â€œMoney makes the world go around.â€ That classic phrase is still as relevant as ever. But having enough money to make your world turn doesnâ€™t always depend on earning it.
Putting yourself in a better financial position is also achieved by taking the right steps to improve your credit rating and free up cash each month. In fact, there are several ways you can make the money you receive go farther. Itâ€™s going to require you to focus on managing expenses, minimizing your debt, and improving how you look to lenders.
Letâ€™s look at some of the key steps you can take and how you benefit from these efforts.
What weâ€™ll cover
How to Become Financially Healthy
Build a Better Credit Score
Raising your credit score is super important to stretching your dollars. Although in some cases it may take a few months to increase your score, the result will put you in a much better position when you need to save money on credit products like a mortgage.
So, first find out why your score is where itâ€™s at (learn about what goes into your score). You can request a free report from each of the major credit rating companies â€“ Equifax, TransUnion, and Experian â€“ once per year. There may be errors or fraudulent records on there, which you have the right to dispute, so itâ€™s important to stay on top your reports.
Then take the necessary steps to raise your score. Here are a few ways you can gain valuable points.
Pay Bills on Time
No strategy to improve your credit is going to work if you pay your debts late. Payment history is the single biggest factor that affects credit scores, and late payments can remain on your credit reports for over seven years.
If you do miss a payment by 30 days or more, contact the creditor immediately and commit to getting current on your debt. A timely payment history will make lenders, landlords, and other creditors more comfortable if you need to borrow money.
Make Multiple Payments Monthly
Credit utilization is another important factor in your score. If you’re able to keep your utilization low each week instead of letting it build toward a payment due date, your score should improve.
Credit cards are a big factor, so if youâ€™re able to make small payments on them throughout the month, it keeps your credit utilization ratio â€” the relationship between your card balances and limits â€” low and will have a big influence.
Paying loans early each month also helps improve your utilization ratio.
Keep Credit Cards Open
Although you might be tempted to reduce your revolving credit, itâ€™s not always the right move. Closing credit cards can make improving your score harder. Closing a credit card removes that cardâ€™s credit limit when your overall credit utilization is calculated, which can lead to a lower score. So keep your credit card accounts open when you can, just use them occasionally (and pay off the monthly balance) so the issuer wonâ€™t close it.
Borrow From the Same Lender
You can save money by using the same lender for multiple credit and banking products. Banks appreciate it when you borrow, use, and save money responsibly, so some offer interest rate discounts for multiple loans or if you also have a checking account or savings account with them.
Achieve a Good Debt-to-Income Ratio
Lenders look at your debt-to-income ratio (DTI) when they determine your creditworthiness. Do you know the percentage of your monthly income goes to pay debts â€“ and what a good ratio is? If you do then you can take steps to lower your ratio, make you more attractive to banks, and get more from your money.
Calculating Debt-to-Income Ratio
Add up your total recurring monthly debt obligations (credit cards, loans, overdue taxes â€“ basically, long-term expenses) then divide by your gross monthly income (the amount you earn before taxes and other deductions).
For example, if you earn $4,000 and pay $1,000 for rent, $300 for your car, and $400 for cards and loans each month, your calculation will look like this:
- $1,000 + $300 + $400 = $1,700
- $1,700 Ã· $4,000 = .425
So your DTI will be 42.5%.
What is a Good Debt-to-Income Ratio?
According to the US Consumer Financial Protection Bureau, an attractive DTI is about 43 percent, which is the highest ratio a borrower can have and still get a qualified mortgage. However, some lenders may offer you a mortgage or loan with a slightly higher DTI. But there may be requirements and limitations beyond the terms of a qualified mortgage.
Lenders look for low debt-to-income (DTI) figures because they often believe these borrowers with a small debt-to-income ratio are more likely to successfully manage monthly payments.
One of the best ways to stretch your income is to lower your credit card interest rates through a consolidation loan. By streamlining your debts, you could drastically reduce the amount youâ€™re paying over the life of your obligations.
If youâ€™ve been making on-time payments for a couple of years and have decent credit, you might qualify for a loan at a much lower interest rate.
People often approach credit card debt by paying just the minimum, which usually covers only interest, leaving the borrowed principal unpaid. If you do that over multiple years, what you pay in interest on your debt can end up being significantly more than the initial principal â€“ and your principal is still due! With a consolidation loan, the debt is fixed and will be paid off by the end of the loan term.
Bundle Insurance Products
In a similar fashion to lenders, insurers offer lower costs when you bundle multiple insurance products with one company. In many cases, larger policies such as homeownerâ€™s insurance get steeper discounts as a percentage when you bundle policies together.
Be sure to check if there are any disadvantages to bundling. For instance, some insurers may raise premiums on all your policies, making your auto policy more expensive than with a different insurer, for example.
Understand Your Cash Flow
Cash flow is the difference between what you have coming to you (inflow) and what youâ€™re paying every month (outflow). Go over your week-to-week expenses and earnings to get a picture of how much money you bring in and where your money is going.
Write up a personal monthly cash flow statement. It can look something like this:
Examining your cash flow helps figure out how much you could save each week and exposes you to your good and bad money management habits. For some, itâ€™s the only time they realize how much they are spending each month at the coffee shop, retail stores, or gas stations.
Benefits of a Better Financial Picture
Why does taking all these steps matter? Because youâ€™ll reap the rewards of becoming financially responsible. Here are a few of the benefits.
A primary reason for taking these steps is that you will likely qualify for advantageous offers, extend your retirement savings, have flexibility to change careers, and qualify for better mortgage, loan, and insurance rates.
Future borrowing will be cheaper as you improve your credit profile. This frees up cash so you can take a long vacation, buy your dream vehicle, move into a better home, add to retirement funds, and doing it all without financial anxiety.
A 2015 survey conducted by TD Bank revealed that 81 percent of respondents found other goals much easier to achieve when their finances were in order. This is due to better health.
Poor financial health can have a devastating ripple effect on your physical health.
Money worries can lead to stress that manifests in physical symptoms such as insomnia, increased blood pressure, and early aging. Mental health issues such as depression can also arise when financial fears are present. Conversely, good financial health reduces these effects.
Financial health is often less about the bottom line than about having financial security with freedom to make choices. When youâ€™re in control of your finances, it is easier to make forward-thinking decisions such as retirement goals. Youâ€™re also more comfortable with long-term obligations like mortgages.
Another benefit of financial security is positioning your money to be able to handle any curveballs that may come at you such as job loss, long-term illnesses, or challenging economic times.
So, take the time to get your financial house in order. Doing some hard work now will pay off in the long run, putting you in a position to have greater freedom, happiness, flexibility, even authority. The results of your efforts over time will leave you with more money â€“ and more options.
It will get your life in a place where you can be more content, less stressed, and enjoy a life you imagine.