Too many of us find ourselves with too little savings. And it can be difficult to build a financial stockpile, to set aside money regularly, especially when inflation makes just keeping up with our daily expenses a challenge. But there are small ways to get started that will pay off big in the long term, simple practices that can become lifelong habits.
Prioritize saving. By paying yourself first, you make saving a top priority. Experts recommend putting 10 to 15 percent of your income toward your savings and retirement goals. If saving that much is not yet feasible, start smaller. Committing to even $25 or $50 a month can help you get started and build momentum. Then set up a six-month or one-year reminder to periodically review your savings with the goal to increase your savings bit by bit. These gradual but regular increases will produce substantial results without significantly changing what you spend.
If you deposit or have money automatically moved into your savings account with every paycheck, you’ll not only be less likely to spend everything you earn, you will foster a habit of saving that will add up over time and help you be prepared for large or unexpected expenses.
Tip:Ask your employer to split your paycheck into two accounts, with the majority placed into checking and a portion into a savings or retirement account.
Find out where your money is going. Long-term financial health requires careful planning and discipline, and tracking your expenses helps you ensure that you’re staying the course.
Here are three steps to maximizing every dollar you earn:
- Add up your monthly bills, such as your mortgage or rent, insurance, utilities, and phone. Then track your personal expenses, such as groceries, gas, and clothes.
- Prioritize your expenses. Put your money where it matters most. Ensure you have enough money to cover your needs first, like paying your bills, paying down debt, and adding money to savings.
- Look at what and how you spend and consider whether an expense is something you need or something you want—and if it’s not a necessary expense, whether or not it fits your long-term goals. Set a budget for those expenditures, and put any necessary guardrails around your spending. New habits might include using only cash to keep from piling up credit card debt, shopping with a list, and eating out less.
Tip: An important step in managing your finances is to keep track of your spending. Budgeting software and apps make the process easy by automating the majority of the work.
Save for the unexpected. An emergency savings fund is a separate savings or bank account used to cover or offset expenses during an unforeseen event, such as a health issue, losing a job, or a surprise home or major car repair. Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or high-interest loans.
While the size of your emergency fund will vary depending on your lifestyle, monthly expenses, income, and dependents, the rule of thumb is to put away enough to cover at least three to six months of your expected expenses. That might seem like a lot, but the idea is to put a small amount away each week to build up to that amount. Set a specific dollar amount as your goal so you know exactly what you’re working toward.
Tip: Place your emergency savings in an interest-earning account, such as a money market or interest-earning bank account. An emergency can strike at any time and having quick access is crucial. If your emergency money is tied up in a long-term investment fund or an account like a certificate of deposit (CD) or an Individual Retirement Account (IRA), you could incur early withdrawal penalties. The account should be separate from the bank account you use daily, so you’re not tempted to dip into your reserves.
Eliminate your most costly debt. No investment strategy pays off as well as, or with less risk than, eliminating high-interest debt.
Start by making a list of all your debt amounts and interest rates. The higher the interest rate, the more it costs to borrow, so you’ll benefit most by paying down your highest interest-rate debt first, such as credit cards.
By paying off higher interest-rate debt in full first, you’ll reduce the total amount you owe faster. You’ll also free up money to put toward savings or pay down your next debt. As you pay down high-interest debt, continue to make regular payments on the rest, more than the minimum amount when you can.
Create a plan to manage your payments and balances. Take these three steps to make managing debt easier:
- Pay more than the minimum. Pay off your debt faster and save significantly on interest over time by paying more than the minimum every month. For example, if you have a $10,000 loan with a 7 percent annual percentage rate, you can pay off the loan in five years by paying $198 a month. But if you were to increase your payment by just $40 a month, you’d pay off the loan a year earlier and save $376 in interest payments.
- Pay more on your credit card bills than the required monthly amount. That can save you a substantial amount of interest over time as well as help you stay on track in paying down high-interest debt. As an added bonus, paying off your credit card bill regularly can lower your utilization rate, a key factor in how your credit score is calculated.
