Last year, 42 percent of U.S. households had lower income than before the pandemic, according to a Bankrate survey. Yet most survey respondents (51 percent) expect to recover their full earnings in six months or more. January is Financial Wellness Month, a good time to assess the state of your finances. After the economic downturn of 2020, take control of your financial health with a solid plan for this year.
While the state of the economy is unpredictable, there are steps you can take to improve your financial wellness.
Review Your Income and Expenses
Look at your income and all of your costs. Find ways to reduce your expenses. These could include:
- Subscriptions and memberships: ask yourself if you are still using the product or service and if there is a cheaper alternative.
- Work out at home: there are many budget-friendly workout apps you can use to work out at home instead of paying for a monthly gym membership. There are plenty of free fitness videos, yoga classes and more online.
- Cancel cable: the average cable bill for U.S. households is more than $200 per month. Switch to a streaming TV service and save.
- Cut internet costs: shop around for a low-cost internet provider – or negotiate a better rate with your current provider.
- Cook at home: this is not only economical, it is typically healthier!
- Avoid unnecessary fees: the average American spends $329 on banking fees, according to a 2017 Bank Fee Finder report. Pay close attention to your bank statements to see if you are paying avoidable fees for overdrafts, out-of-network ATM’s or to receive paper statements. Change your behavior to reduce fees or change banks.
While cutting costs is important, you can also earn more money with a side gig. Here are a few ideas:
- Freelancing – writing, coding, interior design, graphics design
- Dog walking
- User experience tester
- Delivery person
Create a Budget
Once you’ve calculated your income and expenses, create a budget and stick to it.
- Have a plan for every dollar of your monthly income.
- Go over the plan each month with your spouse.
- Put aside a small amount of money for unexpected expenses.
- Make saving money your top priority.
- Plan ahead for occasional expenses, such as auto maintenance, holidays and school shopping.
Start or Rebuild an Emergency Fund
Pandemic-related shutdowns forced companies to lay off employees or reduce their hours. If stresses like these caused you to dip into savings, set a goal to start or rebuild an emergency fund. Experts recommend having three to six months’ income in a savings account. Even if your budget is tight, look at the expenses mentioned above to find savings. Set up an automatic transfer of funds into your savings account. If you receive a bonus or extra paycheck, save a significant portion of it.
Imagine how much disposable income you’d have without credit card, student loan or car payment debt. One debt reduction strategy is to pay your smallest bill first, then add its payment to another bill. Having lower balances on your accounts will also boost your credit score.
Check Your Insurance Coverage
If you have a spouse, life partner or dependents, you should have life insurance. At the very least, you should have a small policy to cover your funeral expenses. However, thinking more broadly, you could protect your family with enough coverage to help pay for a home mortgage or children’s education. The younger and healthier you are, the lower your premiums will typically be.
Remember Retirement Planning
“I’m glad I didn’t save much for retirement,” said no one ever. Yes, you should save for retirement even if your budget is tight. If your company offers a 401 (k) plan, contribute through payroll deduction. The money you contribute lowers your taxable income. Many companies offer a match, meaning they will make an additional contribution to your account. For example, if an employee contributes up to 4 percent of their salary, the company matches that amount. If possible, contribute up to the match to double your savings.
If you are self-employed, a Simplified Employee Pension (SEP) IRA lets you contribute some of your earnings to a tax-deferred account each year.
January is Financial Wellness Month, an ideal time to regroup and take charge after a difficult year. Having a clear picture of your finances, setting goals and monitoring your progress will help relieve financial anxiety. Taking the steps mentioned here will help you move confidently toward your financial goals.