2020 was not an easy year. Millions of people worldwide slipped into poverty, and the lagging recovery means that there’s not a clear way out yet. As the world slowly drags itself out of the throes of the COVID-19 pandemic, you’re probably wondering just how you’re supposed to get back on your feet again.
There’s no easy way to pick yourself up by your bootstraps, but that doesn’t mean it’s not possible. Taking command of your finances is a multifaceted process, one that requires creative thinking and constant vigilance. If you’re willing to put in the work, you’ll be rewarded with a healthy fiscal profile this year. Here’s how to do it:
1. Adopt responsible spending habits.
In a way, your finances are easy: money comes in one way and goes out another. The reality is far more complicated, but this image is revealing: if you can limit the amount of money going out, you’ll be able to save more of the money coming in. Step one of this process is adopting healthy spending habits. Just because it’s now possible to get a credit card for no credit at all doesn’t mean that you can spend without consequence.
Lower your spending limits for all of your cards, buy in bulk, and do anything else that might take the edge off your regular expenses. Buy only what you need; if you shop in person, create lists ahead of time and don’t deviate from them. Keep the money from spilling out, and watch it pile up.
2. Create a budget that works.
Creating a budget is like starting a diet: easy to do, difficult to stick with. Instead of creating an “aspirational” budget, i.e. one that reflects how you’d like to run your finances more than it does what is actually possible, be realistic. Look back on how you spent in 2020: what went wrong? Where are places you could cut back? Try to find a happy medium between your ideal budget for saving and something more functional. It doesn’t need to be perfect; it just needs to help you get back in financial shape.
3. Pay off your debts.
Consumer-held debt is now at an all time high of over $14 trillion; odds are, some of that debt is held by you. It may sound counterintuitive to want to pay off debts when you’re having trouble making ends meet as it is, but not doing so could have some serious consequences down the line. Unpaid debts may accrue prohibitive levels of interest, making them even more difficult to take care of in the future. Any excess cash you get your hands on should go towards slashing your debt profile as quickly as possible. Anything not paid now will continue to grow with no end in sight, leaving you upstream without a paddle.
4. Readjust, realign, and downsize.
Millions of people in 2020 found themselves unemployed, furloughed, or forced to move into a lower-paying career than they had before. While the end of COVID-19 may seem to be on the horizon, there’s no indication that swift recovery will follow. Instead of sitting around and waiting for Superman to arrive, adjust to your new reality of earning potential. Consider moving into a smaller place, trading in your car for a less valuable one, and cutting unnecessary expenses. The sooner you can make your lifestyle align with your income, the easier it will be to get your finances where you want them to be.
5. Get a side hustle.
This takeaway may not even apply to you, as 49% of Americans now maintain some kind of side hustle to supplement their primary income. If you’re part of the remaining 51%, though, consider the possibility of doing some additional work on the side. What it looks like exactly doesn’t really matter: whether it’s a monetization of one of your hobbies or a start-up on the way to greatness, find something that works for you. As long as it doesn’t interfere with your existing career, consider your side hustle an opportunity to grow your earning potential in the meantime while that much-deserved promotion waits in the wings.
6. Bolster your savings.
This one may sound obvious — if you had the money, surely you’d be saving it! — but the implications of a slim savings account can be dire. Significantly less than half of Americans are capable of covering a $1000 emergency with their savings, with the rest needing to use a credit card or being unable to afford such an expense at all. Not being able to handle financial emergencies like a car wreck or hospital bills can cause costs to balloon as interest piles up or your work is stifled. By strengthening your savings account, you’re safeguarding against these possibilities.
7. Start investing — smart.
Simply put, stocks are a good place to store your money: they grow faster than interest rates, gains are taxed at a flat rate, and new platforms like Robinhood are making them easier than ever to buy and sell. The flip side is that the stock market is highly volatile, with many companies seeing their valuations inflated beyond what seems possible. Market investments are solid, long-term ways of making money, but don’t be foolish: keep a diversified portfolio, don’t go all-in on trends, and be ready to hold onto some losses. Over time, markets almost always rise.
2020 was tough, no two ways about it. While 2021 may not be off to the strongest start, there’s every reason to believe that things can get better for you this year. By using your income well and spending smartly, you’ll be in the black in no time at all.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes