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Overcome Financial Stress and Improve Finances

Updated: May 22, 2020

What does it mean to be proactive in your financial planning?


When we suggest using proactive financial planning, we are promoting an alternative to help people move beyond the paycheck to paycheck life that so many of us fall victim to. Living in a reactive manner without proactive planning can lead to “starting over” throughout your life and crush your ability to amass wealth or even live in financial comfort. Unfortunately, millions of Americans are suffering from this fate now during the COVID-19 Pandemic, and for many, it was largely avoidable. But rather than being ashamed of ourselves and the decisions we’ve made in the past, we should focus on being proactive today so we are better prepared for what life will throw at us tomorrow.



The Proactive Mindset


Being financially proactive is a practice that all of us should implement to ensure we are prepared when faced with financial hardship so we can weather the storm. The aim is to plan ahead and stand ready, rather than scramble when disaster strikes. We should all be living under the assumption that financial disaster is inevitable regardless of our income or profession.


Financial hardship comes in many forms; economic downturn, job loss, personal health issues, family tragedy, global pandemic, etc. While we can’t ever predict how or when we will be affected, one thing is certain: life will send you multiple ground balls at once and you have to be able to field each of them. When each comes barrelling, you should rest easy knowing that you were proactive and the situation is under control.


The Reactive Mindset


On the other hand, if you are reactive in your financial planning you likely encounter the following symptoms: you may struggle to remember which bills need to be paid, you may overdraft your bank account accidentally from time to time and you live paycheck to paycheck despite a great income. If you exhibit any of these symptoms you’re at risk for major financial set-backs when financial tragedy strikes that could damage your personal goals and dreams.



To avoid reactive financial planning, our approach to proactive financial health is centered on four fundamental (and basic) concepts. We all know these concepts in theory, but most of us fail to implement them effectively:

  1. Cut down on frivolous spending

  2. Start saving now

  3. Don’t touch your savings and

  4. Budget.


Cut Down on Frivolous Spending


This is truly the most difficult part of our approach for the population and failing to master this step will inhibit your ability to save.


Whether it’s a big beautiful home, a new vehicle, designer clothing or to frequently travel on luxurious vacations we all strive for something in life that requires cash.



The truth is, unless you can pay cash out of your discretionary spending budget, you aren’t ready for these purchases. Life can be plenty enjoyable without these luxuries and your focus, until you have the additional cash, should be on savings and taking care of the necessities. These necessities should be limited to food for cooking at home, paying a mortgage payment that is well within your budget, paying your utility bills and leasing or purchasing an affordable and practical car.


Planning Ahead


The amount left over should be saved. Of course, you should contribute to your employer-sponsored 401K. From there you should have a savings plan and use a savings account for spending on discretionary items such as a home repair project or a vacation and then another savings account for emergencies. Do not spend your money on things you don’t need now and can’t afford with cash.


As we will discuss more in the future, this is not to say that you must use actual cash for all purchases and can’t take advantage of programs on your routine and necessary spending by using credit cards. Though credit cards are usually seen as poor investments, using a credit card in an appropriate manner can actually help you obtain some of the frivolous things you want without spending your money or making a huge impact on your proactive financial health. But the use of credit cards should only be done as part of a financial strategy to maximize spending and not for over-spending or a false sense of financial security.


Vacationing on a Budget


Websites like The Points Guy can advise you on the best deals for credit card points that allow you to maximize the benefits of paying for your essentials. For example, credit cards like the Southwest Airlines Credit Card have allowed thousands of consumers to take advantage of an incredible companion pass where a chosen second person always travels for free with the cardholder thus limiting airline fares for vacations. While other credit cards allow you to start gathering points for home improvement projects or simply cashback.



The key to credit cards is, of course, paying off the balance immediately. As always, you should not buy anything you can’t afford and improper use of a credit card can place you in a perpetual state of reactive finances. Be sure to do your research and pay the bill immediately after spending. Doing so will ensure you maintain a great credit score and maximize incentives provided under your particular credit card program.



Start Saving Now


The ability to save has never been easier. Most banks offer easy-to-access online tools that allow you to open a savings account and deposit money into the account on a routine basis with little administrative hurdles.


If, like most of us, you have trouble remembering to save a little here and there, why not put your savings on autopilot? Either set up a portion of your check to direct deposit into a savings account, or use one of the many “round-up” savings apps. This can be a much easier way to build your savings since the transactions are small, completely automated, and easy to track. It’s a lot easier to stomach a $0.25 “round-up” deposit each time you make a transaction as opposed to a $25 lump sum deposit from your income check each week.


Ideally, you should have two savings accounts to limit the co-mingling of funds you are using to save for non-necessities such as a home improvement project or a vacation and one savings account that you will have when you find yourself in financial hardship. Or, if you are trying to maximize your interest earned you may consider a high-yield online checking account. Either way, it’s important to keep track of your funds and budget applications can help keep track of your savings for particular items and ensure your emergency fund is separate and untouchable.



In the end, however, with the current tools available, budgeting and savings require great disciple and proactivity. It’s easy to want to save but we know how hard it truly is to implement a savings regiment and stick with it. But you must start. Begin by opening your savings account and cutting your frivolous spending. Check out some apps to help automate your savings. Put technology to work for you. Take the time and make it happen.


Don’t Touch the Savings


Even more difficult than starting the savings account is not touching it. It’s a wonderful thing to see $10,000 sitting in your bank that you could easily use to remodel your kitchen or lease a new car.



But as the COVID-19 recession has taught us, a new expensive kitchen or car will not help you financially survive a layoff or keep food on the table. You must save money. Keep the money saved for a real emergency and forego the things you “want” but can’t afford without touching savings or falling into debt.


Budgeting


None of the above will work well unless you have a clear picture of your budget: what you earn, what you must spend on necessities, what bills are due, and what you can save.



Though there are countless applications and online tools, we do not currently have the widespread use of technologies that give you a clear financial picture, advise on savings and move all the money for you.


New innovations will soon be with consumers to help fulfill the three fundamentals and ensure better financial protections for Americans but for now, financial discipline and constant financial proactivity will keep you safe and comfortable when economic troubles hit the market.


Having discipline, saving, and letting that account grow will not only ensure comfort during economic hardship but will free up money for investments and luxurious living in your future.


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