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Your finances can present a lot of questions. Rent or buy? What's the best stock to invest in? Before you get to all that you need to build good habits that can allow you to effectively budget and save.
Fact Checked: Cadeem Lalor
Updated: December 23, 2022
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Fact Checked: Cadeem Lalor
Updated: December 23, 2022
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Much like your daily commute or routine trips to the dentist, managing your money can feel like a necessary evil. And while you might not be enthusiastic about it, it’s an essential part of adulting.
The good news is, once you establish good money management habits, you’ll reap the rewards. This could include a better credit score, a long-awaited vacation, or a sizable retirement nest egg.
But the first step in the journey is getting a handle on your earnings and expenses. After all, if you don’t understand your money, how can you begin to manage it or set financial goals?
In this guide, we’ll take a deep dive into managing your money, offering advice and best practices to help you better your financial situation, all while breaking things down into simple steps.
Money management is the process of wrangling your finances. It’s about understanding your current money situation, setting goals for your cash, and establishing and maintaining solid financial habits.
If your overarching goal is to get a better handle on your money, some smaller milestones can help you get there:
Your budget acts as a roadmap for your finances. It shows where your money is coming from and going, and helps you navigate toward your overall financial goals. While building your budget might not be fun, it’s essential for effective financial management.
The process for creating a budget will differ depending on your preferences, as several different approaches to budgeting exist. While each might work a little differently, they all act as spending and savings plans for your money. Here are some common types of personal budgets and how they work.
The process for creating a budget will differ depending on your preferences, as several different approaches to budgeting exist. While each might work a little differently, they all act as spending and savings plans for your money. Here are some common types of personal budgets and how they work.
With a zero-based budget, you allocate every bit of last month’s income for a specific purpose in the following month. Budgeting apps like Rocket Money and Mint can help if this specific strategy sounds right for you.
As its name suggests, an envelope budget involves putting your cash into different envelopes designated for specific expenses each month, and then using only the amount in those envelopes to cover each cost. It is also known as cash stuffing.
This budget typically uses actual cash and paper envelopes. But those who prefer to budget online might appreciate a tool like EveryDollar, which uses a similar type of system.
With a 50/30/20 budgeting plan, you allocate 50% of your income to essential costs like your rent or mortgage, utility bills, and groceries. Thirty percent goes toward non-essential expenses like entertainment, dining out, and travel. And 20% goes toward your savings or investments.
This simple budgeting method involves setting aside a certain amount each month for savings, investments, or debt payments. The rest can be used for essential and discretionary spending.
More: Latest articles on Budgeting
Once you’ve figured out how you’d like to budget, it’s time to determine the best approach for tracking your spending. Here are some common expense-tracking tools to consider.
While having no debt might seem like the ideal scenario, certain types of debt are considered better than others. Good debts have low interest rates and can help improve your financial situation in the long run. Whereas bad debts have high interest rates and make it harder to get ahead financially.
If you’re struggling with managing your debt, it could help to embrace a debt repayment strategy. Two common options are the debt snowball and debt avalanche methods.
The debt snowball method involves repaying your smallest debt first and making minimum payments on the others, then focusing on your next-smallest debt, and so on. This strategy gives you some quick wins, which can serve as essential motivation for staying on track with debt repayment. But it could result in hefty charges if your largest debts have high interest rates.
Unlike the debt snowball method, the debt avalanche method involves paying off your highest-interest debt first and making minimum payments on the others. While it’s harder to see your progress with this strategy because your wins won’t be quick, your interest charges could be lower in the long run.
More: Latest articles on Debt
What percentage of U.S. adults had a monthly side hustle in 2021?
Another step on the journey to better money management is building an emergency fund. This is generally a savings account where you set aside money for expensive surprises, like unexpected trips to the vet, home and auto repairs, or a job loss.
Experts recommend saving at least three to six months’ worth of living expenses, though you might decide to save even more if you can. A high-yield savings account, or a savings account that earns a decent rate, is generally a good place to stash your cash. You never want to invest your emergency fund, or have it locked away. In general, the more easily accessible your emergency fund is, the better.
