Finance | Money Saver
Save More Money With 4 Simple Financial Habits to Adopt Year-Round
Disclaimer: This content is for educational purposes as I am not a certified financial planner. Please consult a certified accountant or financial advisor before making financial transactions as your capital is at risk.
If you’re new to personal finance, where should you start? It can be somewhat difficult to navigate the neverending scroll of blogs, podcasts, and social media posts on better money management.
Hi, my name is Vanessa M.W.—Savvy’s finance and travel expert—and in just 4 years, I transformed from someone who was over $100,000 in debt to a globally recognized financial educator and consultant. Now, I have a budget plan that helps me hit my savings goals and an investment portfolio that’s on track to make me financially independent by 48 or sooner.
There’s a light at the end of the tunnel and I’m going to describe the financial habits that changed my life.
If you’re keen to make a significant change in your financial wellness this year, you’re in the right place. If you’re just starting out, don’t feel overwhelmed! Rome wasn’t built in one day. It was built brick by brick, and I’m going to show you just how to do that with my top four healthy financial habits that you can do all year round.
1. Create a successful 50/20/30 budget plan.
Budgeting might not sound sexy, but it is life-changing. Understanding how money flows in and out of your account will allow you to easily spot trends and places for improvement. Before I started budgeting properly, I was spending an average of $500 a month on travel when I was only making $2,700 after tax! Today, I’m so good at budgeting that I was able to invest $25,000 of after-tax money in just 1 year. My life transformed from night to day in just 3 years — and you can make it happen, too.
For anyone who hates budgeting, I always recommend that they start with a simple 50/20/30 budget rule:
- 50% of your income will go to needs (rent, bills, groceries, etc.)
- 30% will go to wants (eating out, fun, shopping, etc.)
- 20% will go to savings and paying down debt.
It’s an easy way to divide your after-tax income to ensure you’re hitting your savings goal.
Apply the 50/20/30 budget rule at home
Start with your total after-tax income for the month. For the sake of practice, let’s start with $3,000 as an example number. Then, you apply the 50/20/30 principle. So, $1,500 (50%) will go to needs, $900 (30%) goes to wants, and $600 (20%) will go to savings and paying down debt.
If you want to track and stay on top of all your day-to-day purchases and monthly budgeting goal, I definitely recommend checking out the You Need a Budget App. This award-winning personal budget software teaches you how to prioritize your dollars and manage your money, so you can save for the long run.
2. Build your emergency fund.
Once you have a better understanding of your spending and cashflow, the next step to improve your financial wellness is to establish an Emergency Fund.
An Emergency Fund is a pot of money that is set aside for unforeseen emergencies. It should be at least $1,000, but I typically recommend that my clients stash at least 6 months of expenses (i.e. 6 times their ‘needs’ budget in the 50/20/30 model) in their Emergency Fund just in case there’s a dramatic or unexpected change in their circumstances, like being laid off or a family member gets sick.
Going back to our $3,000 after-tax example, if you wanted 6 months of expenses in your Emergency Fund, then you would need $9,000. This comes from our $1,500 estimate for critical ‘needs’ in your budget and works on the assumption that you could exclude wants and savings until you’re back on your feet.
The reason establishing an Emergency Fund is so important is because it creates a cushion in our budget in case the unthinkable happens. More often than not, people go into substantial credit card debt because they are paying large unexpected expenses on credit versus cash.
An Emergency Fund should be your priority before tackling major debt aggressively. As a gentle reminder, a sale on American Airlines to Cancun is not an emergency.
To deter you from tapping into your Emergency Fund, I would recommend putting that money in an account that is somewhat difficult or annoying to access. If you can put this money into a high-yield savings account, that would be even better! In a high-yield savings account, the bank actually will pay you money to keep your savings in that account. Don’t miss out on this.
3. Reduce or eliminate debt.
It’s expensive to be in debt. Not only are you giving someone else your money, but the interest rates attached to credit cards and personal loans can be soul-crushing. The US national average annual interest rate for credit cards is just over 16%; if you have bad credit, it’s over 25%.
If you want to calculate how much annual interest you owe, use this formula:
- Balance Owed x APR% = Annual Interest
- Example: $1000 x 25% = $250 in Annual Interest
Therefore, if you have a $1000 balance on your card with a 25% APR, every year you are paying $250 in just interest to the bank on top of the original amount you owe.
