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10 Ways to Make Sure You Never Have to Face Financial Crisis

10 Ways to Make Sure You Never Have to Face Financial Crisis

Samuel Johnson once said, “A man who both spends and saves money is the happiest man, because he has both enjoyments.” He couldn’t have been more right. It’s not enough to earn money. It’s equally important to spend and save money wisely. On one hand, we need to spend money to fulfill our needs. On the other hand, if money runs through our hands as soon as we get it, we are in the state of perpetual deprivation and are unable to save anything for the future.

Many of us have to face a point in life at which we are in a terrible financial condition. Your savings could be low, you may have recently (or not-so-recently) lost a job, or you could lose your savings due to battling illness. There are so many possible paths to arrive at that dreadful situation, but we can surely avoid it with proper planning and forethoughts. Below are 10 ways to help you make sure you never have to face a financial crisis.

1. Maximize your liquid savings.

Liquid assets such as cash in hand, cash in currents, saving and money market accounts, and certificates of deposit are our most important financial assets to ensure financial safety. The value of these assets doesn’t fluctuate with market conditions, unlike stocks and index funds, and we can have them at our disposal any time we want, without any financial loss. Maximize your liquid savings. It’s very important to not invest in stocks or other higher-risk investments until you possess several months’ worth of liquid cash.

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2. Keep record of all your earnings and expenses.

The principal reason people face a personal financial crisis isn’t that they do not earn enough but that they don’t save enough. It’s easy to advise someone to save, but equally difficult to actually save something on your own. However, much of the trouble can be spared by keeping a record of all of your earnings as well as expenses. Keeping track of money coming in and going out will help you know if you are overspending or living within limited means. This will help adjust your expenses to align with your income.

3. Prepare your monthly budget and live by it.

When there is no bar set for tour expenses, you are more likely to end up overspending. Monthly budgets prepared at the end of the previous month can help you balance your finances. Prepare a well-organized monthly budget clearly specifying the budget for food, rent, recreation and so on. But remember, there’s no point in making rules if you can’t live by them. You also need to live by your monthly budget allocation if you want to ensure sound financial health besides setting it.

4. Keep your possessions in good condition.

Keeping your possessions in good condition is another effective way to avoid financial crisis. Keep everything you possess, from your car and household utensils to electrical and electronic appliances, in proper working condition. It costs much less for routine maintenance compared to the price you have to pay when they stop working completely, either to replace them or while repairing them. Investing small amounts to keep your possessions working will reap greater rewards in the long run, as money not spent is also money earned.

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5. Stay healthy.

Just as routine maintenance of household appliances helps to save significant amounts of money, maintaining your body also helps the cause. Most often we visit doctors only when the problems we’re facing have become severe. This traumatizes the body and requires significantly higher medical costs. With regular exercises and healthy habits, along with frequent medical checkups, you can pretty much avoid the possibility of major financial setback on the back of substantial illness.

6. Pay off your debts on time.

The best advice would be to never take any debt. But it doesn’t mean that your financial condition is doomed forever if you have taken debts. The first concern of any debtor should be to pay off all debts in full. Having existing debts doesn’t only distress our brains continuously, but also means that we can’t afford further debts, which would be necessary in the face of the adversities. So plan wisely and allocate a portion of your monthly budget to pay off the debts.

7. Safeguard against job loss.

Losing a job is the major event that leads a person to financial crisis. With the loss of job, a person doesn’t have any money to use, particularly if the person has never spared any thoughts for saving before. Safeguarding oneself against potential job loss is a chief way to avoid financial crisis. This could be done via unemployment insurance from your office or the purchase of a private unemployment insurance on your own. You can also find an alternative source of income besides your primary job.

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8. Save a portion of your earnings every month.

Saving shouldn’t be thought of as a luxury, something that you do when you feel like it. You should cultivate it as a habit. There’s no better way to save than putting away a certain amount of your earnings every month. The popular 50/20/30 rule suggests you allocate 20% of your monthly earnings for things like debt payments, retirement funds and savings. If you’re not in any debt as of now, saving 20% of your monthly income would be a wise idea. However, even if you’re in debt, save at least 10% of your earnings, as you need liquid cash in hand in case anything serious happens in future.

