Any time of year is always a good time and place to see where you stand regarding your financial goals. Build and strengthen good financial habits to achieve financial success. Use these personal finance tips as a checklist to become more financially organized.
No matter what your situation is, your financial success doesn’t happen without work. Careful planning, often with professional guidance, requires looking at a wide range of your finances and how you handle money.
We cover significant tenets of personal finance and relevant tips you should know to have better financial health and success.
Evaluate Your Monthly Budget
Track your monthly income and expenses. Break your expenses into fixed or non-discretionary and variable or discretionary costs by category on an excel spreadsheet. Think of your budget as your household’s income statement. Your budget will help you to control your spending.
There are several budgeting methods to try out. We like the 50/20/30 budget rule as a rule of thumb. Essentially, you are allocating your after-tax income into three budget buckets:
- 50% of your spending is for your needs, notably housing, utilities, groceries, car payments, and other needed fixed or non-discretionary expenses.
- 20% for savings help pay down debt, emergency funds, and investing.
- 30% are for your wants, discretionary or flexible spending for entertainment, vacations, and shopping. This money is after you allocate for priorities, notably needs and savings.
Adopt a disciplined strategy as early as possible when you have fewer items to track. Use budget apps readily available or create your own excel spreadsheet.
Update Your Net Worth
Keep track of your net worth, which is your household balance sheet. To calculate net worth, add all of your assets that you own less all liabilities that you owe. You may have more liabilities when you are young because you are just starting and may have college loans. However, over time, you should have amassed a comfortable net worth by accumulating assets that grow at rates faster than debt.
Net worth is an important benchmark to compare against you and long term financial goals. Are you where you want to be in your 20s, 30s, 40s, and after that? The fastest way to build wealth is through good financial habits that require saving, spending less, managing debt wisely, and investing.
Build An Emergency Fund
Save for emergencies in a separate account that is readily available money. A common mistake is not saving money for unexpected events like losing a job, pet surgery, or a flood in your basement. You should plan for at least six months of essential living costs to cover rent, mortgage, utilities, credit card bills, and other fixed monthly expenses. Make sure your emergency fund is liquid in either cash or cash-equivalent (also known as money market) securities.
This money is for emergency purposes, not necessarily your wants for a high-priced vacation. If you like to travel a lot, it may be worthwhile to have a separate vacation fund to set aside for those purposes.
Make Savings Your Mantra
Spend less than you earn so that something is left over to put in savings. When budgeting, you direct part of your savings to investments. Growing your money in investment accounts is your best path to a comfortable financial life and achieving wealth. Alternatively, spending more than you earn will result in more debt.
Automate your finances from your direct deposit paycheck so that some portion goes into your emergency fund, 529 college savings, and retirement savings. Even with automation, review your amounts periodically. It is easy to set up withdrawals from your earnings and forget about them. However, you may be able to afford higher doses than what you set up initially and can sock some more money away now.
Start College Savings Planning Early
Set up a 529 college savings fund as soon your newborn arrives. There are several ways to save for college besides a 529 plan, like a Coverdell Education Savings Accounts and UTMA. Saving for college for your young child gives you a headstart in growing funds through the power of compounding while enjoying deferred tax benefits. Virtually all states have plans though you are not limited to your home state. There are a variety of funds to choose from, including target-date funds.
Retirement Savings And Earn Company Match
Save for retirement as early as possible. By setting money aside as soon as possible, you benefit from compound growth, interest on interest. You may defer tax payments or reduce tax costs long term. Learn how your employer-sponsored 401 K plan works for matching contributions which can be pretty valuable. A company 401 K match may be a certain percentage like 6% of your salary, with the firm matching dollar for dollar (or 100%, which is generous) or something less of the amount you saved.
These contributions are like “free money,” so don’t leave these dollars on the table. Open up a Roth IRA account to complement your 401 K retirement plan. You want to max out these amounts. Invest this money in a variety of investment choices offered by the program.
Don’t delay savings for your 529 or retirement plan because you are overwhelmed by the various options. Opt-in to a plan, and you can make changes later on. Increasingly, companies are changing the format to opt-out, a desirable benefit to employees.
Health Care Savings Accounts
Find out if you have a flexible savings account (FSA) or a health savings account (HSA) available through your employer. Both plans can help you purchase qualified healthcare costs through pre-tax earnings contributions. The HSA is available either through your employer or self-employed, and you cannot have both plans.
The FSA plan sets lower contribution limits than HSA, and if you don’t use it by year-end, you forfeit what’s left in the account. The employer controls the FSA, while the individual possesses the HSA.
