It's Back to School Time, Parents. Here's How to Improve Your Financial Report Card
by Maurie Backman | Aug. 20, 2019
Your kids aren't the only ones about to get schooled.
With summer winding down and the school year kicking off, many parents are focused on buying the right supplies, restocking their kids' wardrobes, and gearing up for the hustle of homework and extracurricular activities. But it's not just backpacks and dismissal times you need to be thinking about; you should also take this opportunity to give your personal finances a checkup and see if they're able to score a passing grade. Here are five key areas to focus on.
1. Your budget
If you're not following a budget, you get an F in this category off the bat. You can turn things around, however, by setting one up immediately and seeing how your total spending compares to your earnings.
To create a budget, list your recurring monthly expenses, and follow that up by incorporating once-a-year expenses into the mix. For example, if you renew your $120 roadside assistance plan every April, allocate $10 a month toward that cost. Then, see how your spending aligns with your income. If there's ample room left over to put some money into your savings account, you get an A. But if you're spending your entire paycheck on living expenses, you'll need to consider cutting costs.
2. Emergency savings
You need money in the bank to pay bills that pop up out of the blue, whether they relate to your home, your vehicle, or your health. If you don't have any cash set aside for emergencies, then give yourself a big fat F -- but pledge to do better.
Ideally, your emergency fund should contain enough money to cover three to six months of essential living expenses. If you have some money set aside for emergencies -- say, a month's worth -- you're in C territory. Two months' worth of living expenses in savings will give you a B, but you'll need to hit the lower end of that threshold -- three months' worth of savings -- to snag an A.
3. Retirement savings
Even if retirement is years away, the time to start saving for it is now. Ideally, you should be setting aside at least 15% of each paycheck for your golden years. If you're already in the habit of doing that, you get an instant A. If you're saving something, but aren't close to that 15% mark, give yourself a C and look at lowering other expenses to ramp up your 401(k) or IRA contributions. And if you've yet to start building a nest egg, consider yourself flunking out -- and start allocating funds to a retirement plan immediately.
4. College savings
Although you may have your entire career to save for retirement, you only have a limited window in which to set funds aside for college, since many students start pursuing a degree when they are 18. If you're not already saving for college, look at opening a 529 plan, which allows you to do so in a tax-advantaged fashion. And if you manage to save enough to cover your children's college costs entirely, you'll most certainly get an A in their book.
5. Your credit score
The higher your credit score, the easier it'll be for you to borrow money affordably when you need to. If your credit score is in the dumps, it's imperative that you address the issue immediately.
Credit scores range from 300 to 850, with the former being downright awful and the latter being perfect. A credit score below 580 is generally considered poor, so if that's what you're looking at, aim to fix it. You can do so by paying off a large chunk of existing credit card debt, and by making all of your future bill payments on time and in full.
Once your credit score reaches 670, it's considered good, and a score of 740 is considered to be very good. Snagging that elusive 850 can be just as difficult as convincing a teacher to give you an A+ instead of an A -- but know that once your score hits 800, it really is excellent.
Now that your children are headed back to school, it's time to see if your finances make the grade. If you're failing in any of the above categories, focus on improving them. With any luck, you'll have straight As by the time the academic year wraps up.
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