9. Try to minimize your monthly bills.

Just because you earn enough and are not facing any financial setback as of now doesn’t mean that the case will be the same forever. Try to minimize your monthly bills before the alarm bell rings. The focus for minimizing the monthly bills should be on cutting out unnecessary expenses as soon as possible. Look over your expenses and find out possible ways to deduct them. You could be turning on your heater or air conditioner even when you’re not home. Simply turning those appliances off when you’re not home will help reduce energy bills and thus, the monthly bills, significantly.

10. Spend wisely.

“Every penny saved is a penny earned.” You won’t be financially secure all the time, unless you are wise enough to spend wisely. Spending wisely is an art in itself. There are several techniques to spend wisely. One is to abstain from buying things you are hardly going to use. The other could be to compare prices amongst multiple vendors and go for the best deal. This could even mean spending money as an investment for the future, as the money you spend today could generate you further capitals tomorrow.

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Featured photo credit: money career upstairs/Anatoly Tiplyashin via fotolia.com

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Nabin Paudyal

Co-Founder, Siplikan Media Group

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Last Updated on March 3, 2021

Top 6 Hacks on How To Build Credit Fast

Top 6 Hacks on How To Build Credit Fast

When done right, credit can open doors and provide a lifestyle that you never imagined possible. Anything from flying around the world in first-class and staying at 5-star hotels entirely for free to starting and scaling businesses. It’s also an area where it can be easy to make mistakes and hard to recover from without the right information. In this article, I will break down how you can build credit fast so you can open doors in your life!

When you start to think about improving your credit score, you have to answer three important questions first:

  1. What are you trying to achieve by having good credit?
  2. What really is your credit score?
  3. How is your credit score calculated?

What Are Your Credit Goals?

Having a high credit score is great, but ultimately, your credit score is a tool in your personal finance arsenal that you can use to open doors. The first question you should ask yourself is “what will a higher credit score do for me?”

I work with many clients directly at Freedom Travel Systems to help them fully leverage the power of their credit so they can enjoy free luxury travel and start or grow their business. For my clients and many others, here are a few common goals many credit-savvy individuals have:

  • Free Travel – getting access to travel rewards cards so you can get tons of free travel and even get first-class flights, hotel suites, and luxury amenities all for free
  • Start/Grow a Business – getting access to business credit so you can start and grow a business with 0% or low-interest financing that does not impact your personal credit
  • More Approvals – getting approved for credit cards, auto loans, or mortgages so you improve your lifestyle or build your personal wealth
  • Better Rates – getting better interest rates on any loans you get will save you tens or hundreds of thousands of dollars over your lifetime

What Is Your Credit Score?

Your credit score is simply a 3-digit number that tells potential lenders how reliable of a borrower you are. Keep in mind that lenders, such as banks and credit issuers, stay in business by lending. Their goal is to find the people that have the highest probability of paying them back and they assess this primarily through your credit score.

What’s important to know is that there are two major scoring models used to create your scores. These scores are your FICO Score and your Vantage Score. More than 90% of lenders rely on your FICO score, so when you are checking your score, you want to make sure you see the actual score that the lenders use. And no, checking your own score does not hurt your credit!

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Then enters the 3 main credit bureaus, which are essentially agencies that collect credit information on you. These are Experian, Equifax, and TransUnion. These bureaus then apply a scoring model to the information they have on you and voila, you now have a credit score! Bureaus sometimes have different information on your report, which is why you will see 3 different scores.

How Is Your Credit Score Calculated?

Next, you need to understand how the credit score is calculated. This will provide a high-level overview, but there is more detail to each of these factors alone.

There are 5 main factors in the calculation of your credit score:[1]

  1. Payment History (35%) – This refers to the amount and percentage of on-time payments you have.
  2. Utilization (30%) – This is how much revolving credit you use as a percentage of the total revolving credit issued to you. Note that installment loans like auto-loans or mortgages do not count towards this while credit cards do.
  3. Age of Credit (15%) – This refers to how long your credit history is, primarily your “average age.”
  4. Credit Mix (10%) – This is how many different types of credit you have. For example, there are credit cards, student loans, auto loans, mortgages, personal loans, and lines of credit.
  5. New Credit (10%) – This primarily refers to how many inquiries you have for new credit.

Top 6 Hacks on How to Build Credit Fast

Now that you’ve learned more about your credit score, here are the top 6 tips on how to build credit fast.

1. Don’t Close Your Cards

Many of us are taught that getting a new credit card is bad and having too many will hurt your score. In fact, the opposite is true. You want to have many positive accounts reporting to your credit report. Logically, this makes sense because having more accounts with more on-time payments shows that you are a more reliable borrower. You just don’t want to open too many accounts too quickly since that can hurt your “new credit” factor.

