Most people have money goals. One person might want to pay off their student loans; another might be saving up for the down payment on a house; and yet another might want a seven-figure retirement fund.
Whatever your particular aspiration may be, there are smart strategies that can help you achieve your goals. These tactics can help improve your financial fitness, balance your budget, reduce debt, and save more money.
Read on to learn some of the best personal financial strategies that can scoot you closer to reaching your money goals.
Smart Financial Strategies to Aim For
Here are some solid ways to begin to enhance your financial fitness.
Build and Maintain an Emergency Fund
When faced with an unexpected big expense or being laid off, it can be helpful to have saved up an emergency fund, which is a cash reserve that is only tapped, well, in case of an emergency. When should you use your emergency fund? A layoff, an unexpected medical or car repair bill, or a relative in need may all be good reasons to dip in.
Starting an emergency fund might cover your basic living expenses for anywhere from three to six months or more. So, if a person normally spends $3,000 per month, then they could strive to set aside $9,000 to $36,000 in their emergency fund. Naturally, this amount will vary based on individuals’ unique financial situations and income vs. expenses.
Now, if that dollar amount sounds a little daunting, it’s always possible to start small — setting aside 50 or 100 dollars a month. With some accounts, users can even automatically transfer a set amount to a savings account on a specific date each month (e.g., payday). Over the course of a year, that bit-by-bit approach to saving money can add up to a much larger sum.
Once a person has tackled high-interest debt, they may have more income available to squirrel away towards their emergency fund.
Some savers prefer to host their emergency fund in a high-yield savings account, which, thanks to its higher annual percentage yield (APY) than standard accounts, can help your money grow faster.
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Paying Off Debt
Debt can be a budget killer. With high interest rates and fine-print fees, individuals can end up paying significantly more than an initial charge on outstanding recurring debts, whether student loans or credit cards.
When it comes to credit cards, for instance, the average interest rate is 20.09% for existing accounts and 22.29% for new accounts . If a person gets charged hundreds or even thousands of dollars in interest per month on existing debts, it could take longer to pay off the initial borrowed amount.
In terms of adopting smart strategies that can lead to greater financial independence, a good place to start is by paying off high-interest debts as quickly as possible.
Two popular debt-repayment approaches are called the snowball method and avalanche approach.
• With the snowball method, you pay down your smallest debts first — no matter what the interest rate is. Once that smallest debt is paid off, you could then apply that payment amount towards the next debt, and so on.
For instance, if a person pays $150 a month to one debt, they could continue paying that sum to their next smallest debt after the first one has been paid down. At the same time, you’ll make minimum payments on all other debts to keep the payment history intact. Over time, the additional payments “snowball,” building up to less overall debt.
• With the avalanche method, a person opts to pay off the debt with the highest interest rate first. Once the highest debt gets paid off, they’ll then roll the regular payments on that now-cleared debt into their next highest debt, all while paying the minimums on other debts at the same time.
While the avalanche method may make more sense mathematically, the snowball method can be more psychologically motivating. The snowball approach can keep some people engaged, since they’ll see quicker progress towards paying down one of their high-interest debts.
However, if a person can commit to the avalanche method, they may end up saving more in total interest paid than with the snowball financial strategy.
Using Credit Cards Wisely
Credit card debt can land cardholders in financial hot water. However, using credit cards judiciously can come with certain benefits (assuming the cardholder regularly pays down what they buy). Here’s a closer look:
• Many credit cards give rewards in return for account holders spending money when shopping. For instance, a user may be able to get 1% to 5% back on grocery store or other purchases at specific retailers. With some cards, it’s possible to earn points that can be used toward discretionary expenses like travel, eating out, hotels, and more.
• Generally, credit cards offer fraud protection, which means that if a card gets stolen (or their account gets hacked), fraudulent charges are not paid by the cardholder — unlike, say, with cash.
• When it comes to healthy financial strategies, it’s also possible to use your credit cards to maintain one’s credit score. One factor that lenders might consider is a loan applicant’s credit history (including the number of active accounts open and their debt-to-income ratio).