The HSA plan has higher contributions, covers a broad range of medical expenses, and is more flexible. Unlike the FSA, it does not have a “use or loses” feature. Instead, if you don’t spend the remaining amount that year, it rolls over. The HSA is portable, so if you leave your company, you can bring the account. You can earn interest on your HSA like any savings account. However, if you use those funds on unqualified items, you will pay the penalty, and if you are below 65 years, you may need to pay taxes as well.
Managing Debt Wisely
Pay your bills on time and entirely, so you aren’t paying interest on your balances. When you pay only the minimum amount required by the credit card companies, you pay far more in interest for what you charged on your card. Give your cards a rest until you can pay it all every month.
Use shorter borrowing periods for car, student loans, and home loans to lessen the interest amount. The faster the time frame on your car, home mortgage, or student loans, the lower your respective total cost. Yes, you are paying more per month but over a shorter time. Perhaps you can increase your down payment.
Know your respective interest rates, fees, penalty rates, and terms on all borrowings: mortgage, car, student loans, and credit cards. When interest rates decline as they did in 2019, refinance your rates.
Use Credit Cards With Care
Credit cards provide an essential convenience and help us to build our creditworthiness. However, if you only pay the minimum on those balances, you incur high-interest rates on what you owe. That’s when compound interest becomes your enemy, and you are paying interest on interest. Keep your balances as close to zero as possible.
Use cash more when possible. It can be a motivator to spend less and help us negotiate lower prices when bargaining. You feel the burn instantly as to seeing it on your monthly bill.
When using payment provider services like Venmo and Zelle, know the differences in your liabilities. Credit cardholders are usually liable up to $50 for unauthorized charges if you report your card as stolen. User protections for P2P vary, so check carefully for coverage.
When working on debt payoffs, eliminate debt with the highest interest rate first. I understand the psychological benefits of the snowball method and if that is an effective motivator for you, go for it.
Avoid payday loans should go without saying. However, if this is your only choice, work with a financial counselor as soon as you can.
Control Your Spending
Comparison shop for everything you buy or sign up for: groceries, clothes, cars, homes, appliances, and services such as financial advisors, insurance, banks, credit cards. Be as informed as possible about points, rewards, and cash-back offerings that encourage more spending than necessary.
Negotiate when and wherever possible. Ask for discounts when you go shopping and lower interest rates on loans. However, learn to negotiate for higher compensation as well. Opportunities are sometimes waiting for you to be more proactive in the bargaining process.
Know your wants versus needs. You don’t need everything to survive. Many items we say we need are often disguised wants we desire, like buying luxurious clothes or jewelry.
Don’t go grocery shopping without a detailed list. Using a shopping list was a game-changer for us. Previously, my husband sans list would come home with loads of unnecessary items all the time. Use per-unit pricing to compare things. Find coupons online.
Window shop with friends and buy when alone.
Be aware of numerous biases playing with your decision-making.
When car shopping, consider buying certified pre-owned cars which go through complete inspections, repairs and may have original factory warranties remaining on its life. Do your oil changes and maintenance checkups as required.
Building And Managing Your Credit
Review your credit report periodically. It is available for free from AnnualCreditReport.com on an annual basis. You can also get one free report every 12 months to review your credit reports from each credit bureaus: Equifax, Experian, and TransUnion. Then you can check your account more often, especially when there are issues.
If and when you find errors, have the issues corrected as quickly as possible. Here’s how you do it.
Your creditworthiness is essential for more than just borrowing. Your prospective employer, landlord, utility provider, and potentially significant other may want to know how you handle money too. By the way, background inquiries are usually soft inquiries that do not affect your score. However, hard inquiries happen when you are signing up for a new credit card or trying to refinance your mortgage loan and will negatively impact your score.
Know how the five key categories impact your credit score. Calculation of your FICO scores use the following percentages:
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit History – 15%
- Credit Mix – 10%
- New Credit – 10%
Your Child As Authorized User
Parents can help their children build up their credit by authorizing them as users on their cards. Think carefully about your credit score. If it is low, it may hurt their score and defeat the purpose of being on your card. Know your child’s maturity, their ability to be responsible, and set up spending limits. There are virtually no age limits, so it is up to parents to decide when their child is ready to access a credit card.
Yes, it is worthwhile for kids to get a credit boost. However, make sure you are not exposing them to fraud or identity theft, one of the downsides of children having a credit card. You will need to monitor their credit report along with yours.
Before getting them a credit card, talk to your children about money, spending, and saving as a means to convey the need for sound financial habits. The card is for their needs, not for paying for their friends.
Raise Your Credit Score
The better the credit score, the lower your borrowing rate and the better for getting credit card deals regarding rewards and cash back. There are a variety of ways to raise your credit score or avoid inadvertently lowering it.
Don’t close any credit card accounts, as this will ding your score. Instead, put these cards in a safe place like a drawer.
