The mission of The Purpose of Money is to empower women to build wealth. Therefore, I am constantly pushing folks to establish and maintain healthy financial habits. In this article I share seven ways you can improve your finances. Let me know what you think in the comments section and feel free to add more tips of your own.
1. Don’t spend more than 30 percent of your income on housing.
Whether you rent or own, it’s best not to spend more than 30 percent of your income on housing. Instead, find housing you can afford that meets this criteria. By limiting your housing costs to only 30 percent of your income you will help control your budget too.
Of course, if you can find housing for less, do it! If you pursue homeownership make sure your total costs includes principal, interest, association fees, and property taxes. The total amount you spend on your home should be no more than four times your income.
If you live in an expensive city, like I do, find ways to lower your costs if you have to spend more to own a home. For example, consider getting a roommate or buying a duplex and renting out the other half. Don’t forget, Airbnb is a great income generator too.
2. Create several streams of income to diversify how you build wealth.
Most millionaires have seven streams of income, but I want 10! Strive to have more than one way to make money so all your eggs are not in one basket. Just like you should diversify your investments, you should diversify your income streams.
For example, you could have a business that creates cash flow based on a product or service. Then also have rental income that comes from rental properties. This is also known as passive income. However, if being a landlord is not for you, there is also real estate investing through a real estate investment trust (REIT). In a REIT, You invest money (with several other investors) and someone else manages the properties and tenants. Lastly, you could invest in stock and only live off the dividends.
Whatever your passion or purpose, find different ways to create income so when some streams are overflowing you are not heavily affected when other streams are trickling given the market or current events. All investments have some risk so do your research to make wiser money decisions.
3. Use your emergency fund to protect your budget from unexpected expenses.
Save for an emergency every payday so when life happens the unexpected expense doesn’t wreck your budget. If you are just starting to build your emergency fund put aside whatever you can until you have at least $500.
Then, save consistently until you have three to six months of your monthly expenses saved. Put this money in a high yield savings account so your money earns the most interest possible. Write a list of your possible emergencies like a major car repair or unexpected medical expense. When you are tempted to dip into your emergency fund consult your list first. If the expense is not there, it’s probably not an emergency.
4. Check your credit report at least once a year. Report and remove errors immediately.
Now is a great time to check your credit report! By law you are allowed to get a free copy of your credit report every 12 months from each credit bureau. This is an opportunity to review your report for errors and outdated information, which may negatively impact your credit score.
Credit matters because with bad credit you could end up paying more for a mortgage, credit cards, or affect your ability to be hired for certain jobs. Most importantly, reviewing your report helps you know if you have been a victim of identity theft.
Access your free credit report now! Just remember, your credit report is free but if you want your credit score you could be asked to pay for it. Before you pay anyone to get your credit score check with your bank or credit card companies. They may provide your credit score for free because you are a customer. You can also use websites like Credit Karma or Credit Sesame to check your credit and monitor it too.
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5. Pay half your mortgage biweekly and you will make 13 full payments per year. This means you pay less in interest and pay down your loan faster.
If you want to pay down your mortgage faster start making biweekly payments. You lower your total interest paid and pay down your debt faster. Plus you never increase your total expenses. However, check with your mortgage lender first to confirm they accept biweekly payments. Some companies will not accept partial payments and will hold your half payment until the rest is paid. This does not impact your overall interest paid so it doesn’t help you.
If your mortgage lender will not accept biweekly payments you still can do this payment plan. Simply open up your own bank account just to pay your mortgage. Each paycheck deposit half of your mortgage payment into this account. If you do this biweekly, by the end of the year you should have a full payment in the bank account, which you can put on your mortgage as a principal only payment.
6. Don’t charge more than 30 percent of your credit limit.
To minimize your debt and establish good credit don’t charge more than 30 percent of your total available credit. In fact, the best rule of thumb is not to spend more than you can pay off. But if you insist on using credit and carrying a balance create a payment plan to eliminate those balances promptly. Always pay more than the minimum balance due for your credit card each month, and don’t continue to charge on a card if you are paying it down.
7. Bad money habits are not genetic, but can be contagious.
Dare to have better money habits than your family or friends. Just beware hanging out with folks trying to keep up with the Joneses could affect you too. It’s important for you to resist the urge to keep up with anything but your own personal goals and good financial sense.
For more money tips and ways to build wealth join The Purpose of Money Community. Together we are building generational wealth for our families one dollar at a time.