Editor’s note: This is a guest post from J.D. Roth, who writes about smart personal finance at Get Rich Slowly.
The economy is in a shambles. The stock market’s down, unemployment’s up, and the housing market is still skidding sideways. The people I know are beginning to get nervous. They’re worried that the recession will turn worse, and that their personal finances will end up in ruins, too.
When it comes to money, the best defense is a good offense. The best way to avoid fallout from the national economy is to take control of your personal economy. By developing smart financial habits, you can remain calm even in the midst of a financial crisis. (Well, mostly calm, anyhow.)
Over the past three years, I’ve written a lot about money. Based on my experience (and feedback from my readers), here are ten essential money skills that can help you to weather the current financial storm.
Set up a budget
For many people, budgets are boring. But if you can plan where your spending will go, you’ll make better decisions with your money.
I’m not a fan of detailed budgets. They work for many people (and if they work for you, by all means use one!), but for myself I need a simple budget, one that focuses on the Big Picture. Over the past three years, I’ve found three such budgets that my readers tell me are truly effective.
- Andrew Tobias suggests a simple three-step budget: Destroy all of your credit cards. Invest 20% of all that you earn (and never touch it). Live on the remaining 80%, no matter what.
- Elizabeth Warren’s balanced money formula is outstanding. It’s the budget I use. Allocate 20% of your after-tax income for savings (or debt reduction), 50% for needs, and the remaining 30% for wants.
- If you crave a little more complexity, try the 60% solution from Richard Jenkins at MSN Money. He says spend 20% of your pre-tax income on savings (half for retirement, half for long-term savings or debt), 60% to committed expenses, 10% to irregular expenses, and 10% for fun.
You can set up a budget on a piece of paper, or in a spreadsheet, or with a piece of software (PearBudget, for example).
[For more info: How to build a better budget]
Track your spending
This single action can work wonders for your finances. You can’t change your habits if you don’t know where the money goes. You can track your spending with a simple notebook, but most people find a computer makes things easier. You can create your own spreadsheets, or you can try a piece of personal finance software like Quicken.
[For more info: How to track your spending]
Check your credit report
It’s important to obtain a copy of your credit report at regular intervals. The credit reporting agencies are not infallible, and neither are your creditors. People make mistakes, and mistakes on your credit report can cost you money.
It used to be difficult to check your credit reports, but not anymore. In the U.S., the Fair Credit Reporting Act requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. To meet this obligation, they created AnnualCreditReport.com.
There is never a need to go through any other agency to obtain your credit report. This is an official, government-approved site. There are three ways to obtain your credit report:
- Order it online at AnnualCreditReport.com.
- Call 1-877-322-8228.
- Complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
If you’d like, you can obtain reports from all three credit reporting agencies at once. Or, you can stagger your requests, possibly requesting one report every four months from a different agency.
You will need to provide some basic information, including your social security number, and you may need to provide some personal financial information. If you plan to check your report online, be wary of impostor sites. Be absolutely certain that you have reached AnnualCreditReport.com.
[For more info: How to obtain your free credit report]
Stop junk mail
Junk mail isn’t just annoying — it can pose a danger to your financial health. Credit card applications are ripe for identity theft, and other junk mail simply tempts you to spend where you ought not spend. You save money and simplify your life by turning off the flow of junk mail at the source. Here are three ways to stem the tide:
- OptOutPrescreen.com looks like it might be a phishing site at first. It’s not. It’s an official site established by the Consumer Credit Reporting Industry to allow consumers to opt-in or opt-out of credit offers. When you complete your request, you can elect to either opt out of credit card offers for five years, or you can opt out forever.
- OptOutPrescreen.com will stop the credit card offers, but wouldn’t it be nice to stem the flood of other junk mail? You can at least put a finger in the dike by visiting the Direct Marketing Association’s Mail Preference Service, which allows consumers to to remove their names from the junk-mail lists.
- Though junk mail is annoying, it’s nothing compared to telemarketers. Fortunately, there’s an easy way to deal with them, too. The U.S. Federal Trade Commission manages the National Do-Not-Call Registry. Once you sign up, telemarketers are required by law to leave you alone. If they don’t, you can file a complaint.
- Though I’ve never used it, my readers at Get Rich Slowly often recommend Catalog Choice, which allows you to eliminate unwanted catalogs you receive by mail. This is a free service.
