Credit is a powerful tool in your financial repertoire. Financial products such as personal loans can be used to build your creditworthiness and cover short-term problems, but come at a cost. Cold and calculating use of credit is the secret to getting the most benefits while incurring the fewest costs, something that is key to good financial management.
Here are five tips to help you manage your finances:
Building Up Your Credit Rating
Your credit rating is a measurement of your reliability as a customer of financial products. Its composition is simple, with 35% based on your payment history, 30% on outstanding debt, 15% on the length of time for which you have had your credit, 10% on credit inquiries, and 10% on the kinds of credit at your disposal. Taking out a personal loan can help you improve your payment history, the length of time for which you have had credit, and even the kinds of credit at your disposal.
Choosing the Right Financial Products
Always choose the financial product that is going to give you the greatest benefit at the minimal cost. Read up on the terms of the financial products available to you and go for the one with the smallest effective annual percentage rate. This is the actual percentage of the balance that is paid to use the product. For example, if you have a choice between a credit card with 12% interest compounded monthly and a personal loan with 12% interest compounded annually, go for the loan because the effective annual percentage of the credit card is 12.68%, calculated as 1.01^12-1. Remember that non-interest charges and other miscellaneous fees should not be neglected in this calculation.
Creating Budgets and Maintaining Accounts
Maintaining accounts is as simple as recording the nature of your expenditures and then noting the sum besides them. Begin keeping accounts and then use the recorded data to establish your spending patterns. Use those patterns to create a budget that results in savings rather than a structural deficit. Do not be too optimistic and unrealistic when it comes to budgeting. If you cannot do without any entertainment, then do not create a budget that eliminates entertainment expenses because you will fail to keep to it and slide elsewhere due to disappointment.
Barring a short spike of more than 8% in 2008 and 2009 during the Great Recession, Americans are famous for having a poor savings rate that ranged from 1% in late 2001 to never more than 6%. Unless you can raise your income on a whim, you should part from this trend by cutting down on your costs. Having more cash saved up means possessing more financial options and being better prepared for emergencies. Use both your budgets and your spending patterns as recorded in the accounts to find items that you either do not need or can go without.
Using Cash Rather than Credit
Although financial products such as personal loans can be quite useful, credit is not a magical solution for better management of personal finances. Barring rare circumstances unavailable to private individuals where creditors are effectively paying you to borrow due to inflation rates, using credit is always more expensive than using cash. This is not an all-or-nothing stance. You can still take out personal loans to build your credit rating while saving up cash beforehand to make repayment easier.
Peter Coppola is a personal finance and insurance expert. He mainly writes for personal finance and insurance blogs. Click here to get your credit report.
Good personal management of finances is a collection of related measures. Each successful implementation reinforces the others and practice makes sustaining them easier over time.