As we head into a new year, we can expect people to want to make changes to their lifestyles. New Year’s resolutions often include things like new diets, more exercise or changing our spending and saving habits. For those looking to improve their financial situation as part of their New Year’s resolutions this year, it can be daunting to form new financial habits, especially if previous years are leaving you with debt. If you’re looking to change your financial situation for the new year, there are a few key things you can do as we delve into how can we prepare our finances.
Creating a budget
The number one most important thing to prepare our finances is to do is create a budget. There are a variety of apps that make it more user-friendly than manually creating a spreadsheet. Apps like YNAB (You Need A Budget) or PocketGuard are great examples of easy to use apps that can help you keep track of your expenses and help you visually see what you are spending and where you are spending it.
Another crucial component of creating a budget revolves around paying off debts. Creating a structured payment plan that seamlessly fits within your monthly budget is key to paying off loans, mortgages or student loans. If possible, try to set aside extra to pay more off when you are able to. Additionally, it’s important to remember that your budget may need to fluctuate each month. For example, some months you may need to spend more than others for birthdays, holidays or other events. Other months you may be able to save more, and that can go to paying off debts are starting or growing an emergency fund.
Growing an emergency fund
Emergency funds are critical, and they are often something that people struggle with maintaining. The majority of U.S. adults, 57%, are currently unable to afford a $1,000 emergency expense, according to Bankrate’s Annual Emergency Fund Report. Creating an emergency fund is and should be a goal for people, and a great time to start one is at the beginning of a new year.
Many people may think they need to set aside a lot of money each month for an emergency fund. That is certainly a way to do it, but even five dollars a month can help make sure you are prepared if an emergency fund is needed. One way people may lose their emergency fund is by tapping into it when there is no real emergency, but rather when people believe it’s just sitting there so they use the funds for various expenses or bills, and quickly become depleted. It’s imperative to only use emergency funds when there is an actual emergency. By building and sticking to a budget, this can be prevented when we prepare our finances.
Improve your credit score and set tangible goals
Credit scores can make things easier or harder for you depending on your number. If you are struggling with a lower credit score, you can improve your credit score by paying your bills on time and in full, paying off debt, limiting opening new accounts and cutting back on spending.
If you have a long-term goal of purchasing a house or a new car, it is important to set smaller tangible goals that get you to that long-term goal. If you need a higher credit score, and want to purchase a house within five years, create a goal for this year to not overspend, and work on raising your credit score. You can also raise your credit score by paying off your credit card bills strategically, which demonstrates your ability to be a good borrower, a large determining factor in your credit score.
Smaller, tangible goals are incredibly important as they allow you to feel accomplished while not being so insurmountable that you give up. Whether your goal is to set aside money for an emergency fund, to purchase a house or to just be more organized and aware of your financial situation, it is important to create small goals that allow you to stay motivated.
Conclusion
Embarking on a journey towards financial wellness in the new year involves a combination of strategic planning and practical action. Establishing a budget using user-friendly apps, creating a structured plan for debt repayment, and building an emergency fund are foundational steps. These steps not only lead to a healthier financial situation but also foster a sense of accomplishment and control, when we prepare our finances. As you step into the new year, remember that each small, positive decision can lead to significant changes, setting the stage for a more secure and prosperous financial future.
