In this article, we’ll cover:

• Key differences between saving and investing
• When to save and when to invest

The key differences between saving and investing

Saving and investing are distinct financial concepts. While they both involve putting money toward the goal of increasing your assets in the future, they have very different functions and results when it comes to time horizon, potential for returns, liquidity, risk, and inflation. Once you understand the differences, you can determine how each fits into your financial plan. 

Your future goals

Some of your future financial goals are achievable sooner than others. If you’re looking at the short term, think of savings. If your goal is further into the future, consider investing. 

• Short-term goals: Saving can be a good choice for achieving short-term financial goals like taking a vacation, buying a car, getting a new computer, or putting a down payment on a home. Opening a savings account is also ideal for building up an emergency fund to cover large, unexpected expenses or get you by if you lose your job. 
• Long-term goals: In contrast, investing is more appropriate for achieving large goals far in the future, like paying for your kid’s college education or setting yourself up for retirement. Investments have the potential to grow your money more over time by earning higher returns than you’d get from earning interest in a savings account, but you may need to keep your money invested over the long haul to realize those gains. 

Potential returns

The return on investment (ROI) differs quite a bit between saving vs. investing. The entire point of investing is to earn returns. Saving is more about setting aside money over time, but earning interest in a savings account certainly does grow your money more than hiding it in your mattress. Most traditional savings accounts pay some interest, and you can often earn an even better rate with high-yield savings accounts, money market accounts, and certificates of deposit (CDs). Interest rates are variable, and often rise and fall in relation to inflation. The longer you keep your savings in an interest-bearing account, the more you can take advantage of compound interest, which is when the interest you’ve earned also earns interest. 

The ROI on different types of investments can vary greatly, but over the long term they usually outpace both inflation and what you could earn through interest in a bank account. The historical average return for stocks is around 10%, while bonds have historically produced 5% to 6% in returns on average. Other investment vehicles like mutual funds, index funds, and ETFs vary quite a bit in their average returns, since each fund contains a different mix of multiple assets. But because they usually hold stocks and bonds, funds tend to offer more lucrative long-term returns than a simple savings account. 

Impact of inflation

Inflation measures how much the cost of products and services rise over a given period of time. When inflation goes up, your purchasing power goes down; your dollars don’t go as far as they used to. This is an important consideration for your savings. If the interest rate on your savings account is lower than the inflation rate, it erodes the value of your savings over time.  

The money you earn today will have less purchasing power in a couple decades, so you want your investments to generate enough returns to compensate. Investing is often used as a hedge against inflation because the returns are generally higher than inflation over the long term. That’s why investing is typically advised for financial goals far into the future, like retirement. In fact, some investors pursue strategies intended specifically to profit from inflation. 

Liquidity (how accessible your money is to you)

Liquidity describes how quickly you can get your hands on your money. Cash is your most liquid asset; actual dollar bills in your wallet can be spent any time. Money in your savings account is also incredibly liquid because you can easily withdraw it at the bank or ATM. The only drawback is that some savings accounts charge a fee if you make more than six withdrawals a month. Liquidity gives you the flexibility you need to spend your savings, such as tapping your emergency fund for a big car repair or buying that TV you’ve saved up for when it goes on sale. 

Investments are typically less liquid than savings; the amount of rigidity varies among asset and account types. Certain types of investment vehicles, like bonds, may have a fixed term that requires you to stay invested for a certain amount of time. Stocks and shares of many funds are more liquid in that they can be sold any time, though it usually takes three business days to get your money. And if you’re selling stock because you need the money for an emergency, you run the risk of having to sell at a loss. Tax-advantaged retirement accounts, which are types of investment accounts, are extremely inflexible; you usually can’t withdraw money before age 59 1/2 without incurring steep penalties. Finally, if you invest in things like collectibles or real estate, your money is locked up in those assets until you can find a buyer, which could take a lot of time and effort.  

