5 Steps to Strengthen Your Finances

The first step to strengthening your finances is to create a budget. A budget is not simply a set spending plan. The most effective household budgets help you set savings and debt-reduction goals, manage your monthly cash flow and react to changes in your income. Calculate your expected expenses using last year’s bank and credit card statements. Divide them into fixed and discretionary categories. Discretionary expenses are those you can do without, such as entertainment, dining out, movie rentals, gym memberships and other costs you can eliminate or reduce to improve your financial picture. List all sources of expected income, including gifts. If you include gifts or bonuses in your budget, you’ll be less likely to blow them when they arrive. Track your income and spending during the year and adjust your spending if necessary to stay on track with your financial goals.

If you don’t record and track your expenses, you will not know how much of an opportunity you have to cut spending. Cutting costs here and there can add up to thousands of dollars a year you can put toward debt reduction. For example, cutting out one $10 lunch and one $40 dinner per couple, per month, will save you $720 each year. When you subtract the cost difference of your in-home meals, you’ll still likely save $500 per year. If you can find other areas like this to trim expenses, you can save thousands a year. For instance, reduce your water, heating and cooling costs by adjusting thermostats, using energy efficient light bulbs and conserving water during showers, shaving and dish and clothes washing. While this might seem like a pain, these savings, added to others, will add up to a nice chunk of change each year. Raise your auto deductibles to reduce your premiums. Pay that off credit card at 20 percent interest and your finances improve by $6,000.

When you reduce debt, you not only improve your credit score, you decrease interest payments. Because interest is added to your credit card balance, you might not notice how much of your paycheck actually goes to credit card interest each month. Commit to paying down credit cards, even if it means reducing your retirement or college fund contribution. As your debt decreases and your credit score rises, look for a new card that will allow you to transfer a balance at a 0 percent or low interest rate to further help you improve your financial position. Don’t cancel those cards yet — a lower balance-to-available-credit ratio helps your credit score.

Don’t pay more taxes than is required. Invest in a Flexible Spending Account if your company offers one. Determine if it’s better to take standard deductions or itemize, based on your family size, income and expenses. Take advantage of a 401(k) to save for retirement tax-free. Starting a home business gives you a variety of deductions, including on your home and car. If you reinvest dividends automatically, don’t pay taxes on them.

If you can each increase your income by even $250 per month, then use that money to pay down a credit card at 25 percent interest, you’ll improve your financial position by $6,500 annually. Have a garage sale and unload everything you haven’t worn or used in more than a year. Ask for more hours or projects at work. Look for ways to make money online, try a flea market booth on the weekends or offer your services to small businesses on a consulting basis.