The quickest way to smash debt is to choose a specific strategy — Avalanche or Snowball — and then stick with it. There are pros and cons to both strategies, but both styles get you where you need to go quickly. These strategies should be applied to consumer debt, student loans, medical costs, and circumstances where there are multiple debts to consider (i.e. not a mortgage).
In Avalanche, you focus on the debt with the highest interest rate first and then make the minimum payments on all other debts until you’re done with the most expensive debt first. Once this debt is fully repaid, then you move onto the next highest interest rate. This style of repayment will save you the most on interest, but it can be difficult to stay motivated with such large sums of debt over time. Read more about Avalanche here.
In Snowball, you focus on the smallest debt first (prioritized by interest rate) and then make the minimum payments on the larger debts for the time being. Every time you pay off a smaller debt, you can rollover (or snowball) that money to start paying off the next smallest debt with the highest interest rate. This is a great way to keep the motivation going because you’re seeing immediate results versus the slow burn that Avalanche requires. However, you will be paying slightly more interest in comparison to Avalanche. Choosing between the two really depends on your priorities. Read more about Snowball here.
4. Investing for the future.
Even if you’re prudent with your spending, saving your pennies in the bank won’t provide the financial stability most people desire in their later years. Every year, the average value of your cash decreases by 2% thanks to inflation, so allocating a piece of your budget to investing every month is critical. However, there are a few ways to tackle investing without it taking over your entire life.
Start investing in your retirement accounts provided by your job first. A 401(k), 403(b), and 457(b) are all employer-sponsored accounts that you can contribute up to $19,500 every year. The money put into qualified retirement plans is made on a ‘pre-tax basis’ or before the money is withheld from your paycheck for taxes. Contributions to these accounts also lower your annual taxable income and you’re not taxed on this money until you make withdrawals during retirement. You can read more about employer-sponsored accounts here.
Grow your long-term retirement wealth
Let’s put a few real numbers behind this. For example, if you have an annual salary of $50,000 and you contribute $5,000 to your 401(k), 457(b), or 403(b) account, then only $45,000 of your salary is taxable income for that year.
Some employers also match contributions so if this is available to you, take it! Otherwise, you’re leaving free money on the table. Using the previous example, if you contribute $5,000 and your employer has a 100% match policy, then they will contribute another $5,000 (at no additional cost to you) into your retirement plan; thus pushing your contribution to $10,000! Keep in mind that there is likely a requirement attached to your company’s match policy (i.e. you need to invest X%, they will match up to X amount, etc.) in order to take advantage of the full amount, so keep an eye out for these important details.
Ask your employer
Inside of your retirement account, you sometimes need to allocate this money to a specific fund; if this is not already done for you automatically. Check in with your HR department and ask the following questions. Feel free to copy and paste the questions into your email if that makes you feel more comfortable!
- Do I have an employer-sponsored retirement account? If so, does my employer match my contributions?
- Which brokerage manages my 401(k)/403(b)/457(b) retirement account?
- What fund is my money invested in? How much is the management fee/expense ratio for this fund?
These questions will give you 90% of the critical information necessary to make educated decisions on your retirement account and financial future. Even if you choose not to do anything else with this information, at least you have it in writing in case you leave your job or if you consult with a financial planner to see what options are best for you.
Next, ensure that you are regularly contributing to your retirement account every month. This will ensure that you’re practicing good investing habits all year long.
Self-employed retirement fund options
If you don’t have an employer-sponsored retirement fund and you’re self-employed, you also have options. Depending on your circumstances, you can potentially open a:
- Traditional or Roth IRA
- Solo 401(k)
- SEP IRA
- SIMPLE IRA
- Defined Benefit Plan
Read more about these self-employed options here.
Patience and consistency leads to financial wellness
Think of financial wellness as a marathon versus a sprint. Sprints are difficult on the body because you have put everything you have into just a few moments. Marathons are difficult on the mind because there’s an element of self-motivation that some people aren’t necessarily born with. However, marathons are much better tempered than sprints and you won’t need to maintain the same sort of exhausting intensity for a long period of time. Instead, committing to a steady, long-term plan will propel you towards the finish line at a pace that’s comfortable for you.
Having a financial strategy that fits your lifestyle and personal goals is always the best way forward. Happy savings!