Risks involved

People usually think about risk when it comes to investing, but not savings. It’s true that putting money into savings is generally quite low-risk. As long as you keep savings in an FDIC-insured bank account, you’re protected even if the bank were to go under. That said, saving money comes with certain risks, too. For example, if you only keep money in a traditional savings account without investing some of it, you run the risk that it won’t grow enough to keep up with inflation, leaving you with a lot less spending power in retirement. There’s also the risk associated with variable interest rates. If your bank drops interest rates, the return you’re earning on your savings will drop as well. 

With investing, there’s always the risk that you could lose money if the value of your assets drops below what you paid for them. Business risk is the potential for a stock to lose value due to financial or management issues with the company. Geopolitical risk comes into play when things like war, terrorism, and trade relations impact the economy. And overall market volatility can cause the value of your portfolio to fluctuate. One way investors can manage these investment risks is by diversifying their portfolios. Diversification reduces risk by spreading the holdings in your investment portfolio across different asset classes like stocks, bonds, and funds. If one of your investments loses value, others may hold steady or even grow.

When to save your money

How do you decide when you should be saving vs. investing? Consider what you’re trying to achieve. Saving is well-suited to funding things you want within a few years and protecting your financial well-being when life throws you a curveball.  

• Financial goals: If there’s a large purchase you want to make in five years or less, saving for it makes sense. That’s too short a time to be confident that investments will grow, but not so long a timeframe that inflation is likely to seriously erode your purchasing power. 
• Emergency funds: If your dog needed emergency surgery tomorrow, could you pay for it without going into credit card debt? What about if you were laid off; how long could you cover your basic living expenses before your bank account was empty? These kinds of scenarios are exactly what an emergency fund is for. Putting aside money to cover unexpected expenses is one of the primary uses for a savings account.  

If you want to save up more, look for ways to spend less. From sticking to a budget to reducing discretionary spending to lowering your bills, reducing how much money you spend increases how much money you can put into your savings. 

Places you can park your cash and save

When you’re stashing money aside for an emergency fund or savings goal, you can put it to work earning interest so your savings grow faster. There are several different kinds of deposit accounts where you can store your savings, and they vary in the details of potential interest rates, liquidity, minimum balances, and fees.  

• Traditional savings account: A basic savings account usually offers a pretty low interest rate; the average APY (annual percentage yield) was 0.46% as of December 2023. But there are often low or no minimum balances or fees, making them accessible if you’re just getting started with saving.  
• High-yield savings account: This type of account functions just like a traditional savings account, but offers much higher interest rates. At the same time, many require you to maintain a minimum balance and might charge account maintenance fees, which can eat into your returns. There’s often a minimum opening balance, too, so you’ll need to already have some funds accumulated before you can open an account. 
• Money market account: If you want higher rates and more liquidity, money market accounts can be a good place to keep your savings. Their interest rates are usually close to high-yield savings accounts, and, unlike savings accounts, they come with a limited number of checks and debit transactions a month. That makes it even easier to spend your money when you want to. Be aware that minimum balances and fees are common with these accounts. 
• Certificate of deposit (CD): Savings and money market accounts offer variable interest rates, so they could go up or down at any time. CDs, on the other hand, give you a fixed interest rate for a set term, usually between six months and six years. CDs often have interest rates as good as or better than high-yield savings accounts, but the trade-off is a lack of liquidity. If you withdraw your money before the term is over, you’ll generally lose some of the interest you’ve earned. 

When to invest your money

Are you many years, or even decades, away from retirement, sending your kids to college, or putting a down payment on the house of your dreams? Do you have an emergency fund and enough money in savings for your short-term needs? Have you paid down any high interest debt? If so, it may be time to start investing your money. Investing is most likely to help you reach longer-term goals: things for which you need to build up a large amount of money, but you won’t need it any time soon. Consider investing when:

• You don’t need the money within the next five years: Keeping your money in investments for at least five or ten years may lead to better returns in the end. Long-term investing, also known as a buy-and-hold strategy, is the idea that you hang onto assets long enough to ride out the inevitable ups and downs of the stock market.
• Your employer offers 401(k) matching: Many employers will match your contributions dollar for dollar up to a certain percentage of your salary. It’s like free money for your retirement account. If your financial situation allows, invest at least as much as your employer will match so your retirement account grows more quickly. 
• You want tax advantages for retirement investments: The money you put into 401(k)s and traditional IRAs is pre-tax, meaning you don’t pay income tax until you withdraw it in retirement. Your contributions now are subtracted from your taxable income when you file your return, reducing your current tax burden. 