- Set up payment reminders and recurring payments. Stay on top of your debt by setting up automatic payments through a “bill pay” feature.
Build your credit by paying on time. Your payment history accounts for about 35 percent of your credit score. Paying all your bills on time is one of the best and most important things you can do to protect your credit rating.
It’s a good idea to schedule monthly payments of at least the minimum balance on all your accounts. Set up automatic payments for the minimum amounts due; you can always pay more or pay in full. These automatic payments will ensure you are never late on a payment and protect your credit score.
Tip: Set up automatic payments and reminders online to save you time and help ensure all your bills are paid before they’re due.
Know where your credit stands. Maintaining good credit is one of the most important ways to remain financially healthy. A strong credit history and credit score can help you get better interest rates on loans, credit cards, and lines of credit. Plus, insurance companies, cell phone providers, landlords, and others refer to your credit score to make decisions.
Your credit activity, or what you borrow and when you repay it, makes up your credit history. Credit reporting agencies collect this information from various sources and issue reports based on your borrowing and debt-paying habits. All this information contributes to your credit score.
Credit scoring models look at how close you are to being maxed out on your credit availability, so try to keep your balances low compared to your credit limits. If you close some credit card accounts and put most or all of your credit card balances onto one card, you can hurt your credit score by using a high percentage of your credit limit on that card. Experts advise keeping your usage to no more than 30 percent of your credit limit. Paying off the full balance on your credit cards each month will improve your credit scores.
Reviewing your credit report regularly helps you know where you stand. It’s a good idea to check your report at least once a year for errors that could negatively affect your score.
You can request a free copy of your report once every 12 months from each of the three nationwide consumer credit reporting agencies: Equifax, Experian, and TransUnion. Additionally, many credit card apps include credit-monitoring features that provide you with an updated credit score every month.
Tip: If you are new to credit, consider getting a product designed to help you establish and build credit. Financial institutions have developed an array of products and services, such as secured credit cards and credit builder loans, tailored to help consumers establish and build their credit.
Protect what you value
You work hard for yourself and your loved ones. Protecting what you value doesn’t have to be as hard. Consider using insurance, such as homeowners or renters, auto, life, and umbrella insurance to secure yourself financially and protect those you love.
Use an annual insurance review to consider what insurance you might need. Your insurance needs will change as your life changes, so you should also review your insurance whenever major events happen, such as moving, getting married, starting a family, or changing jobs. A home renovation or upgrade is another reason to review your insurance. It can help ensure that your home and belongings are fully protected and that your coverage is keeping up with your current needs. Everything from new furniture to a kitchen upgrade can affect the value of your home—and may even qualify you for additional discounts on your insurance policy.
Tip: When you’re choosing a plan, many insurance companies will give you a discount for bundling your policies.
Give yourself more time to save for retirement.
The sooner you start saving for retirement, the less money you may need to put aside. Having a longer horizon gives compound interest more time to work and more time for your savings to increase.
Do you have access to a qualified employer-sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b)? If so, take advantage of this valuable benefit. If your employer offers matching contributions, consider contributing at least as much as the match; this is free money you don’t want to pass up. If your employer doesn’t offer a QRP, think about opening an IRA and consider contributing the maximum amount each year. You are eligible to contribute to an IRA whether or not you contribute to a QRP.
To keep your retirement goals on target during your peak earning years, consider:
- Annually reviewing and adjusting your savings and investing goals and managing your asset allocation to stay aligned with your long-term goals, even during periods of market uncertainty;
- Putting part or all of any bonuses, tax refunds, or other lump-sum payments into your retirement savings;
- Maximizing your retirement savings and not letting competing priorities get in the way.
Tip: Make a big impact on your retirement savings by maximizing your 401(k) or IRA. With small ongoing contributions, you’ll likely never notice the difference in your take-home pay.
We’re here to help. For more information on developing healthy financial habits, contact us at (215) 735-9530, or email me at email@example.com.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.