Shocked stressed young woman reading document letter about debt
Few things are scarier for me than Stephen King, particularly his book and pursuant movie It. Thanks to them, I can never go near a clown again. There are also some scarier things that can haunt us day after day and night after night: our personal finances. Here are a few strategies to help you overcome your greatest money fears so that you can begin crushing your financial goals:
Fear #1: Losing control of your money
Budgeting can be scary. We don’t like having to track every penny or feeling bad about our spending, yet we feel terrible when we’re broke or are living paycheck to paycheck. It’s like staring at the face of failure and then looking up at an insurmountable mountain to overcome. Yikes!
Face that monster in 3 steps:
1) Start with “why?” Write down why being in control of your money is important to you. What will that allow you to accomplish and how would your life change? How would that feel? Establishing a strong enough “why” can give you the courage and motivation to begin the budgeting journey.
2) List out your expenses. I prefer the pen and paper approach as a starting point. If you prefer a spreadsheet, here’s a template, you can use. If you prefer something higher tech, then an app like Simplfi, Mint, or Pocketguard might do the trick . The most important thing is to pick the approach that’s easiest for you.
3) Identify opportunities to save. Comparison shop for bills like cable, wireless phone, and insurance. Eliminate expenses for things you don’t use or that don’t align with your why. You can check out additional ideas here.
Fear #2: Running out of money
Having your checking account go to zero is stressful. Then the unexpected happens and you’re left with a terrible decision to make between deciding which bill will go unpaid or pulling out your credit card. As we all know, the unexpected tends to happen pretty frequently.
Deal with this monster in 3 steps:
1) Build an emergency fund: Open a separate account for your emergency savings. A high yield savings or money market account is a great place to start. The purpose of this account is for true emergencies, not for the occasional travel expense or gift.
Make getting that account to $2,000 your #1 priority. Once you are there, continue to increase those savings towards 3-6 months of expenses while balancing your other financial priorities. You can read more about creating an emergency fund here.
2) Budget for occasional expenses: If you want to be successful with your budgeting, you’ll need to set aside money for occasional expenses. For example, if you spend $2,000 a year on travel and $1,000 a year on gifts or birthdays, you can set aside money for these expenses in advance. I’ve found setting up and funding a separate account for each occasional annual expense (ex. travel and holidays) to be super helpful.
3) Set your savings on automatic: Set up a direct deposit or automatic monthly transfer to your separate savings account. Your employer may be able to take money directly out of your check and deposit it for you. Otherwise, set up an automatic transfer from your checking to a savings account on payday.
Fear #3: Facing a mountain of high-interest rate debt
Carrying high interest rate debt (anything greater than 7%) can give you a terrible case of the heebie-jeebies. The longer you wait to address it, the worse the catastrophe that awaits you becomes. Making your move now will save you time, money, and debilitating stress that can negatively impact your life.
Slay the debt monster with these 3 moves:
1) Take inventory: List your debts, including the total balance, interest rate, and minimum payment due.
2) Pick a debt pay-off strategy and implement it. The two most popular approaches are the debt snowball and the debt avalanche. The debt snowball works great if you have many debts and need some quick wins to boost your confidence. With this strategy, you focus on paying extra on the lowest balance debts first and make minimum payments on everything else. As you pay each balance off, you roll the total payment and add it to the next lowest balance and repeat until you are debt-free.
The debt avalanche focuses on making the extra payments on the highest interest rate balance and minimum payments on everything else. You then roll the total payment to the next highest interest rate debt once the previous debt is paid off. This strategy saves you the most time and money and can work well if you have a lower number of debts and/or care most about the bottom line.
3) Leverage good credit to refinance: If you have a strong credit score, leverage it to speed up your debt freedom. (If not, follow these tips to improve yours.) You may be able to sign up for a 0% balance transfer, which can lower your interest rates for a period of 12, 18 or even 24 months.
You can also refinance your debts through a lower rate personal loan. Use a site like this to explore what you might qualify for. Just be sure not to use these as an excuse to further add on to your debt!
Fear #4: Having to work FOREVER
Take these steps to prevent that nightmare from coming true:
1) Run a retirement estimate. This will let you see if you’re on track. You can use a calculator like this or one of these.
2) Save enough to take advantage of your employer’s retirement plan match. That’s free money!
3) Automatically increase savings. If you can’t save enough now to close the gap, try using an automatic contribution rate escalator that could be offered in your employer retirement plan or set a reminder in your calendar to manually increase your savings by 1% or more every year (ideally around the time you get a raise) until you hit your target!
Fear #5: Your investments being gone FOREVER
The markets have been crazy volatile and the media everywhere is screaming recession, catastrophe or worse. During these times, we tend to feel the most unsafe and apprehensive about our investments. In short, the investment fear factor is high. Take these steps to calm those investment jitters:
1) Don’t panic and make an emotional decision. Instead, evaluate your risk tolerance by taking an assessment like this. It will provide you with an idea of what an appropriate investment mix should look like given your time frame and comfort with taking risk.
2) Stay focused. The best thing you can do is to stay the course and focus on your goals. If you have a cash need in the next 3-5 years then build up your conservative bucket (in cash, savings, or money markets). If your needs are much longer term, focus on having an investment approach that is properly diversified and is aligned with your time frame and comfort with risk.
3) Keep investing simple. If you don’t have the time, interest, and experience to manage investments on your own, consider a hands-off approach like a target date fund, asset allocation fund or a robo-advisor. If you want to be more hands-on, focus on simple and low-cost investments like index funds and have a process to rebalance and check in on your investments. You can leverage these tips to get you started.
As you can see, vampires, ghouls and goblins aren’t the only things that fill a Halloween horror story. Stop breathing life into these personal finance monsters by starting to act today. If you’d like additional help getting started, consider consulting a qualified and unbiased financial professional. You might even have access to one for free through an employer-provided financial wellness benefit.