Whether you’re a hands-on DIY investor, prefer working with a financial advisor, or enjoy the ease of an automated robo advisor, opening a brokerage account is the first step in your investment journey.  

Saving vs. investing: strike the balance you need for financial security

Saving and investing aren’t mutually exclusive. Understanding how to use both strategies empowers you to work toward your goals in the short term and far-off future using the right types of accounts for what you want to achieve. Something saving and investing have in common: the sooner you start, the more time your money has to grow. Start finding your balance today.

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The post Saving vs. Investing: 2 Ways to Reach Your Financial Goals appeared first on Stash Learn.

To help get your finances on track and prepare for your future, you may want to start a budget.

Budgeting is the process of creating a plan for how you’ll spend and save your money to help achieve your goals.

To help you on your financial journey, we’ve gathered the following tips that can help with budgeting for young adults:

1. Track your spending
2. Prioritize paying off debt
3. Set short and long-term goals
4. Create a detailed plan
5. Try a zero-sum budget
6. Start an emergency fund
7. Take advantage of employer matching
8. Practice frugal habits
9. Follow the 50/30/20 budget
10. Save for retirement
11. Use a bullet journal
12. Talk to a professional
13. Keep taxes in mind
14. Try a side-hustle
15. Use personal finance apps
16. Protect your health
17. Negotiate your salary
18. Try the envelope method
19. Automate your savings

Ready to start budgeting? Let’s get started with these 19 financial tips!

1. Track your spending

Before you can get started on your young adult budget, you must first understand where your money is going. You can do this in many ways, whether by keeping track of your receipts, using an app, or setting up a spreadsheet.

When tracking your spending, it can be helpful to categorize your transactions to help get a sense of what you’re spending your hard earned money on. These categories may include rent, groceries, utilities, clothing, entertainment, and more.

Remember, there is no set group of categories you should follow, so be sure to categorize your spending however works best for you and your shopping habits. Once you get a big-picture sense of your spending, you can better organize a budget that makes sense for you.

2. Prioritize paying off debt

When looking to improve your future spending, it’s crucial that you don’t forget about any debt you may have. From student loans to credit card debt, prioritizing getting out of debt can help you get out from under any interest payments that are getting in the way of your financial goals.

You can prioritize paying off your debt in different ways, including:

• Snowball method: You can follow the snowball method by paying off your debts, starting with the smallest amounts and working your way up to the largest. This works well for people with small debts, typically less than $3,000.
• Avalanche method: With the avalanche method, you’ll prioritize paying off your debts by starting with the highest interest rates and working your way down to the debts with the lowest interest rates. That way, you’re limiting the time spent holding on to debt with high-interest rates and your overall interest expense.

Whether you decide to use the snowball or avalanche method, continue making the minimum monthly payments on all of your debts as you focus your extra money on paying off the highest-priority debts.

3. Set short and long-term goals

Setting short and long-term goals is a great way to boost your financial success. That way, you can always keep your eyes on the prize. Start a practice of writing down your goals, this will help keep them top of mind for you when you’re making daily spending decisions.

These goals should be customized based on your specific wants and needs. For example, a short-term goal may be to pay off all of your student loans within three years and a long-term goal might be to retire by age 60.

4. Create a detailed plan

A financial plan is a way to assess your current financial situation, identify long-term financial goals, and create a road map to achieve them.

No matter your financial situation or goals, creating a detailed financial plan for young adults is a surefire way to keep yourself committed to financial success. A budget and a financial plan may sound very similar. A budget is a tool for tracking and managing your spending and savings on a short-term basis, where a financial plan actually maps out your goals over the long-term and your plan to achieve them. You can keep it simple and do this using a pen and paper, or you can utilize spreadsheets, templates, budgeting apps, or whatever works best for you.

5. Try a zero-sum budget

Now that you have a sense of how to start a budget, you may wonder what type of budget you should follow. A popular option for young adults is the zero-sum budget. The zero-sum budget is a budgeting method in which you use every penny of your income every single month.