Smart financial strategies for credit cards include paying off the entire bill on time and keeping old lines of credit open so the account holder’s credit history is longer. Also, it’s advisable to aim for a lower credit utilization ratio — which is how much debt a person has in relation to how much credit is available. A credit utilization rate below 30% is, generally, considered “good,” though lower will be better.
• Another one of the smart financial strategies is to use credit cards for 0% interest balance transfers. If someone has a credit card with a high-interest rate, they could apply for a balance transfer credit card, pay a fee to transfer over their card’s balance, and then get more time to pay down the existing debt interest-free.
Some cards offer over a year of interest-free access. However, it can be smart to pay off the transferred debt before the end of the agreed-to 0% interest period. Otherwise, a higher interest rate will kick in on whatever has not been paid off. In some cases, the interest after the zero-interest period could be higher than what was paid on the original card.
Budgeting Incoming and Outgoing Money
Budgeting is a classic way to keep tabs on how much money is coming in and how much is being spent each month. If a person is not yet budgeting for their expenses, whether essential or discretionary, it can be one of the simplest ways to track money, and there are many different budgeting methods available.
When adopting financial strategies for budgeting, a good place to start with the 50/30/20 rule. With this budgeting rule, a person spends 50% on needs, 30% on wants and 20% on savings.
• Needs include housing, utility bills, food (basic groceries, not pricey takeout or restaurant meals), car payments, and debts.
• Wants span entertainment, travel new but unnecessary clothing and gadgets, and similar purchases.
• Savings could include an emergency fund, retirement account, and investments.
Budgeting can be made easier with Google Sheets or Excel, or by using an app, or taking advantage of tools that your financial institution offers. Digital personal finance apps can be easy to use. Many financial institutions offer solid ones that give users insights on spending patterns and money habits.
Considering Reducing Monthly Expenses
After tracking their monthly expenses, some people like to see where they can trim and tighten their spending. Some pricey expenses that could be pared down include:
• Housing costs: If rent is gobbling up a huge amount of income each month, moving to a less expensive place or area (i.e., lowering your cost of living) could help with cutting back on spending. If an individual ends up moving to a more economical city or town, it’s likely that local housing costs, groceries, and the general amount it takes to cover day-to-day living expenses will go down as well. Or you could take in a roommate.
• Transportation: In terms of transportation, drivers could try to get out of an expensive lease and purchase or lease a less expensive vehicle. Or a person could utilize public transit or carpool with colleagues to save on gas. One good financial strategy is to shop around for lower car insurance rates.
• Pricey cable plans: If a person spends a significant amount each month on non-essential items or services, they may want to try to reduce their discretionary costs, too. For instance, instead of paying an expensive cable bill every month, one could only pay for Hulu or Netflix as a way of lowering your streaming services costs. Many internet providers run promotions, so it may be worth thinking about switching to a less expensive provider.
• Eating out vs. cooking at home: In lieu of eating out every day, budget-minded individuals could cook at home. Buying ingredients is, generally, much less expensive than dining in a restaurant or picking up take-out. And, if cooking is intimidating, perhaps invest in a slow-cooker to ease into cooking at home.
• Shopping online: Online shopping can tempt many to spend unnecessarily. It’s just so darned easy to click-to-buy when a credit card is saved online. So, some savings seekers opt to delete their credit card details from their favorite online shops.
This adds one extra step (digging the card out of the wallet) before being able to purchase. Those added seconds can give shopping lovers a second chance to decide whether the item in their cart is really essential. You might also unsubscribe from shopping emails that can tempt you with sales and special offers.
Negotiating Better Deals
If you don’t have time to call up your providers and search for better deals, apps like Trim can analyze an individual’s spending patterns, negotiating internet, cable, phone and medical bills while canceling older subscriptions. Users pay a fee for this service, but it could end up saving dollars that would otherwise get spent unknowingly.
