5 Steps Toward Financial Health

5 Steps Hero

Personal finance is often discussed as something that you are either “good” or “bad” at. It’s framed as though some people who are naturally frugal and have no trouble staying organized with their money (people who are “good with money”). And then there are others who struggle to pay bills on time, spend impulsively, or are simply not planning for the future — those who probably describe themselves as “bad with money”.

At Digit, we believe that financial health is within reach for everybody. We also know that not everyone starts in the same place. Some people have parents or mentors who teach them the basics of financial literacy from a young age. Some have never had to worry about how to pay their next bill, afford rent, or even pay for their education. But considerably more people are simply left to figure it out for themselves.

The good news is that no one is born knowing everything about personal finance. Everyone starts somewhere, and everyone can improve their own financial situation simply by being open to learning more. There are countless free resources (including our blog!) available to help you feel more comfortable and confident about managing your money.

More good news: Once you master the basics, it gets a lot easier. There are a few steps that anyone can take toward becoming more financially healthy. Here are five ways to start feeling more confident and comfortable with your money.

Start a rainy day fund

You probably know what a rainy day or emergency fund is: It’s money you set aside for, you guessed it, an emergency. But do you know why having a rainy day fund is so important?

Having a rainy day fund gives you two things: Peace of mind, and greater financial stability. If you have to pay $400 for an unexpected medical emergency, and you don’t have a rainy day fund, you might stress about having to put the charge on a credit card (which will charge you interest), or take out a loan (which will charge you interest), or borrow from a friend or family member. In other words, you’ll need to go into debt to pay it off. That $400 bill might end up costing you a lot more in the long run (including the stress of trying to dig your way out of debt).

On the other hand, if you can prepare for these kinds of emergencies over time, then you don’t have to worry about where you’ll get the money, or how you’ll pay it off. You can simply use your emergency fund for what it was intended — to pay emergency expenses — and then work on replenishing it over time. That $400 bill will actually cost you $400. You will be able to pay it, and then move on with your life without jeopardizing your ability to pay your bills or meet any other financial obligations.

Spend less than you earn

The concept of living within your means, or spending less than you earn, is easy to understand but can be more difficult to execute. To confidently live within your means, you need to know two things: How much money comes into your accounts each month, and how much goes out.

If you have a single, full-time source of income, it should be pretty simple to figure out how much you earn: Just take a look at your recent pay stubs to see your monthly income. But if your income varies or comes from multiple sources, it can be tricky. If you can, take a look at a few months of earnings to get a sense of an average monthly income.

If you haven’t done this in a while (or ever), take a moment to make a list of all of your recurring expenses — the big ones like rent/mortgage payments, utilities, etc., but also the smaller ones, like your Netflix subscription or favorite meditation app.

It can be a helpful mental exercise to do this the old-fashioned way (on pen and paper). Write down when these are due, how they are paid, and how much they cost you each month.

Total them up, and make sure that your total expenses do not exceed the amount you earn in a month. Take a look at your list, and see if there is anything you can cut or reduce, like a subscription you don’t use or can share with a family member. This should give you a sense of how much you have available to put into savings or spend as you wish throughout the month.

Automate paying your bills

Another area where many people struggle is in managing their bills and other recurring expenses. It can be confusing to figure out when you get paid, when bills are due (and how often), and how much you actually have available to spend. It’s incredibly frustrating to have to pay a late fee simply because you didn’t realize that a bill was due.

Save yourself some manual effort (and stress) each month by automating your bill payments where possible. You can do this by adding a bank account, debit or credit card as a payment method and then setting each of your bills to auto-pay. Since you’ve already figured out how much your bills cost you each month, you can budget for them so you don’t have to stress about overdrafting!

Create a plan for paying off your debt

Whether it’s from student loans, credit cards, car loans, or a mortgage, most people carry some form of debt. Debt in itself is not inherently a bad thing: Some types of debt, like a mortgage, can help you build your wealth over time. But there are some types of debt (like untamed credit card debt) that can get very expensive, very quickly.

Whatever kind of debt you have, it’s important to have a plan for how to pay it off. Will you budget for one consistent payment, or use what is leftover at the end of the month? Will you work on paying off each debt at the same time, or try to pay off one at a time?

There are a few different approaches to this: You can pay off your highest-interest debt first, or start with your smallest debt and then work your way up, or start with your biggest and then tackle the small ones. The most important thing is that you have a plan that will help you reduce your debt over time.

Start saving for longer term goals

Finally, no matter where you are in your financial journey, it’s always important to spend some time thinking about what you actually want to do with your money in the long term. It’s easy to get frustrated or bored with the day-to-day parts of money management — paying bills, paying off debt, etc. Thinking about and planning for what you want to do with your money can be incredibly motivating and can help you achieve more than you thought possible.

Do you want to go on a trip, own your own home, start a business, or achieve some other life goal that will require some funds? Start saving now! You’d be surprised at how quickly a few extra dollars here and there can start to add up.

Start

The best part about each of these steps toward financial health is that you don’t have to master one before starting another. You don’t have to have all of your debt paid off to start saving for your future. You can automate your bills and start a rainy day fund all on the same day, if you’re feeling up for it! The most important thing is simply to start — and Digit can help you do that.