5 Steps To Set Up a Better Financial Future
Wondering what your financial future will look like? Here are five basic steps you can use to improve your personal finances for the years to come.
May 27, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment adviser before making investment decisions.
Your financial future isn’t something that should be left to chance. When you set clear financial goals and take actionable steps to get there, you secure your own future — and perhaps even that of future generations of your family.
Ensuring that you’ll enjoy financial freedom in the future involves both short-term and long-term goals. It’s never too early to start financial planning. The sooner you start preparing for the future, the sooner you can make an impact on your financial health for the better.
Here are five key ways that you can improve your financial future — both in the short term and for the long haul.
Top 5 steps to prepare for your financial future
While things like your retirement plan can vary based on your lifestyle goals and current financial situation, the following financial planning steps are applicable to most people. Adapt them to your individual situation and consult with a financial advisor when necessary.
1. Pay off debt — especially high-interest debt
Research reveals that, on average, American adults have $90,460 in debt. That number includes credit card debt, student loans, medical bills, mortgages, auto loans and so on. If you have a poor debt to income ratio — meaning most of your monthly earnings are going to debt payments — you’ll have a hard time qualifying for additional loans or saving for your financial future.
The first step to improving your financial life is to develop a plan to pay down your debt. One approach is to pay off higher-interest accounts first, as compounding interest can quickly increase how much money you owe.
For example, if one credit card has a 20% interest rate and another has a 15% interest rate, you should try to pay down the card with a 20% rate first. This will lower your total debt costs over time, even if it means temporarily paying the minimum amount on your other card.
Consolidating debt payments into a lower-interest line of credit may also be an option.
One of the benefits of paying off your debts is that it can improve your credit score by lowering your credit utilization ratio. In addition, when you reduce how much money is going to debt payments each month, you’ll be able to set aside more for other short- and long-term goals and needs.
2. Set up an emergency fund
Financial experts generally recommend that you save the equivalent of three to six months of expenses in an emergency fund. It should be enough money to cover housing, food, utilities, debts and other necessary expenses if you were to lose your source of income.
With an emergency fund, you can lower the chance that you’ll have to go into additional debt to cover your cost of living until you find a new job. Emergency funds can also be used to help cover major unexpected costs, like a hefty medical bill or your air conditioner breaking down.
You can put this money in a savings account rather than a checking account. Savings accounts generally provide interest on your deposits, allowing you to grow your money risk-free. The more frequently you can add money to these accounts, the more you’ll be able to take advantage of growth through compound interest.
In addition to setting up an emergency fund, opening a life insurance or disability insurance policy may be beneficial, especially if you have a family to support.
3. Budget to reduce living expenses
Establishing a budget is essential for accomplishing your financial goals. One of the best ways to start is to account for how much money you spend each month. You can get this information from your credit card and bank statements. Categorize your spending so you can figure out exactly where your money is going.
One common budgeting plan is the 50/30/20 rule, where 50% of your monthly budget goes to needs, 30% goes to wants and 20% goes to savings. If your needs and wants are keeping you from being able to save 20%, you can try to find ways to cut your living expenses.
For example, going through your credit card bill might reveal that you’re subscribing to four different streaming services even though you’re really only using one of them. Canceling the extra subscriptions could be an easy way to lower your expenses.
4. Plan for mid-range goals
Whether you want to save up for your first home or help put your kids through college, there’s more to your financial future than retirement. These “mid-range” or “mid-term” goals also require a savings plan.
For example, perhaps you want to make a down payment on a house. Or you might be looking to open and fund a 529 college savings plan for your child. Discussing your specific goals with a financial advisor could help. You may need to make cuts to some of your “extra” purchases to save up enough for these goals.
In addition to setting aside money in a savings account, you could also benefit from opening an investment account. This will depend on your personal risk tolerance and should generally be done with the help of a Certified Financial Planner (CFP) or financial advisor. Investing in stocks and mutual funds can deliver a higher rate of return to help you save faster, though there is also the risk of market losses.
5. Create a retirement plan
Generally, when people discuss their financial future, they’re thinking of retirement. Successful retirement planning starts by taking advantage of retirement savings accounts, such as employer-sponsored 401(k) plans and traditional or Roth IRAs.
Social Security and other forms of retirement income can help supplement what you are able to withdraw from your retirement accounts, but you generally don’t want to count on these to cover your retirement expenses on their own.
To start planning, calculate how your cost of living could change during retirement. While housing costs often go down during retirement, healthcare needs usually go up. You should also consider how you want to spend your retirement and how that would impact your budget.
You’ll want to create a savings plan that will give you enough to cover unexpected costs in addition to your plans to travel the globe or golf. This way, you’ll be able to enjoy your golden years without worrying about money.
A key part of retirement planning is figuring out when you can retire. A financial advisor can help you account for your current and future debts, inflation and investment strategies that will help you retire at your desired age and live the lifestyle you want.
Start planning today to secure your financial future
No goals in life are accomplished by accident. Just like how you set goals and make plans for graduating from school or landing that dream job, setting financial goals can give you focus as you reach for the future you desire.
If credit card debt is making it hard to achieve your goals for your financial future, Tally† may be able to help. Tally offers a lower-interest line of credit that combines your card payments into a single monthly bill. By reducing debt, you can start putting more money toward other goals.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.