What happens after you have reduced all your credit card debt? You have worked hard to get here and can now reap the freedoms that come with your new found financial flexibility. Here are a few important tips and things to think about to be sure you make the most of the positive circumstances you have put yourself in:
6-12 months emergency fund
Now that you have gotten to the point of being debt-free the only thing that can change your situation for the worse is to get back into debt. No one ever plans to get in to debt, it just happens as a result of other circumstances. The main reasons why people get back into debt are due to job loss and medical emergencies. Virtually every financial curve ball that might be thrown your way can be taken care of if you have a 6-12 month emergency fund. I say 6 to 12 because you want to start with a goal of 6 months worth of savings, and then beef it up to 12 months by slowing contributing to it over time. The best way to save is automatically. There are a few systems/techniques which I recommend. The first is an automatic draft every pay period from your checking to your savings account. Start with $25, $50, or $500 – whatever you are comfortable with based on your budget. The key is to make sure that the money is automatically transferred BEFORE you pay your expenses. The dollar amount is not as important as the consistency. Another great way to save automatically is a “One” account described below. Once you have your emergency fund in place, you can feel confident in contributing to investment accounts with the same automatic process.
Using Credit Responsibly
There is a myth that I hear all the time from people beginning their journey toward debt freedom. They saying things like “I can’t wait to cancel all these credit cards and be done with them!” or “I’m never going to use a credit card again, I hate these things!” While everyone is responsible for their own credit card usage patterns, the fact is, like it or not, credit cards are pretty much a basic necessity in the world we live in. Not only is there a major convenience to using them, but they also protect us from fraud/theft better than cash, and most importantly, responsible use of credit (i.e credit cards) is the only thing that can build a solid FICO score and credit history. I typically recommend a few credit cards be kept open for the purposes of credit positioning (see prior article “The Secrets of Credit Positioning”) as well as score building. Just because a credit card is open does not mean you have to use it. As long as there is no annual fee on the card, you are doing yourself no harm whatsoever by leaving the card open. The whole key to using credit cards responsibly is paying your balance in full every month. This is the only way to completely avoid interest charges. While I do not advocate using cards for rewards purposes, the one card which I think can help you if used responsibly is the American Express One account. This card places 1% of your spending in a high-yield savings account with no restrictions (that I am aware of. It won’t replace a solid savings plan, as described earlier, but sure can help you towards your savings goals. And again, as long as you pay the entire balance in full each month, you are being responsible and moving towards your long term financial goals all at the same time!
Create a Budget/Manage your Finances
I said the “b” word, but don’t worry – I’m not talking about budgets in the ordinary sense. The bottom line is you need a system to track all your checking & savings accounts, credit cards, investments, etc. The old fashioned way of putting everything down on a sheet of paper just doesn’t cut it anymore. There are several FREE online budgeting & financial management tools which you should get set up with right away. The one I use is called Mint, www.mint.com and will allow you create budgets, track your bills, expenses, due dates, and see where all your money is going. It links all of your accounts into one portal and imports all of your transactions daily, so managing all of your money and where it is going just became a whole lot easier. Other sites which you can check out that are similar online money management tools are Wesabe (www.wesabe.com) and Mvelopes (www.mvelopes.com)
Ive just touched on some of the most relevant topics I feel are important for those who are newly debt-free or approaching this status. As always, if I can be of assistance give me a call at 1-888-456-5635.