Just because you can pay your bills each month, and maybe have a little leftover, does not mean you have your finances in order. To truly have a grasp on your finances, you should have and use a budget, have a retirement plan, and have an emergency fund for unexpected expenses. This is the minimum you should do to ensure your finances are in good shape. If what you are doing is working, it can be tempting not to change a thing. However, just because something is working now does not mean it will work forever. You may be only one unexpected expense or furlough away from disaster. Healthy finances are beneficial in many ways.
Protects Your Credit
One of the common side effects of unexpected expenses or job loss is debt. Whether you put it on a credit card, take out a personal loan, or use the equity in your home to cover expenses, if you don’t have a healthy emergency fund, you will have to make tough choices when the unexpected happens. Adding sudden debt is not good for your credit score. You enter into a painful cycle where you need the money, but, as your score is negatively affected, the interest rate you are required to pay rises. If your score drops too much, or you take on additional debt quickly, you can make your lenders nervous. When this happens, it isn’t unusual for lenders to start lowering your borrowing limits. This lowers the amount you have available in case of emergencies and increases your credit utilization, which, again, lowers your score.
It may seem extreme that you would worry about your credit score if you were facing a crisis, but this number is used for many businesses besides lenders. Utilities, landlords, and insurance companies all access this number and make decisions based on it. If you or your child are attending college shortly, you may be counting on private student loans to help fund some expenses. These loans work like any other, and while the rates are competitive and the borrowing limits generous, you must qualify based on your credit score. You should aim for a credit score of at least 650 to be able to get a private student loan without a cosigner.
A Gift to Your Loved Ones
Having your finances in order is a gift you can give those you care about. If something unexpected happens, and they need to take over your duties for some time, having your finances organized makes it much easier. If you are always paying late, putting off one bill to pay another, or otherwise constantly trying to make your money stretch, your loved one will be confused and overwhelmed when they take over those duties.
Lowers Your Stress
It can be tempting to avoid looking at your accounts when the balance is low or avoid opening credit card statements when the balance is higher than you want to admit. Putting these things off only delays the inevitable. Take the time to sit down, make out a budget, and if you are in debt, work on a plan to pay it down. It may be painful at the time, but you may be surprised at how much relief you experience as you make progress towards a sound financial picture.