Keep your credit utilization rate well below 30% of total available credit. It may be beneficial for you to open a home equity line of credit (HELOC). If you have equity in your home, you can take out a line of credit up to that value. HELOC will expand your available credit, improving your utilization rate.
Specific programs are becoming popular that may help you boost your score for free or a low monthly amount. For example, Experian Boost, launched in late 2018, counts on-time household payments for services such as telephone utilities towards your score. RentTrack And Rental Kharma report on-time rent payments to credit bureaus. Craig and I used the Experian Boost, and it pushed up our scores.
If you have poor credit or need to build up your credit, apply for a secured credit card as a means of boosting your creditworthiness. Become an authorized user on a close family member’s card for some time.
Applying To College
Fill out FAFSA, Period
If you are seeking funds for college, there is no downside to filling out the FAFSA (Free Application For Federal Student Aid) form other than your time spent. The application is necessary for federal loans, grants, work-study programs, and merit-based scholarships. Don’t lose these opportunities by bypassing FAFSA. Federal loans tend to have better loan rates than private loans.
Be aware of your respective terms, grace periods, due dates, and repayment options. Automate where possible, so you don’t miss any payments. Try to target paying back your loans in a shorter time frame than the standard 10-year terms, especially if you get bonuses or are getting nice raises.
Consider community or two-year colleges, which can be cost-effective, for those who wish to work while going to school or want an interim step.
Save Money In College
When in college, look for ways to save and make money. College students tend to be better budgeters and track spending based on having less money to spend. As students living in an intimate environment, you share similar tight money circumstances over the four years at school. College students eat ramen noodles, take public transportation, and enjoy more experiences.
Keeping up with the Jones comes later after you get your first job and start making money. Try to remember your frugal days at college and resist lifestyle inflation by having good financial habits.
Understand Your Company Benefits Plan
Review your company benefits package, whether you have been working at your first job or the same firm for years. What may not have been of interest to a 25-year-old may be desirable now. Companies are increasingly adding features to their compensation plans, including customization for your life stage.
Standard benefits plans include retirement plans, health care insurance, tuition reimbursement, insurance, flexible spending accounts (FSAs) or health savings accounts, paid vacation, sick time, and medical or family leave.
You may need to add more coverage to parts of your benefits offerings, such as life insurance. Typically, companies provide you with a starter package which will likely not be enough protection for a growing family. Company plans vary and may be a good reason to choose between two competing offers.
How To Start Investing Early
You can only reduce spending and save so much. Learning to invest is the best way to outpace inflation, save money for college tuition and retirement, and accumulate wealth. According to a Gallup poll in 2019, 55% of Americans own stocks individually, in mutual funds, or retirement accounts, and this rate is below pre- 2008 recession levels of 62%.
Inflation refers to increases in prices resulting in the reduced purchasing value of money. As prices go up 5%, your money will get fewer units than in prior periods. By investing in stocks, you can better maintain your purchasing power. Stocks tend to generate better returns (based on higher risks) than other securities, outrunning inflation. Stocks grow at a compound growth rate of 9% over the long term (over 90 years), though 2019 has been a banner year with the S&P index, including dividends, registering one of best gains since the 1990s at roughly 10%.
Stock Market Games
Playing a simulated stock market game is a great way to learn how to invest and get familiar with relevant terminology without losing real money. Several free games are available and easy to set up that realistic mirror trading and investing with friends, family, or your own. These sites have tutorials, videos, and articles to educate you on the basics and provide strategic tips.
Start Investing With Small Amounts
Put small amounts like $25-$50 per month into your investment account that you can afford to lose. That is, don’t invest your rent money. Starting small is an excellent way to get started as you gain a better understanding and confidence. Many large online brokers have lowered or eliminated commissions and initial minimum amounts designed to encourage small investors. Be aware that there may be management fees on your balances.
Buy Exchange Traded Funds or ETFs which do not have minimum requirements, are available at low fees, and provide you with diversification. Most mutual funds require a minimum initial investment between $500-$3000 and higher, and for beginner investors, that may be a steep amount. You have many choices of ETFs and low-cost index funds and start with Vanguard offerings.
Some Investing Basics
When you begin buying stocks, have a long-term outlook. Although lower or zero commissions are available, you can realize better returns with long-term investing (over a year or more) rather than trading. There are tax benefits when holding a stock for more than one year through capital gains and capital losses.
Have some discipline strategies in place for when you should sell or exit a position. If you have a stock up 20%-25%, it is a good idea to cash in some of your gains. A helpful rule is bulls make money, bears make money, and pigs get slaughtered. Don’t get too greedy.
