Fall might be a time for apple picking and bonfires, preparing for the upcoming holidays and enjoying the Halloween festivities, but it’s also an ideal time to assess your financial health and get on solid footing for the year to come. As a millennial, it’s important to make sure you are establishing solid financial habits for the future to ensure your finances are in good shape for years to come. But what steps can you take between now and the end of the year for a Fall financial check-up?
Assess Your Debt-to-Income Ratio
Your debt-to-income ratio is one of the most straightforward ways that you can assess your current financial health. You can calculate this ratio by taking the total amount you pay in debt payments each month and dividing it by your overall monthly income. Most lenders recommend a debt-to-income ratio of no more than 30 percent, but the lower you can keep it the better. In contrast, if your ratio is up at around 35, 40 or 50%, you may be headed for financial trouble, so the sooner you can address it the better.
As a millennial, maintaining a good debt-to-income ratio is particularly important, as you are likely to take on more debt in the near future when getting a loan for a car or a mortgage on a new home. Of course, your income is likely to increase before you make that sort of commitment, but it is worth remembering that your debt-to-income ratio affects your credit score. A low ratio will help keep your credit score in good nick and shows lenders you are trustworthy, which will almost certainly improve the terms you are given on future loan agreements.
Make Sure You Have an Emergency Fund
To avoid stressing about unexpected life expenses or a potential change in your employment circumstances, try to make sure you have as much money as possible saved in an emergency fund. Three to six months worth of living expenses is a good target, but remember, you can never be saving too much. Having such a fund can be essential when life throws an unexpected but hefty bill your way.
If you are prepared, repairing your car or replacing a vital home appliance such as your washing machine or dishwasher may be frustrating, but it won’t put you in a difficult financial position. Remember that this is not a fund for planned expenses like buying a home or saving for college. It is solely for unanticipated bills. Having it will give you the peace of mind to know you can handle unexpected situations easily and without going into debt.
Check Your Credit Health
Having a good credit score is one of the most important things in establishing a solid financial footing. Despite this many people don’t take time to learn their credit score or work to improve their credit. Without a solid credit history, lenders are unlikely to grant you a mortgage, car or personal loan. Fortunately, keeping track of your credit health is very simple, with Experian, Equifax and TransUnion, the three major credit reporting agencies, allowing you to check your credit score for free once a year.
Check to make sure there is nothing on your report that shouldn’t be there or is hurting your score. Make sure you are paying all of your bills on time every month, especially credit cards, as late payments will really hurt your credit score and could cost you in late fees and interest payments. If your credit score is low, don’t panic. Many millennials have not yet had the chance to build up a strong credit history, but there are simple steps you can take to change that. Opening a secured credit card or becoming an authorized user on a family member’s card are two ways you can start to build your credit score for the future.
Increase Savings When Your Income Increases
Many employers offer bonuses to their staff at the end of the year, whilst your income is certain to increase as you gain experience and seniority in your chosen field. When you receive a bonus, promotion or raise, make sure to celebrate your accomplishment. However, it is important not to let “lifestyle creep” take over, which refers to the tendency for people to increase spending as their income increases – as they view what were once luxuries as new necessities.
Of course, you don’t need to live an entirely spartan lifestyle. Don’t feel guilty if you occasionally open your wallet for something you don’t need but do want. But make sure that it does not become a regular occurrence. If it does, your savings will suffer. Instead of increasing spending when you begin making more money, set yourself increased savings goals. That may not be the most exciting use of your money, but peace of mind is invaluable and you’ll thank yourself in the future.
So this Fall, take time to assess your financial situation and ensure you are on the right track for 2020. Spending just one afternoon looking at your financial picture can go a long way in making life less stressful and more prosperous.