Instead of closing a card, what you should do is simply keep the card open and put a small subscription service on it monthly. Why? Because each time you have an on-time payment, it helps build your payment history, the largest factor of credit.

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If you close a card, you are missing on potential on-time payments, age of credit, credit mix, and also lowering the total credit lent to you so your utilization percentage may go up. If you have an annual fee on a card you don’t like, see if there is a “no-fee” version of the card and downgrade it to that card rather than close it.

2. Use Autopay to Never Miss a Payment

This one is easy to do and easy not to do. Go into your credit card account and set up auto-pay. You can choose to either pay the full amount, the statement balance, or the minimum payment. Personally, I like to set up autopay to pay the minimum payment so that I never get a late payment. Then, I go in and manually pay the statement balance each month by the payment due date.

This helps me personally see my spending and have a manual review of my charges while ensuring, not have to pay interest, and still get the benefit of making sure that I never miss a payment if something goes wrong. Think about it, if you were to have a medical or family emergency, the last thing you want to experience on the back end of that is a late payment and a drop in your credit score. So, set up autopay.

A pro tip is to update your payment due dates across all bills and accounts to be the same so that you can “time batch” the process and have one time a month where you sit down and handle your payments. You can do this by simply contacting the credit card company or doing it online.

3. Get a Credit Limit Increase to Lower Your Utilization

One of the factors that get most people into trouble is using too much of their allotted total credit. Their utilization, which is the percentage of revolving credit they use, goes up, and their score tanks. You should aim for less than 30%, and in an ideal world, less than 10%.

To help drive this down, call your credit issuer and ask for a credit limit increase. This will help increase the total amount of credit extended to you and drop your utilization. Oftentimes, they will only give it to you when your utilization is fairly decent (less than 50%), so work to pay it down as best as possible before doing this. You should ask if the credit limit increase will give you an inquiry as some banks do a hard inquiry while some do not. If they do a hard inquiry, it is often better to just get a new card altogether or pass.

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4. Add Authorized Users to Increase Your Age, Add History, and Decrease Utilization

This is one of the best hacks out there as it helps with the 3 biggest factors of improving your credit: payment history, utilization, and age. This concept is also called “credit piggybacking” where someone with great credit history on a card adds an authorized user (AU) to the card. When the AU gets added, the credit history and information from that card are added to the AU’s report!

This is extremely helpful for people with young credit because it can drastically increase your age of accounts. It can also help many people with limited payment history or high utilization.

Please be aware that anything good or bad on that account you are added to will show up on your report. So, you want to avoid any cards with negative marks or high utilization. That being said, it is a one-way street, so nothing that you do with your credit can impact the primary account holder.

This is so valuable that there are companies that sell AU accounts. I always suggest starting with your family and/or personal network first as there are likely people in your network that can help!

5. Space Out Your Application Strategy

New credit is the smallest factor of credit, but it still matters! If you are looking to build up your credit, you should space out your applications. If you apply for too much credit in a short period, it looks very needy in the eyes of the lenders. For this reason, it is safest to apply for cards slowly over time unless you have really studied more in-depth how this works. A good rule of thumb is once every few months.

If you are in the credit game for the hopes of getting tons of credit card points for free travel, which is what I personally take full advantage of, you will want to familiarize yourself with the different bank rules and card promotions to put together the right application strategy. Applying blindly will waste inquiries and leave tons of benefits on the table!

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6. Review Your Report for Negatives

If you have any negative or “derogatory” marks on your credit report, this will hurt you drastically. They do impact you less as they age, however, you should review your credit report to ensure that everything on your report is 100% accurate and actually yours. Wrong information ends up on credit reports all the time and you will want to take personal responsibility for making sure it is accurate.

The “burden of proof” is on the credit bureau to confirm that any information on your report is in fact accurate. If you find inaccuracies, you can dispute that with them, or you could consider getting a credible credit repair company to help you.

Final Thoughts

There you have it, the top 6 tips on how to build credit fast so you can get closer to reaching your goals. Now that you’ve learned more about how credit score works and how you can improve yours, you’ll hopefully be able to make better financial decisions and achieve your financial goals quicker.

More Tips on How to Build Credit Fast

Featured photo credit: CardMapr via unsplash.com

Reference

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