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Friday, December 27, 2013

Post Christmas debt: 6 tips on how to deal with your fear of finances

You made it through all the crazy holiday spending this year but might find yourself nervous to check your bank account and open your bills.  That's okay, it's totally normal.  Fear is a common reaction to dealing with money, primarily because so many people are uncertain about their real financial situation and have yet to figure out the principles of personal finance.  However, this holiday season I am going to pass along some advice to help you conquer your fear of finances.

Really Know and Understand Your Finances

First off, I'll make the assumption that you know exactly how big your paycheck is.  This is very important when calculating your finances so you have an accurate idea of your checks and balances.  Make sure you take the time to sit down and allocate how much money is going towards bills and expenses and how much is going towards a 401(k) or savings account.

It's all about understanding your cash flow.  This will not only allow you to create a budget that works and is successful but it will keep you from going paycheck to paycheck worrying about money.

Write Out a Plan of How to Pay Down Debt

Paying down debt sounds about as easy as coming face to face with Freddy Krueger, but by writing out a plan that you can maintain consistently, you can get out of financial burden faster than you thought possible.

The average college graduate today has over $35,000 in student loan debt and many have a lot more. Not to mention that credit card debt among Americans is at an all time high.  Using a budget or finance tool can really help put things in order.  Mint is a free online tool that allows you to categorize your spending and save for the future. I would highly recommend checking it out.

Apply for a cash-out refinance today.  Pay off debt or make home improvements with equity from your home. 

Learn the Financial Lingo

You might freeze up with hearing things like IRA, 401(k), ROI, and APR.  Mastering the terminology means better communication when speaking with financial professionals. Also, the more educated you become the less fear when making big financial decisions.

I've put together a short cheat sheet that will hopefully help you remember each term.

Compound Interest - Compound interest is proof of the proverb money begets money.  With compound interest, your money will earn interest on the interest already earned.
ROI - Return on Investment.  What you made compared to what you spent.
APR - Annual Percentage Rate.  The interest rate you're paying on debt like a mortgage, credit, or installment loan.
APY - Annual Percentage Yield.  The true interest rate you get paid factoring in compounding.
IRA - Individual Retirement Account.  A private retirement savings account where the contributions are tax deductible in the year you make them.
Net Worth - The amount in your name after you've subtracted your liabilities from your assets.

Save Money for Two Things, Retirement and Fun

We've all heard it on the news or from our parents, but Pensions are a thing of the past.  Social security is doomed to disappear someday entirely.  However, all these points lead to why you should set up a 401(k) with your employer.

However, is also important to save money for things like vacation and a fun night out.  Leaving a little bit of budget for entertainment and fun will help keep you motivated to save for the future and not overspend during the week.

Remember, even if you can only afford to set aside $50 from each paycheck, creating the habit to save will serve you well in the future.

Stay Within Your Means

Two ways to increase your savings and decrease your financial woes is to live below your means or find a way to make more money.  Both are probably a good idea.  

One of the biggest struggles that Americans face is the ability to live within their means.  We want more than we can afford and will go to any efforts to get what we want.  Just remember, desire is short lived but the feeling of achievement and successfully saving can go a mile.  

In Case All Fails, Have an Emergency Fund

So maybe you're not quite ready to put $400 a month towards an IRA or vacation fund but always make sure to have an emergency fund of money.  Three to six months worth of income is recommended.  Having that much saved will be a huge relief in case you ever lose your job or have an unexpected expense.  

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