But don’t get your hopes up, as it doesn’t mean you get to blow all of your money on flashy purchases and summer vacations. Instead, you’ll allocate your monthly income towards your wants and needs, debt payments, and savings goals until every penny of your income is accounted for.

For example, let’s say you have a monthly income of $4,167. With the zero-sum method, your budget may look like this:

As you can see, by combining your spending and saving, you’re using up all of your monthly income while also meeting your savings and debt payment goals.

6. Start an emergency fund

Let’s face it. Life can get in the way sometimes. Whether it’s unexpected job loss, car damage, or any other financial emergency, there are times when we could all use some extra cash. Fortunately, you can help dampen the financial burden of these situations by starting an emergency fund with your first budget.

Generally speaking, you’ll want your emergency fund to cover around 3-6 months of expenses. By building up an emergency fund, you can live your life in comfort, knowing you’re prepared to handle any unexpected circumstances that could impact your financial well-being.

7. Take advantage of employer matching

If you’re fortunate enough to work for a company that offers retirement plans with employer matching contributions, it can benefit your financial future to take advantage of it.

For example, if your salary is $50,000 and your company offers 6% matching with their 401(K) plan, your employer will match your contribution up to $250 each month. This means if you decide to contribute $250 a month towards your 401(K), your employer will also contribute $250 bringing the total monthly contribution into your 401(K) to $500. 

By taking advantage of this benefit, you can increase the amount of money that goes towards your retirement every month, allowing you to build up your retirement savings and accumulate wealth more quickly.

8. Practice frugal habits

When prioritizing budgeting for young adults, adopt smart spending habits to avoid spending unnecessary money. Examples of these frugal habits include:

• Making meals at home: By prioritizing groceries over eating out at spendy restaurants, you can limit the money you spend on food every month.
• Shopping secondhand: Whether you buy a used car or furnish your home with used furniture, shopping secondhand can help you reduce spending.
• Skipping brand name items: Generic brands are usually much cheaper than their brand-name counterparts. By shopping for generic brands, you can cut costs at the register.
• Waiting before you buy: If you’re prone to impulse spending, try forcing yourself to wait a few days before making any big purchases. Often, waiting it out can help you realize if your desired purchase is truly necessary.
• Learning to say “no”: In some cases, you may get invited to do things that go against your financial goals. By learning to say “no,” you can avoid committing to things that may be beyond your financial means.
• Buying in bulk: From toilet paper to canned goods, buying in bulk can sometimes come with huge savings, keeping you from paying more than you have to for your essential items.
• Buying essential items only: By sticking to only the essentials every time you shop, you can avoid throwing money away on unnecessary junk spending. Creating a list before you go shopping can help you stick to the task at hand and not get distracted by what you see.

While nobody goes from a mindless spender to a frugal shopping wizard overnight, keeping these frugal habits in mind can help you spend less on your shopping outings.

9. Follow the 50/30/20 budget

Another popular budget for young adults is the 50/30/20 budget. Under the 50/30/20 rule, you’ll split up your monthly income as follows:

• 50% for essentials
• 30% for wants
• 20% for savings

For example, if you make $4,167 a month, you’ll dedicate $2,083.50 to essentials, $1,250.10 to wants, and $833.40 to savings.

By sticking to this simple rule, you can easily budget your spending without skipping out on fun purchases and experiences, all while satisfying your monthly savings goals.

10. Save for retirement

As a young adult, meeting your retirement goals can seem like a far-fetched idea or tomorrow’s problem. But the reality is there is no better time to start saving for retirement, as the earlier you start, the quicker you’ll be able to retire.

This is especially true due to compound interest. In simple terms, you can think of compound interest as “interest on your interest,” meaning the quicker you save money for retirement, the more time it has to grow.

Let’s say you begin saving $150 a month with an average positive return of 1% a month, compounded monthly over 30 years. After those 30 years, your retirement savings will be nearly $525,000.

On the other hand, let’s say you waited 30 years and instead invested $1,200 a month for ten years with the same average positive monthly return. Despite your increased monthly contribution, your retirement savings would only be around $275,000.

