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Money is difficult to obtain — and far too easy to lose.
The world is full of people who had money and squandered it away by making poor decisions.
To avoid that fate and preserve and grow your wealth, you need to have a solid money management strategy in place.
Ok, so what should I do with my money?
Disclaimer: Everyone’s financial circumstances are unique, and everyone has different financial goals.
I’ll start off by saying that it’s important to think about your timeframe: Are you trying to make money in the short term, or are you more focused on securing long-term financial freedom? Keep your big-picture money goal in mind as you make decisions.
Regardless of your goal, know that your money is worth more today than its equal sum tomorrow because it has the power to grow. So one of the best things you can do is act with a sense of urgency with your money.
Stop delaying things like funding your retirement account. Instead, put a plan in motion today that can help you achieve your goals. The sooner you act, the better.
Here are the steps you should take as you get started.
Step 1: Form a budget
The more money you make, the easier it is to spend it. To keep more of your hard-earned dollars in your wallet, you need to start budgeting. You can do this on your own using a free budgeting template or do it with the help of an app like You Need a Budget (YNAB).
To form a budget, first figure out how much money you make each month. Then, figure out where you’re spending it! You have regular, fixed expenses like rent or student loans. You can’t change the minimum amount you owe on those things. But you do have control over how much you spend each month on groceries, eating out, travel and other variable expenses.
See how your actual spending aligns with your money goal. Maybe you’ll realize that you need to cut back on entertainment to be able to put money into an investment account. In any case, figure out what you want to spend money on each month, and how much.
Once you have a plan, the next step is to stick to it on a daily basis. Keep a running track of your spending so that you know where every dollar is going.
By taking this approach, you can keep yourself in check and eliminate wasteful spending.
Step 2: Pay down debt
Now that you have a budget, you’re ready to act. You’re motivated to be in better financial shape, and you have a solid management plan to get there.
And the first thing to do is pay down debt.
Take a look at your overall debt load and determine which accounts have the highest interest rates. Consider starting with the account with the highest rate and putting as much money into paying it down as your budget allows.
If you have a significant amount of money sitting around checking or savings and your budget allows for it, you may want to consider putting the majority of it toward paying off your high interest debt. Paying off a credit card or student loan with a lump sum can get you out of debt much faster. Plus, you’ll pay less money overall this way.
Step 3: Save
The next step is to develop savings goals and put money into a bank account. Consider opening a high-yield savings account (HYSA) from an online bank, which offers a much higher interest rate than you’ll find at a traditional retail bank. You might also want to open up a money market account, which has higher returns than regular savings accounts with more flexibility.
Whatever you decide, start by building a six-month emergency fund. You’ll need emergency savings to cover any unexpected expenses that may arise — like losing your job or getting stuck with medical bills.
Once you have at least six months of expenses socked away in the bank, set that money aside and don’t touch it. Then continue following a savings plan that aligns with your budget.
Step 4: Invest
As important as saving is, you have to go above and beyond that if achieving true financial independence is your goal. Savings interest rates are simply too low to make substantial gains.
That’s why you should also consider investing in the stock market. Investing is riskier than putting your money into a bank account because the bank account is insured by the federal government, so you can’t lose the money in it. With investing, you can lose money if a stock drops and you sell it. But on the upside, you can potentially generate much stronger returns while benefiting from tax advantages.
Before you can start investing in the stock market, you’ll need to open an investment account at a brokerage firm like Schwab or Fidelity.
As you begin researching your options, you will quickly see that there are many types of investment accounts you can open.
One option is a taxable brokerage account. These accounts can provide access to a range of investments like stocks, mutual funds, index funds, and exchange-traded funds (ETFs).
Just as the name suggests, taxable accounts require you to pay taxes on your earnings (your capital gains and dividends). As such, these accounts are better for short- to medium-term investing.
By opening a tax-advantaged retirement account, you can obtain tax-free or tax-deferred advantages.
Some of the most popular tax-advantaged accounts include employer-sponsored 401(k) plans and individual retirement accounts (IRAs).
Tip: You can’t open a 401(k) account yourself, but if your employer offers one, you can invest in it. Many companies will even match the amount you invest, so you’re getting free money invested in your account! Talk to your benefits coordinator at work to get started or for more information about your company’s 401(k) plan. If you’re on your own as an entrepreneur or independent contractor, you may want to look into a solo 401(k), or a simplified employee pension IRA (SEP IRA), which offer additional tax advantages.
A traditional IRA provides upfront tax breaks and tax-deferred growth until retirement. The IRS sets an annual contribution limit on these accounts, so be sure you don’t put too much money into your IRA.
Another popular type of account, a Roth IRA, lets your investments rack up tax-free growth — meaning you don’t have to pay taxes when you sell your stocks in the account for a gain during retirement. This is an incredible way to grow your retirement savings, but these accounts can only be used if your annual income is less than the amount specified by the IRS. If you can do it, funding a Roth IRA early on in your career is a great move.
