If your savings are minimal and your credit card balances are higher than you’d like, you are not alone: 42% of Americans have less than $1,000 in savings and 46% of people with credit cards are carrying a balance from month to month. Saving and paying off debt are at the heart of financial fitness.
Here are six steps you can take to improve your financial fitness:
Set up an emergency fund
An emergency fund is the foundation of financial fitness and flexibility. Cash in the bank gives you options and the ability to pay for things that don’t fit within your regular monthly income. It’s also your insurance policy against taking on debt. If you have the cash to pay for an unexpected expense, you don’t need to put it on a credit card or take out a loan to pay for it. So go ahead and open up a high yield savings account for your emergency fund. Ultimately, you should aim to have 3-6 months of your expenses saved up, but start with whatever you can right now.
Increase your savings rate
Your saving rate plays a major role in how long it will take to achieve your financial goals. The higher your savings rate, the faster you can save up for what’s important to you. Start by calculating your current savings rate:
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Add up how much you are saving each month across all sources (your savings account, retirement accounts, health savings account, etc.). Any money that you don’t spend on a monthly basis counts!
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Calculate your gross monthly income. You can find your gross pay (total pay before taxes and deductions) on your pay statement and multiply by two if you are paid twice per month.
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Divide your total monthly savings by your gross monthly income and multiply by 100. This is your savings rate!
Saving 10%–20% of your income is a good goal, but no matter where you are starting from, aim to increase your savings rate by at least 1%.
Set up a retirement account
While cash savings gives you flexibility for your short-term goals, retirement savings serve your long-term financial stability. If your employer offers a retirement account, sign up—especially if they contribute to it as well. If you don’t get retirement benefits through work, don’t worry, you aren’t out of luck. You can set up an individual retirement account (IRA) and contribute up to $6,500 annually.
Check your credit score
A credit score is not the end-all and be-all of financial fitness but it is one indicator of it. These days, a lot of banks provide your credit score for free and you can sign up to be notified of changes in your score. This can help you monitor what is really moving the needle on your score (for better or worse). Work on inching your way up toward a score of at least 750.
Pay down debt
Paying down improves your financial fitness in multiple ways. It shows that you have extra income and reduces the amount of interest you’re paying each month. Paying down credit cards in particular will cut down on the percentage of available credit you’re using each month (i.e. your credit utilization ratio). This makes your finances more resilient in the long term.
Pay off debt
While reducing your debt balances is a positive step, paying off a debt completely frees up more room in your monthly budget for expenses you actually want to care about. Once that payment is gone, you can reallocate money toward something more important to you. So pick one debt to focus on, either your highest interest debt or the one with the lowest balance, and put your energy and resources into getting it down to zero.
