Despite the economic shock caused by the pandemic, reports say household wealth grew in 2020. Due to a rising stock market, increases in real estate values, and higher savings rates, the net worth of U.S. households is now at higher levels than ever before.
While this may be reassuring to read, it’s probably safe to say that many of us don’t feel more financially secure, let alone wealthier. And that could be because this statistic may not apply to most of the middle class, many of whom don’t own much stock and who may not be benefitting from the boom in housing.
As noted in the Forbes article linked above, despite increases in real estate and stock values, the middle class is facing a combination of debt accumulation and now, in the recession, stagnating wages and massive unemployment — some of which hit middle-class jobs hard.
So if you are part of the middle class for whom owning stocks and real estate may not help grow household wealth, what will? Here are some ideas about personal finances that could provide you with the tools to work toward financial stability and to perhaps even pass some wealth to your children, a true sign of financial growth — for both communities and families.
Solid emergency fund
Life can throw you a curveball and hit your personal finances when you least expect it. Therefore, an emergency fund really should be part of any household wealth plan. An emergency savings fund can provide you with the cushion to help prevent the other behaviors which can lead to financial hardship, sabotaging wealth growth.
For example, if you’re faced with a sudden out-of-pocket medical expense but don’t have the savings on hand to pay for it, you may have to take out a loan or use other forms of credit to cover it. That could put you into a debt cycle that could set you back from reaching your financial goals by months or even years.
While most experts suggest saving three to six months of expenses in an emergency fund, consider your unique situation before you come up with an exact figure. If you’re the solo breadwinner supporting a family of five, for example, your emergency fund should probably be higher than that of a single individual. Here are a few creative ways to help build up your fund:
- Treat your emergency fund like an expense: Every month, automatically transfer a certain amount of money in your emergency fund. Treat it like an expense that you must cover until you’ve built a figure that makes you feel comfortable. You could also use rounding apps to help you meet this goal.
- Utilize credit rewards: If your credit card comes with a cash back reward program, consider taking advantage of it. Place any cash that you earn directly into your emergency fund.
- Sell what you don’t need: Chances are you own clothes, electronics, appliances, or other items you don’t want or need. You could sell them on sites like Craigslist, LetGo, and Facebook Marketplace and put your earnings in your fund.
Healthy debt to income ratio
Essentially, your debt to income ratio is your monthly debt payments divided by your gross monthly income. It’s a vital part of your credit score, which is used by lenders and creditors in deciding whether or not to approve you for a loan or credit card. Plus, access to credit is a key part of accumulating and then transferring wealth.
The lower your debt to income ratio is and higher credit score you have, the more likely you are to get approved for credit with low interest rates. Better rates can allow you to save thousands of dollars over time.
If you’d like to put your hard-earned money toward your financial goals rather than interest payments, pay attention to your debt to income ratio. Ideally, it would be no more than 30%. To lower it, you can:
- Increase the amount you pay toward debt: Extra debt payments can help you lower your ratio quickly. If you don’t have extra cash on hand, consider picking up a side gig or part-time work for a short period of time. You can always quit after you’ve made enough progress.
- Change how you pay for big items: It may be tempting to put your new couch or lawn mower on a credit card, but doing so could lead to a higher debt to income ratio. Wait until you have enough cash on hand to make a large purchase.
- Only take out loans and credit cards when necessary: Do not take out a new loan or credit card unless you absolutely need to. It’s best not to rely on financing to meet your goals.
Realistic retirement savings plan
No matter how old you are, an attainable retirement savings plan is a wealth building tool. It can help you live comfortably in your retirement, and it could enable you to pass wealth onto the next generation. But without a retirement savings plan, you won’t have a clear idea of how you can eventually meet your retirement needs.
If you’re unsure of how to create a retirement savings plan, don’t hesitate to consult a financial advisor or utilize an online retirement planning tool such as one from Vanguard or MarketWatch. Once you decide on a plan, you may want to implement strategies like:
- Save regularly and right away: Through compound interest, the earlier you start saving, the higher returns you could enjoy. So as soon as you have a retirement plan in place, get to work. Depending on your situation, place money in your employer-sponsored 401(k), Roth IRA, Solo 401(k), SEP IRA, or other retirement investment account. Do so every month if possible.
- Increase your contributions over time: As your income goes up due to promotions, raises, or job changes, be sure that your retirement contributions increase as well. Do your best to forgo lifestyle inflation and prioritize your retirement.
- Diversify: If you invest, remember the old saying: don’t put all your eggs in one basket. Diversify your retirement savings so that they’re spread out among cash, stocks, bonds, and other classes. This can help you manage market fluctuations and risks.
Debt can sap your household wealth
Low debt levels can help you feel confident about your household wealth and in control of your personal finances. After all, the less you have to put toward debt, the more you can allocate toward your short and long-term financial goals, whether that includes building wealth or just staying afloat.
If you’re currently dealing with an unhealthy cycle of debt, you may want to consider a debt relief program. To learn more, talk to a Freedom Debt Relief Certified Debt Consultant. They’ll help you find out if you qualify or provide information on other options you can use to resolve debt and build a stronger financial future. Get started now.
- Balances at a Historic Low: Time to Get Credit Card Debt Under Control (Freedom Debt Relief)
- How Will Coronavirus Impact My Retirement Savings? (Freedom Debt Relief)
- Financial Advice to Ignore During a Recession (Freedom Debt Relief)
- Here’s the Reason Americans are Saving So Much of Their Income (MarketWatch)