Whatever type of investment account you decide to open, it’s a good idea to talk with a tax advisor or financial planner to confirm you are on the right track.
Tips for managing money
How you spend your money is your business and yours alone. While it’s okay to take financial advice from friends and family members, it’s important to carve your own path.
Don’t be afraid to say no to an expensive trip if you don’t have the money to pay for it. It’s also a good idea to avoid status symbols like fancy cars that can send you into debt.
Think about your future self
Putting money into savings or investment accounts can be difficult — especially if you’re on a fixed budget with high living expenses. It might help to think of saving and investing as a form of paying your future self. By delaying gratification in the short term, you won’t have to work as hard down the line.
What’s more, putting money away into savings and investing can make your money grow. If you do it consistently, you can build a small fortune over time and reach your long-term goals.
Start a side hustle
Starting a side hustle can help you pay down debt faster and reach your savings and investment goals. It can also enable you to make ends meet while maintaining an aggressive retirement plan.
Here are some examples of side hustles to consider:
- Babysit or pet sit
- Walk dogs
- Help businesses with social media
- Write blogs
- Drive for Uber or Lyft
- Drive for DoorDash or Postmates
- Take surveys with Swagbucks
- Work as a virtual assistant
Work with a certified financial planner
Managing money can be a lot of work, and most people lack the time and knowledge to maximize their savings and returns.
That’s okay! By working with a financial advisor, you can minimize risk while putting yourself in the best position to succeed. That said, use caution about who you work with, and make sure they have your best interests in mind. Look for a fee-only financial planner. These professionals get paid a set fee for their advice and don’t accept kickbacks from investment companies for pushing clients into certain investments that might not be in their best interest.
Don’t forget to donate
If you have extra money left over in your checking account at the end of the month, think about giving back by donating to a tax-deductible charity organization.
Donating is a great strategy because you can help those in need while also receiving breaks at the end of the year to lower your taxable income.
The IRS offers a free search tool for locating tax-exempt organizations. Check it out before making any donations that you assume will be tax-friendly.
If you enjoy gambling, treat it as an entertainment expense in your budget and do it responsibly. Chances are you’re going to lose a lot more than you make. As the saying goes, the house always wins.
As a tip, go in with a set amount of cash and leave your debit card in the car so you’re less tempted to go to the ATM when you run out of money.
Frequently Asked Questions
Is all debt bad?
No. Not all debt is bad debt. In fact, some debt can be positive. For example, buying an item like a television and paying it down quickly can help build credit. And credit is necessary for securing loans on big-ticket items like a house or a car. Believe it or not, paying down student loans can also help your credit score.
But when people budget poorly and overspend, debt can quickly accumulate and collect interest. In time, it can become difficult to dig out of the proverbial hole.
If you use credit, be careful about how you manage it to avoid falling behind in your payments. Many people max out credit cards and end up drowning in interest payments. For the best results, pay your balance in full each month.
Should I invest in Bitcoin?
Bitcoin is one of the most popular forms of cryptocurrency — and something that all investors should at least know about. But only you can make the decision about whether to invest in it.
Part of what makes Bitcoin so attractive is that there is no telling how high its value may climb. However, Bitcoin – like all cryptocurrencies – is volatile, so investing in it is risky.
If you decide to put money into Bitcoin, treat it as an alternative investment. As with all other investments, don’t put all your eggs in one basket — you can invest in stocks, bonds and even real estate to spread out your risk.
Do I need a 401(k) to retire?
Having a 401(k) can help you retire. But it’s far from the only available option. Many people don’t have a 401(k) because they choose to invest independently or because their employer doesn’t offer one.
In fact, not having a 401(k) can be a benefit because it forces you to plan your own retirement.
It’s possible to achieve similar retirement benefits through an IRA. You can also obtain further tax-advantaged growth through a health savings account (HSA) and some life insurance policies, too.
What is a robo advisor?
Many brokerage firms now offer robo advisors – or automated assistants that manage investments. A robo advisor is basically an algorithm that analyzes your financial situation and automatically puts money into various accounts on your behalf.
Robo advisors can be highly effective and are a great strategy for people who aren’t interested in managing their own accounts. However, it’s never a good idea to blindly trust a robo advisor.
If you decide to use a robo advisor, pay attention to what it’s doing and call the brokerage if you have questions.
The Bottom Line
No matter what you decide to do with your money, you can build wealth by making smart personal finance decisions.
Limit your spending, make wise investments, and save as much money as possible. If you stick to this plan, you’ll be in great shape.
Remember that financial planning requires action. Without discipline and consistency, you can veer off course and fall behind — faster than you might imagine.
If you need help with money management, keep doing your homework, and consider working with a financial planner. With your financial well-being on the line, what do you have to lose?