3 Financial Red Flags You Should Address
June 25, 2020
Sometimes life sends you signals your finances aren’t quite where they should be, such as an overdraft fee on an account or a denied credit card application. Here are several common financial red flags you should address — plus easy ways to eliminate them.
You Don’t Have a Budget
Knowing how much of your income goes toward housing or how much you spend on dining out each month is important. One of the simplest ways to identify — and overcome — multiple financial red flags is to create a budget. Having a budget can also help you avoid overdrafts on your accounts. Try the 50/20/30 method to start your budget:
- 50% of your monthly income goes toward living expenses (rent, mortgage, utilities, groceries, car maintenance, and loan payments).
- 20% goes toward money goals (investments, savings, and debt-reduction payments above the minimum amount).
- 30% goes toward personal spending (entertainment and other wants).
Your Credit Score is Low
When you want to buy a car or a house, your credit score will play a role in what interest rate you are offered from a lender. If your credit score is low, you may receive a higher interest rate, costing you more money over the term of your loan. To improve your credit score, pay your loan balances on time and keep your credit usage below 30% of your available limit on all lines of credit. Other steps you can take to improve your credit score are:
- Paying down debts.
- Bring delinquent loans current.
- Apply for and open new credit accounts only as needed. It’s important to not open multiple new lines of credit in a short period of time.
- Keep unused credit cards open. You can pay off credit cards, but don’t close them, as the available limit will help your score.
You Don’t Have an Emergency Fund
Having an emergency fund can help pay for unexpected expenses, and reduce the stress of adding more debt. An easy way to get started with an emergency fund is to set up automatic transfers from your checking account to your savings account each payday. By paying yourself first each month, you will quickly be able to build your emergency fund.
Being aware of red flags when it comes to your finances is critical to becoming more financially savvy. By establishing a budget, improving your credit score, and have an emergency fund, you will be on your way to being in a financially stable position.