Personal finance behaviors start at a young age and most often stick with you for the rest of your life. Research from Harvard Business School shows that even Americans who are taught personal finance in school don’t seem to save more or manage credit better than anyone else.
Avoid the financial ER using these personal finance behaviors:
YOU SPEND LESS THAN YOU EARN
This is the foundation for financial health. You can’t get out of debt or save for the future if your expenses eat up all your available income.
YOU PAY BILLS ON TIME
One of the major personal finance behaviors you should stick to, is managing your cash flow and meeting your regular financial obligations. Missing payments costs you money in late fees, hurts your credit and causes stress.
YOU HAVE A DECENT EMERGENCY FUND
“Decent” varies according to your circumstances. The Center for Financial Services Innovation, which developed ways financial institutions can measure consumer financial health, would like to see everyone have six months’ worth of living expenses set aside. But as little as $250 can be enough to save a low-income family from a serious financial setback, according to a study by the Urban Institute, a policy research group. What’s more important than the amount is developing a habit of saving regularly so you continually replenish your coffers.
YOU’RE ON TRACK WITH RETIREMENT SAVINGS
How much you need will vary by age and circumstance, but you’ve done the calculations and are setting aside money regularly to get there. If you have other goals, such as buying a home, you should be saving toward those, as well.
YOUR DEBT LOAD IS SUSTAINABLE
The Center for Financial Services Innovation recommends that mortgage payments consume no more than 28 percent of your pretax income and that all debt payments, including a mortgage, should be less than 36 percent. Another benchmark is the 50/30/20 budget: Keep housing payments and other must-have expenses — transportation, food, utilities, child care, insurance and minimum loan payments — to 50 percent or less of your after-tax income. That will leave you 30 percent for wants and 20 percent for debt repayment and savings. An even simpler gauge is whether your debt keeps you up at night.
YOU DON’T ROUTINELY CARRY HIGH-RATE DEBT
Mortgages pay for homes that can increase in value, and student loans provide an education that can help increase your income. That’s why they’re often described as “good” debt, when used in moderation. There’s typically nothing good about credit card debt, which often leaves you paying for items long after you’ve used them up.
YOU HAVE GOOD CREDIT SCORES
Some people treat credit scores as a proxy for financial health. They really measure only how well you repay debt. However, the personal finance behaviors that set good credit is only safety net when you need it. It’s also a money-saver even if you’re not planning to borrow; bad credit can increase your insurance premiums, prevent you from getting an apartment and force you to pay larger deposits for utilities.
YOU’RE APPROPRIATELY INSURED
You want to be protected against financial shocks that could wipe you out, including medical bills, lawsuits, natural disasters or the death of a family member. Health insurance is a must, and so is homeowners or renters insurance. If you have a vehicle, you need auto insurance with liability limits at least equal to your net worth. If anyone is dependent on your income or services — we’re looking at you, too, stay-at-home parents — you probably need life and disability insurance.
Anyone who can tick these eight financial health boxes is making the most of what they have.
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