You might also call your credit card company and see if they can lower your rate, especially if you’ve found a better deal elsewhere. And if you have a major bill, don’t be shy about seeing if it can be reduced. You may even be able to negotiate medical bills.
Opening a Retirement Fund
When it comes time to retire, money will be needed to pay for everyday life. That’s why it’s a good financial strategy to start a retirement account as soon as a person starts working.
There are many different types of retirement accounts to choose from, including individual retirement accounts like a Roth IRA (which individuals can open on their own and contribute to with after-tax money), a 401(k) (which is a plan through an employer, and a traditional IRA (which people open on their own and gets taxed upon withdrawal).
If an employer offers retirement fund matching, take advantage of it! Matching entails putting a percentage of a paycheck automatically into one’s retirement. The employer then matches that deposit with the same amount. Employer matching can speed along an individual’s path towards saving for retirement; it’s pretty much free money.
In terms of how much to save for retirement, it can be smart to put aside at least 15% of pre-tax income every single year. Doing so can help you later on in life to avoid needing to delay retirement because not enough had been saved prior.
Searching for Low Interest Rates on Loans
Big expenses — going to college, purchasing a car, buying a home, repairing a house, or moving — can come with a big price tag. So, many individuals seek out loans to cover these big-ticket items. When taking out a loan, some smart financial strategies include shopping around and comparing interest rates — looking for the lowest interest rate possible.
As with any debt, it’s essential to pay back the loan on time every month to avoid late payment fees or dings to one’s credit history. For some, it may also be possible to refinance a loan and secure a lower interest rate.
Getting Started with Investing
For those stashing money in a traditional savings account, it’s likely that the money is earning very little interest. As a result, some individuals choose to invest their money with the hopes of earning a higher return over time.
Investing is one the financial strategies, however, that can come with higher risks. Few investments, including those in the volatile stock market, are guaranteed to make a return. For instance, investing in stocks can bear higher returns, but stocks can also plunge in value. Indeed, some investments are riskier than others.
Speaking with a financial advisor can help many to understand the pros and cons of investing and whether it’s the right choice for them.
Here’s an overview of common kinds of investments:
Investing in the Stock Market
While investing money in the stock market can result in a higher return, it’s not guaranteed. It can be safer to invest in already profitable companies that pay out dividends, which distribute some of a company’s earnings to investors. However, more seasoned investors may choose to take on more risks, investing in start-ups or lesser known companies.
Micro Investments
Should a person want to purchase stocks that are more expensive but can’t afford buying an entire share, it’s possible to complete a micro investment. Micro investments are fractions of stocks and a good way to get in on the market without taking too big of a risk.
Mutual Funds
Mutual funds are diverse investments; rather than investing in one stock, an investor is putting their money into a collection of them. The fund has a manager who decides what they’ll do with the money. Typically, investors are charged a fee to invest in these funds.
Investment Bonds
Investment bonds, which are loans made to a company or government, are significantly less risky than stocks. But, it’s worth remembering that lower risk also typically comes with a lower return. Many people get U.S. Treasury Savings Bonds when they’re children and cash them in at a later date.
High-interest Savings Accounts
Some high-interest savings accounts offer around 4.00% APY or higher on deposited funds — significantly higher than the 0.01% that many standard accounts offer. There’s no risk of lost saving, as long as account holders stay below the FDIC-insured limit of $250,000 per account holder, per account ownership category, per insured institution. Interest rates on savings accounts can, of course, vary over time and by bank.
Whichever method gets chosen, there are investment brokers and financial advisors who can offer guidance on how to utilize income and savings.
The Takeaway
Keeping tabs on income, expenses, savings, and investments is one smart financial strategy. With so much to track when it comes to personal finances, budgeting tools can help you develop smarter financial habits and trim back on unnecessary spending.
Opening an online bank account with SoFi lets you save and spend in one convenient place, while earning a competitive APY. Ready to track and then tweak your spending? A SoFi Checking and Savings Account has tools to help you do just that, as well as save towards different goals with our Vaults feature.
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