What if this all sounds like too much work? A service called GreenDimes will do take care of some this for you. According to the company’s FAQ, “GreenDimes reduces credit offers, insurance offers, sweepstakes offers, coupon mailers, charitable solicitations and retail catalogs that your household receives.”
[For more info: How to stop junk mail in its tracks]
Optimize your bank accounts
The internet has been a boon to savvy savers. It’s now easy to find an online savings account that offers convenience — and good interest rates. But in many cases, you can actually find better rates in special rewards checking accounts at small local credit unions and savings banks. (Some of these rates are currently as high as 6%!) If you’re happy with your current bank, call them and ask them to eliminate service fees or to give you better interest rates.
If you’re unhappy with your bank, find a new one. Here are a few popular online banks, all of which offer high interest rates and FDIC insurance:
[For more info: Which online high-yield savings account is best?]
Open an investment account
Especially given the current economy, it may seem scary to open an investment account. I’m not going to advise you whether you should invest in stocks or bonds — or neither. I’m not a financial expert. I will say, however, that it’s best to begin investing as early as possible.
Opening an investment account isn’t as scary as it may sound. And because of the magic of compound returns, making regular small investments now will pay off huge in twenty or thirty years. Consider scheduling automatic investments: have $100 (or $50 or $25) automatically deposited into a Roth IRA or your employer’s 401(k).
To learn more about automatic investing, borrow David Bach’s The Automatic Millionaire from the public library.
[For more information: What is a Roth IRA and why should you care?]
Call around for better deals
What are you paying for your credit card? Your cable? Your cell phone? You can probably find better deals elsewhere. Do some research. Did DirecTV just mail you a great offer? Did you get a zero-precent credit card mailer? Use this information as ammunition. Call your current service providers and ask if they can meet or beat the deals from their competitors. They may not, but it never hurts to ask. (My readers report about a 50-50 success rate with this tactic.)
If you want to play hardball, threaten to close your account. This is often very effective, but you have to be prepared to actually follow through with your threat. An hour or two spent calling utilities and credit card companies can free up cash now.
[For more information: Want to save money? Just ask!]
Visit your public library and borrow one (and only one) personal finance book. (If you borrow more, you’re less likely to read any of them.) Take this book home and begin reading it. Which book should you choose? Any of the following are excellent starting points:
- Your Money or Your Life by Joe Dominguez and Vicki Robin
- The Total Money Makeover by Dave Ramsey
- The Millionaire Next Door by Thomas Stanley and William Danko
- The Only Investment Guide You’ll Ever Need by Andrew Tobias
- The Wealthy Barber by David Chilton
Once you’ve finished your first personal finance book, you’ll have a better idea of the topics that interest you. Return it and check out one (and only one) new personal finance book. The public library is a fantastic resource for saving money.
[For more information: 25 of the best personal finance books]
Set financial goals
Goals are the fundamental building blocks of success, not just in personal finance, but in every area of life. Without goals, you are living reactively, letting life push you around. With goals, you can live a proactive life, steering toward a destination. When you have an end in mind, it’s easier to see when you’ve made a wrong turn. You know where your path is supposed to lead.
Here’s an excellent set of basic financial goals that you can build upon:
- Establish a $1000 emergency fund.
- Pay off credit card debt.
- Fully fund a Roth IRA each year.
- Save for major expenses: house, marriage, car, etc.
No matter the state of your personal finances, whether you’re wealthy or poor or somewhere in between, take time to set goals. State them in positive terms. Make them specific. Put a deadline on achieving them. Make them actionable. Write them down. Work a little toward them every day. (It’s much easier to achieve goals when you focus on the individual steps toward them.)
[For more information: The road to wealth is paved with goals]
Create a money file
The final This can be an actual file, or it can be a shoebox. It can even be an encrypted file on your hard drive. It simply needs to be an easy-to-access location in which you keep all of your important financial information, including account numbers, service providers, phone numbers, etc. This final step ties together all the work you’ve done on Money Day.
[For more information: Which financial records to keep (and how long to keep them)]
Previously at Zen Habits, J.D. has shared how to make the most out of luck in your career and life and how he paid off $35,000 in debt. You can follow J.D. on Twitter or visit his personal finance blog.
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