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While financial hot topics like Crypto, Gamestop and the timing of the market to buy and sell in time may be fun for some enterprising investors, don’t let the hype distract you from focusing on your overall financial health.
Imagine you invested 50% of your money in cryptocurrency and there is no emergency savings when you suddenly lose your job. When you try to sell your cryptocurrency so that you have enough money to live on, you realize that the value has gone down so much, that it is hardly worth anything. Although the price was high just a few weeks ago.
Now here you are, unemployed and without money. How do you pay rent, among other things?
While this is an extreme example, as a financial advisor, I see people being “left dry and good” and without much emergency savings, plunging them into a real personal and financial crisis.
So what is the solution? Building financial health means building financial resilience as well, helping you weather setbacks like losing a job, losing a job due to illness, childcare, aged care, or a global pandemic, to name a few.
No matter what trend is in the market right now, don’t forget these three basics when it comes to building your financial health.
1. Build your credit
Even in this time of turmoil, it doesn’t look like some well-established systems are going anywhere anytime soon, like the credit system. No matter how much cryptocurrency you have, your balance can affect your ability to qualify for certain jobs, rent an apartment, buy a car or house, and more.
Just like newer computer software versions and sometimes updated versions, both major credit scoring models (FICO and VantageScore) have different versions that they have developed over the years.
For example, FICO® The score, which is the credit score most used by lenders, now has a version 10, but mortgage lenders still use FICO versions 2, 4 or 5, depending on the credit bureau. While FICO 10 can include information such as utilities, rent, and cell phone payments if reported, older credit score versions do not include this information.
So, if you use a service to report rent to credit bureaus, and you don’t have another account history on your credit, a mortgage lender looking to issue an older credit score may think you have zero credit, and deny you a home loan because of it.
This means that when it comes to building your credit to reach your larger life goals, you may have to do it the “old school” way.
Here are some tried and true Ways to build your credit history:
- Use a building credit loan. These loans can help you build your payment history, which is a major factor in your credit. They are usually open to people without credit or bad credit, even those who have been denied due to other credit products.
- open secured credit card. These cards work just like regular credit cards, but you pay a security deposit first to access them.
- Pay off existing debts. If you have high credit card balances, you can improve your credit just by paying those balances on or off, since the amount of available credit you use is another major factor in your credit score.
- Review your credit reports and object to inaccurate information. According to the Federal Trade Commission, 5% of consumers have errors in their credit reports that have led them to pay more for credit products. Visit Annualcreditreport.com to pull a copy of your credit reports, check for accuracy, and object to items if necessary.
- Pay your accounts on time from now on. Making payments on time is one of the most impactful things you can do for your credit since payment history is a major factor in your credit score.
2. Build your savings
Unfortunately, the past year has opened people’s eyes to what can happen if you lose your job and don’t have a financial cushion to fall back on. Even in normal times, it takes the average person about 9 weeks to find another job after losing it.
If you lost your job today or faced another financial crisis, would you have the money to manage the instability? Or will you have to borrow from friends or family, take out a personal loan, or pay off credit card debt to fill the gap?
If you don’t already have emergency savings, now is the time to focus on building one. This way, you can turn a financial emergency into a financial inconvenience, avoid having to take on debt, or reduce the amount of debt you need to take care of yourself in a crisis.
Here are some ways to make emergency savings:
- If you are working on building credit And the Savings, consider a credit generator loan. While interest is charged on the loan, you still build the habit of saving and set aside some money that may come in handy later on.
- Automate your savings so you can set it and forget it. Set a percentage of your salary aside for automatic deposit into your savings account so that the money is out of sight, out of mind, and in savings.
- Memorizes Before You spend, not yet. Make your savings an intention, not an afterthought, and plan your spending around your savings goals, not the other way around.
- Reduce expenses that you don’t need or don’t appreciate. Align your spending with your needs and priorities, and cut back as much as possible. Put the money you save into savings.
- Find ways to grow your income. Make a side hustle, ask for a raise, sell things around your house, work extra hours at work, etc. to bring in extra money adding to your savings.
3. Build your retirement
Financial journalist Stacey Tisdale says you shouldn’t invest money in the stock market (or cryptocurrency, really) that you might need in the next five years. y . reserveOur investment for long-term goals, such as retirement or planning your child’s college education.
why? Because in the event of an emergency, but the market is in a downturn, you may not have that money when you need it. If you have a longer investment horizon, the money has a chance to bounce back over time.
It’s never too early to start planning for retirement either. In fact, the earlier you start investing for retirement with an account like a 401k or Individual Retirement Account (IRA), the better thanks to compound interest and the return on your investment over time.
What is compound interest? This means that you can earn interest on both interest And the The principal amount in your retirement accounts, rather than only earning interest on the principal balance, like many other accounts.
Here is an example of the impact that early retirement can have, created with this compound interest application:
Let’s say you have $6000 in your retirement account now. Assuming you add $300 per month to your account and generate an 8% return each year, that means in 20 years you’ll have just over $206,000 in retirement.
If you use those same numbers but have 30 years to retire, you’ll have about $512 000 to retire. This is a big difference.
To get started, use some of the same techniques I mentioned earlier about building emergency savings but use that money in your retirement account instead. And if you have a company that offers 401k matching but doesn’t take advantage of it, it’s like leaving money on the table. Not to mention that contributing to a 401k may reduce your taxable income for that year.
While short-term investments can be fun, do your future self a favor and plan ahead for your golden years by planning your retirement investments for the long term.
build your dreams
Building the fundamentals of financial health is not just about blocking opportunities to realize your dreams (like the dream of owning cryptocurrencies, for example), it’s about creating a stable foundation on which to build. While it can be fun to play in the present, be sure to plan for your future as well.