Your Home Equity Can Work for You
If you don’t have perfect credit, you might wonder if there are other methods for consolidating your debt.
Likewise, you may be looking for a better way to pay for big-ticket expenses like medical care, education, or a second home.
If you’re a homeowner, you’ve built up wealth in your home, and you can use home equity to pay off high-interest debt or improve your finances in other areas.
There are several traditional methods of accessing home equity:
- Home equity loan – A home equity loan is also called a second mortgage. You take out a loan for up to 85% of your equity in your home and use it for whatever you need. Because this loan is secured, it may carry a lower interest rate than credit cards or student loans. You’ll make a monthly payment in a fixed amount until the loan is repaid.
- Home equity line of credit – A home equity line of credit (HELOC) is another method of accessing your home equity. Instead of receiving the entire amount of the loan at once, you only borrow what you need. You pay that amount off in monthly installments and can borrow again later if you need to. The payment amount is based on how much of the line of credit you’ve used.
- Cash-out refinance – If you don’t want a second mortgage to worry about, a cash-out refinance is another method of accessing equity. Instead of borrowing against the equity, you refinance your home for a higher amount of money. The excess between what you owed and the new loan amount is paid to you in cash. Then, you make monthly payments on the new loan.
What Are the Drawbacks to These Methods?
Borrowing against your equity in your home has some advantages, especially if you need access to cash quickly. However, there are drawbacks you must consider, including:
- Higher interest rates – Home equity loans and HELOCs often come with higher interest rates than your primary mortgage.
- Pricey closing costs – Accessing your home’s equity comes with a price. If you use a home equity loan or cash-out refinance, you should expect to pay significant closing costs on your new loan.
- Larger monthly payment obligations – A HELOC or home equity loan is an additional payment you must remember to make each month. It can take a serious chunk out of your budget. A cash-out refinance typically comes with an increased monthly payment since the loan amount is higher than your original mortgage loan.
- Risk of losing your home – If you don’t make the needed payments on your new loans, you risk losing your home. The collateral for home equity loans, HELOCs, and cash-out refinances is your home so make sure you can afford your payments before choosing one of these options.
Improve Your Finances with a Sale-Leaseback
A new year is ripe with opportunities for change and improvement. If better financial fitness is on your radar for 2022, then consolidating debt, setting a budget, and working on your investments are just some of the financial tips you can try.
If you are house-rich cash-poor and want to use your home equity, a sale-leaseback might help.
Sale-leasebacks help homeowners convert their equity to cash without adding to their overall debt or taking on risky second mortgages. With a sale-leaseback, you sell your home, converting your home’s equity to cash, and renting your home back. The cash you receive allows you to improve your finances.
Whatever your goals, seizing the opportunity to get your financial future in order can free up money and mental space to help you achieve them. The new year is an ideal time to set financial goals and take control of your debt. From budgeting and saving to paying down debt, discover 5 ways to improve your finances.
- Debt.org. What is Debt Consolidation? https://www.debt.org/consolidation/
- Debt.org. How to Create and Manage a Budget. https://www.debt.org/advice/budget/
- Investopedia. How to Get Equity Out of Your Home. https://www.investopedia.com/mortgage/heloc/home-equity/