Another good rule when investing in stocks, courtesy of the Investor’s Business Daily (a great resource!), is always to sell a stock if it falls 7%-8% below what you paid for it. The premise of this principle is that by selling then, you are capping your downside potential, and it has worked well for me. On the other hand, investors use another strategy to buy small portions of stock initially and then buy opportunistically at lower prices to reduce the cost basis of your stock.
I consider that all investors, including beginners, should have a basic knowledge of the Federal Reserve and its impact on interest rates, money supply, and financial markets. We have a primer on the Fed for those who want some insights.
Compound Growth And CAGR
One of the essential terms in finance to understand is compound growth. It can work against you when you refer to a long-term debt such as a fixed mortgage when you pay interest on interest which increases your loan. Here, when investing, it can work in your favor when you refer to your investment’s growth rate in your portfolio. While stocks have above-average returns, they have down years that can be sharp, like during the 2008 recession.
The most accurate way to calculate returns is the compound annual growth rate or CAGR, which smooths out returns over a more extended time. Investors like to compare CAGR S&P 500 index (commonly referred to as the market) to their savings account or to that of a specific mutual fund or their portfolio. This is how investors can see how they are doing relative to the market. The formula for the compound annual growth is here. Thankfully, there are CAGR calculators to use.
If you are investing without a financial adviser, you need to do research. There are a lot of publicly available resources available to learn about the company and its businesses, its industry, and its risks. You need to understand trends in the market. Expect stocks to be volatile, and they may bounce back quickly after a fall in the market.
Diversification And Asset Allocation
Diversification of your stock holdings is essential. Don’t put all your money in one stock or one sector of the industry, and that is a recipe for more significant losses. The best way to achieve diversification is through buying ETFs or low-cost index funds which contain baskets of different securities. You want to minimize your risk as best as possible based on your tolerance.
You want to have different stocks in your portfolio; you should aim to have different types of investments. This diversification can include money markets, Treasury, municipal and corporate bonds, foreign securities, and real estate. You can use ETFs and mutual funds to gain diversification within each asset class. Asset allocation is a means of diversifying these different investments. How you allocate your assets is based on your preference, age, and lifestyle. Use a financial advisor or planner to talk through your planning and goals.
How To Choose A Financial Advisor
Meet with a financial planner or advisor to review your financial goals periodically and discuss how to achieve them. A financial planner does much more than sell you securities. Look for someone with a CFP designation. However, that should not be your only criteria. You should feel comfortable with this person and their team. They should understand your household’s financial situation, lifestyle, and plans regarding children and college, career, retirement, insurance needs, and estate planning. Here is how to choose a financial advisor.
Protect Your Family Financially
We love our families. Take proper steps to protect them financially. Besides making a good income, saving, paying off debt, and investing, providing financial security requires protective measures like buying essential insurance coverage and estate planning.
Insurance Coverage Is Essential
Your employer may provide you with some types of insurance as part of your benefits, including life, health and disability but often it is not enough. As your family grows you need to make sure you are adequately covered to take care of your family’s essential living costs and their future plans, including college. There are 8 types of insurance that you need to have proper coverage: auto, homeowners, renters, life, disability, health, long term care, and umbrella insurance.
Prepare for the worst for your family’s sake. There are several steps to take for estate planning. Create a will or trust according to your wishes. You also need advanced medical directives and a living will as essential documents for your loved ones and health care providers. Most people resist dealing with estate planning and consider it to be a challenging topic. However, not dealing with it may leave your loved ones in a confused state during their time of grief. Think of estate planning as a plan of action that you are taking for your family.
Review And Update Your Designated Beneficiaries
An effective and efficient way to distribute our assets is by designating our beneficiaries outside the will through our bank accounts, insurance policies and such. Many of our assets are non-probate property, transferable to survivors by contract immediately upon death rather than under a will.
The advantages of contract transfer over the distribution of assets by a will are less time, cost and more privacy. Transfers to loved ones by a will could take six months to a year if probate is not required. If contested in court, the distribution could take longer. Even worse, your will would be made public through court documents. At a minimum, be aware of the need to have designated beneficiaries for all assets. Review and update your beneficiaries based on life events such as having a new child or other necessary changes.
Invest In Yourself
Education does not end at the schoolhouse door. Embrace learning so you can master skills that are valuable to you. Read more and acquire knowledge to be competitive at work, have broader and diverse social circles, and teach others. Avoid procrastination which can be costly and cause unnecessary mistakes. Use time as the precious resource it is so that you may live every day to its fullest.
To achieve financial success in life you need to have a game plan combined with good financial habits. Measure how you are doing with a review of your budget and net worth. They are key documents that help pinpoint where there may be some improvements needed. You should discuss financial planning among family members. Calculate specific financial ratios, benchmarking your financial health. These ratios are tools designed to evaluate financial strength. As a companion to this article, see our post: 18 Financial Ratios You Should Know.
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.