The simplest way to start saving for an emergency fund is to automatically divert a portion of your paycheck to this account each pay period. You could have your employer add a set amount to your emergency fund account or schedule an automatic transfer on your own.
You can even start small until you’re confident about your ability to save. Setting aside just $25 out of every biweekly paycheck will result in a total annual savings of over $650.
Want to learn more about money management? Shake the sphere for eight financial facts.
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Sometimes you might want to earn a little extra money to help pad your savings or meet a specific financial goal. Fortunately, there’s no shortage of part-time gigs and side hustles available.
But the best way to earn extra income might be to start at home. Chances are you’ve got some extra stuff lying around that you don’t use, and services like eBay and Facebook Marketplace make it quick and easy to sell unwanted household items.
Of course, there are other side hustles available too. A few popular options include driving for a rideshare service, delivering food, or walking dogs in your spare time. Companies like Instacart and Doordash let you make your own schedule delivering groceries or takeout, which can be convenient if you don’t have a ton of extra time. You can also look into Rover or Wag if you want to earn extra cash as a dog walker.
If you prefer a more passive side hustle, Neighbor or Turo might be worth considering. With Neighbor, you can rent storage space in your home, like an extra closet or a shelf in your garage. And Turo lets you rent out your car when you aren’t using it. No heavy lifting required!
More: Latest articles on How to Earn Money
Apart from saving, paying down debt, and padding your income each month, one of the best financial steps to take is improving your credit score. Doing so could make it easier to rent an apartment, get a mortgage, or access other types of financing. You could also get more favorable interest rates, making it cheaper to borrow money.
There are different models for grading a credit score, but the most common is the “FICO” score. This model is named after Fair Isaac Corp., which introduced its modern credit scoring system in 1989.
To understand your credit score, it’s important to first understand the different FICO score ranges:
Once you understand the ranges, check your credit reports and score. There are three main credit bureaus in the U.S. — Equifax, Experian and TransUnion — and each one collects slightly different data. You can access all of your reports for free at AnnualCreditReport.com. After that, work toward improving your score using these strategies:
More: Latest articles on Credit Score
No matter where you are on your career path, saving for retirement can put you in a better financial position in the future. If you’re just starting out, consider making small, regular contributions to your employer-sponsored 401(k) or an IRA account.
Every little bit helps, and you might be surprised how much your retirement savings will grow thanks to compound interest. You can open an IRA account on your own with a financial firm like Fidelity, TD Ameritrade, Vanguard, or SoFi.
How much should you save for retirement? According to Fidelity Investments, the rule of thumb is to retire at 67, you should have 10 times your income saved.
If you’re further along in your career trajectory, you may want to set aside more money for retirement. Following your budget, tracking expenses, and picking up a side hustle may make it easier to build your retirement savings.
Another option if you’re already saving for retirement is to start investing your money using a taxable brokerage account. These accounts let you invest in common assets such as stocks, exchange-traded funds (ETFs) and mutual funds, depending on the market and other factors.
Taxable brokerage accounts are available through major investment firms and smaller financial companies like E*Trade, Ally Invest, Betterment, and more. Many offer apps that make investing easy.
While you’ll pay taxes — referred to as “capital gains taxes” — for withdrawals, holding your assets for over a year will help you minimize your capital gains tax rate. Certain taxable brokerage accounts offer no trading fees as well, meaning you get to keep more of your money in your pocket.
Start by researching the market and determining what you’d like to invest in. For instance, you could choose to purchase stock in a company you admire or opt to diversify by buying shares of an ETF or index fund.
Investing your extra cash is a smart way to take advantage of compound interest, and you could earn more by investing in the stock market than you would with a traditional savings account. Here’s an example of how it works. Let’s say you put $5,000 into an investment account that earns 6% interest every year. After one year you could earn $300 on your investment. With your investment now sitting at $5,300, you could earn another 6% on top of the new amount. After 20 years, your initial $5,000 balance would be worth $16,035.68.
More: A deeper dive into investing
The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.
