California is a wonderful place to live, offering lots of opportunities in terms of strong employment markets, very diverse communities, and all sorts of amazing activities you can do outdoors throughout the year. However, like anywhere else in the world, living in California is very expensive to maintain a household there.
Financial security isn’t about getting rich quick. You can have financial security when you’ve built habits and systems that allow you to predict where your money will go, be prepared for unexpected bills, and can keep working toward your long-term goals.
For Californians, a path to greater financial stability with finances begins with a realistic plan for achieving financial security that takes into account the true cost of living in the state.
Understand Your Actual Cost of Living
A strong financial plan for your financial future starts with the numbers of your past expenses. Most people have a rough idea of their monthly rent or mortgage payment, but they often underestimate how much smaller monthly expenses add up to over a month.
Of course, to no one’s surprise, California’s highest costs are housing and then a whole bunch of other transportation and goods and services costs. To break it down a bit further, here is the rough ranking of all household costs: housing, transportation, food, children, health care, and then insurance.
Identify all of the recurring expenditures from bank and credit card statements for several months. Create a separate category for every expense to ensure a precise figure. Divide up the costs for groceries, for instance, for purchasing fresh produce and for meals at restaurants that serve takeout. The expenses for work lunches could be separated from those for purchasing coffee at stores, for example.
With a good grasp of the numbers, it is then possible to figure out how much income will be left for items like saving, repaying debt, investing, etc. and thus how fast you can work towards goals and how much financial stress you can bear.
Build a Budget That Matches Real Life
However, managing to stick to a budget that limits financial flexibility in order to save is not a given and therefore the most important aspect to create a successful financial plan is to have enough room for maneuver. In practical terms, this means creating separate line items in your budget for different types of expenses and not focusing solely on reducing spending to the absolute minimum.
Budget for important expenses, minimum debt payments, and savings. Set limits for entertainment, food, travel, and other personal spending. Due to regional variations, for example, high summer utility bills, long commutes, parking, and wildfire insurance, Californians will need to budget differently than others across the country.
You will also want to consider including savings for irregular expenses such as car registration, annual insurance premiums, home repairs, holiday expenses, and professional expenses. Even though these expenses occur on an irregular basis, it is still important to make provisions for them in your financial plan.
In addition to resources for creating budgets and paying off debt, the Consumer Financial Protection Bureau also offers resources to help households make informed borrowing decisions.
So although a budget will restrict your spending somewhat, it will not be so strict that it is completely impossible to follow. It will help you to manage your finances effectively and therefore allow you to continue enjoying life without the threat of your finances letting you down.
Establish an Emergency Fund
Unexpected expenses can create financial stress. This can include unexpected medical bills, car repairs, job loss, or rent increases. By having an emergency fund in place for these types of unexpected expenses, the financial impact can be minimized.
You start with a small amount for minor unexpected expenses. This can be $1,000 to $2,000 to start, then gradually build up to three to six months of money for the essential expenses in the event of a layoff.
For individuals with unpredictable incomes, very high housing costs, or limited work history, it is wise to keep a larger amount set aside to handle a financial crisis. These groups include, for example, people who work in California seasonal industries such as farming, in the entertainment field, in technology startups, in the hospitality industry, and as freelance workers of all types.
It is wise to keep your Emergency Fund money in a completely separate account. While it is important that you can easily access the money in case of an emergency, you do not want to make it so easy that you accidentally spend it before you know it.
Manage Debt With a Clear Strategy
Paying off your debts is difficult to do while you’re saving, but if you organize a plan for paying off all of your debts and include each balance, interest rate, minimum payment, and repayment term in your financial plan, you can make progress eliminating your debts.
After listing all your debts including the amount owed, their respective interest rates, minimum monthly payments, and repayment periods, you can apply any of the above strategies for paying off your debts. While some prefer to start with the smallest amount first, so as to achieve quick results, others prefer to tackle the debt with the highest interest rate first in order to save on interest payments over time and money.
New debt should be carefully considered and included in your overall budget to determine the impact on your finances. Personal loans can be used to pay off high-interest debt and help cover unexpected expenses, but make sure to look at the total cost of the loan including interest and fees. You can use a personal loan calculator to estimate your monthly payments, as well as the interest and total cost of the loan over the life of the loan.
Borrow to meet a financial goal, not to pay for things you can’t afford to pay for in the first place. Look for the lowest interest rate, lowest fees, shortest loan term, and largest amount of money that you can qualify for.
Reduce Housing and Transportation Pressure
California is a pricey place to live, especially for housing. But the costs of transportation can extend far beyond the monthly car payment, especially when there are additional costs for things like fuel, maintenance, parking, registration, insurance, and repairs. These are all things that could be reduced by reducing the number of cars on the road, something that may be possible in areas with good public transportation.
Renters might find living with a roommate in a larger rental unit to be cost-effective. Another strategy is to rent out a room to a friend. Renters might also look for lower cost units in other parts of town. Homeowners might examine their insurance policy and the costs associated with maintaining their property. They also might look at ways to take advantage of the current market to refinance their mortgage.
In addition to the cost of the car, other costs associated with transportation should also be considered, including fuel, maintenance, and repairs, as well as the costs of parking, registration, insurance, and any tolls that need to be paid.
In regions with an acceptable public transport system, driving less can save money. With more work done from home, flexible working times and working from anywhere, even more money can be saved by buying less fuel for commuting, less time spent driving to and from work, fewer tolls, less parking and fewer car wear parts. Only when purchasing a car should the total cost of ownership be considered instead of only the monthly payments over a period of one month.
Build Stability One Decision at a Time
Stability is created by repeat choices that enable less stressful financial lives by means of spending money intentionally, saving money before it is spent in cases of emergencies, paying off debt, and preparing for long-term needs.
There are higher costs to doing business in California than in many other states. Yet financial security is attainable in California. It begins with spending money thoughtfully and saving for the things that are most important before an emergency occurs. A careful management of debt and a preparation for the financial needs of the future will, in time, make for a less stressful financial life.
While having a healthy bank account can bring many benefits and enable many choices, having a financially secure life goes far beyond having a large bank account. A secure life enables choices, gives confidence and brings freedom in your life. All financial decisions can then be made from a place of calm and thought, instead of from a place of worry and stress.
