It's always a great time to learn how to master your money and take control of your finances. With these seven simple steps, we'll show you how to save and invest more while reducing your expenses so you can work toward achieving your short- and long-term financial goals in 2021. Some of them only take a few minutes to set up.
1. Open a retirement account and contribute regularly
Many experts agree that you need to pay yourself first when saving for the future. Starting an IRA or investing in a company-sponsored plan, like a 401(k), is the perfect place to start saving and investing for retirement. These accounts grow tax-deferred so more of your money continues to grow year after year. Traditional IRA and 401(k) accounts may offer tax breaks today, while Roth IRAs offer tax-free withdrawals in retirement.
When you start contributing to a company-sponsored retirement account, the money will be automatically withdrawn from your paycheck. An IRA is not automatic by default, but you can set up regular contributions from your bank account. You can learn more about Roth IRAs, including how to set one up, here.
If you already have these retirement accounts set up, increase your contribution amount by 1% or a small amount. The ideal time to do this is when you receive your annual raise, meaning a portion of your raise will fund the extra retirement contribution.
2. Create a list of debts to understand how much you owe
To get a solid understanding of your finances, you need to know how much you owe and the details of those debts. You can create this list in Excel, Google Docs, or even on paper. Having this information allows you to create a game plan to pay off your debts and achieve financial freedom.
Start by gathering all of your bills or requesting your free credit report from AnnualCreditReport.com. You'll want to list the creditor's name, the total amount owed, monthly minimum payment, and interest rate. Other helpful information includes your credit limit, type of account (e.g., auto loan, student loan, credit card), and what the money was used for.
3. Review biggest expenses for savings opportunities
Some people focus on small expenses, like buying coffee, when figuring out how to save more money. That works for some people. However, many experts recommend focusing on your biggest expenses, because they can offer the largest impact on your finances.
Focus on the top 10 places that you spend the most. These might include your housing, vehicle, insurance, credit card payments, student loans, and food. Think about how you can reduce those expenses. Talk with your Bank about refinancing your home and see if you can lower your rate and monthly payment. Save on dining out expenses by cooking more meals at home to cut down on the cost of eating out or ordering in.
4. Create a plan to pay off your debt
Now that you know how much you owe and have reduced the spending on your biggest expense items, you can create a plan to pay off your debts. The two most popular strategies are the debt snowball and avalanche methods. The snowball method focuses on quick wins by paying off your debts from smallest to largest, while the avalanche method concentrates on the debts with the highest interest rate.
Some people start with the snowball method to get a couple of quick wins and the confidence that they can pay off their debts, then switch to the avalanche method to tackle those with the highest interest. There is no right or wrong answer when choosing between these two strategies. The most important thing is to just get started.
5. Build an emergency fund
Many consumers get into debt when an emergency expense happens. The best way to avoid that debt is to build an emergency fund that is there when you need it the most. Ideally, you'll grow to have an emergency fund that can cover three to six months of expenses in case you get hurt, sick, or lose your job.
A 2019 study by the Federal Reserve found that 40% of Americans don't have $400 in the bank for an emergency expense. So, the first step is to get started. Look at your current financial accounts to see if you may have an existing savings feature option. There are also online savings accounts that may have no minimum balance requirements and no monthly fees, like the Ally Online Savings Account and the Capital One 360 Performance Savings Account. This means you may be able to open a savings account with just a few dollars and continue to add to it whenever you can. Be sure to research different options to figure out what will work best for your budget.
6. Use Netspend's Prepaid Card & Avoid Using Credit Cards
As you work to eliminate your debt, avoiding new debt is key. Using the Netspend Prepaid Card is an excellent way to avoid new credit card debt because it is not a credit card. As an added bonus, you can only spend what you've loaded onto the card. This strategy can help you stay within your budget and help keep you from overspending.
7. Learn a new skill
Achieving financial freedom isn't just about spending less. It's also about making more. Learning new skills can potentially help you make more money in your current position, find a new job, or start a side hustle. There are numerous free resources online, such as MIT OpenCourseWare and Khan Academy, that can help you learn new skills on a wide variety of subjects. You can also try out new subjects to see if you're interested in pursuing more education in that field.
Become a money master
Building a better financial future requires getting a handle on your money so you can develop a strategy that works for you. Some are quick to set up, while others require a little more time and research. Even if you cannot execute on all seven of these financial tips, starting with one of them will improve your finances and build momentum for future success.