As you can see, time is your friend when saving for retirement. Keep in mind that many compound interest accounts require a minimum deposit to get started. Because of this, be sure to do your research and select an account that works best for your financial situation.

11. Use a bullet journal

Another popular way to create budgets for young adults is to use a bullet journal. A bullet journal is highly customizable and includes specific sections you can use to organize your spending, goals, time, and other aspects of your life.

Because there is no right or wrong way to use a bullet journal, you can organize your pages however you’d like. This is a helpful method for those who prefer to physically write things down rather than using a digital method such as a spreadsheet.

12. Talk to a professional

A lot of the time, people may wait until they have a lot of money or are in a crisis before seeking help from a financial advisor. But that doesn’t have to be the case with you.

By being proactive and going over your finances with a professional, you can help come up with a plan tailored to your income, expenses, and financial goals. Plus, it doesn’t hurt to have someone who can answer all of your questions and help you create a personalized budget based on the advice of an expert.

13. Keep taxes in mind

Whenever you’re thinking about budgeting and financial planning, you’ll want to keep your taxes in mind. After all, the amount of money listed for your salary isn’t the same amount that will reach your bank account. Because of this, always use your monthly income after taxes when planning your budget.

In addition, you’ll want to do your research and see if you’re eligible for any tax deductions that can put money back into your pocket. Examples of common tax deductions include deductions for student loan interest and charitable donations.

If you’re unsure what deductions you qualify for, you may want to talk to a tax professional.

14. Try a side-hustle

If you’re looking to turn your free time into some extra cash, you may want to take up a side hustle. Side hustles can vary, from picking up an extra job to turning one of your unique skills or talents into a source of income. Need some side hustle inspiration? Try one of these ideas:

• Become a rideshare driver (Average hourly pay: $21.41)
• Tutor your favorite subject (Average hourly pay: $18.33)
• Sell your talents as a freelance writer (Average hourly pay: $24.26)
• Start babysitting (Average hourly pay: $16.22)
• Become a dog walker (Average hourly pay: $17.54)

No matter your interests or talents, there are many paths to bring in some extra income. If time is a limiting factor, consider passive income sources.

15. Use personal finance apps

For those interested in using technology to help with budgeting ideas for young adults, there are numerous personal finance apps you can use to take control of your finances.

From tracking your spending with a budgeting app to practicing long-term investing with an investing app like Stash, your phone can be a valuable tool for staying on top of your financial goals.

Not only that, but personal finance apps are a great way to manage your budget and finances wherever you go, with some apps even offering the option to link your debit or credit cards to give you an up-to-date view of your monthly spending.

16. Protect your health

Even if your goal is to save as much money as possible, you shouldn’t write off medical insurance as an unnecessary expense. Accidents happen, no matter how careful you are, and medical insurance can be the difference between small out-of-pocket costs and life-changing medical bills.

Something as minor as an accidental sports injury could end up costing you thousands of dollars if you’re uninsured and could put a massive roadblock in between you and your financial goals. Because of this, research what medical insurance is best for you. In some cases, it may be offered through your employer.

17. Negotiate your salary

On top of prioritizing saving money to improve your financial well-being, you can also work towards increasing your monthly income by negotiating your salary. When negotiating your salary, you should first determine your fair market value by assessing the salary of similar job postings.

Then, you’ll want to bring evidence of your value to the company to help show your boss why you deserve a raise. From there, be prepared to answer any questions your boss may have. While this isn’t guaranteed to work every time, you may be able to earn an increased wage which can help you achieve your financial goals.

18. Try the envelope method

Another popular budgeting method for young adults is the envelope method. The envelope method is a budgeting system used to help control where your money goes.

With the envelope method, you’ll want to dedicate an envelope to each spending of your spending categories. For example, if you allow yourself $500 a month for groceries, you’ll want to cash your paycheck and then put $500 into your grocery envelope.

Then, when it’s time to go grocery shopping, you’ll take the $500 and start shopping. Once you’re finished, you’ll put the change back into the envelope, so it’s ready for next time. Once you run out of money, you’re done buying groceries for the month.

This method is a great way to keep yourself from overspending, as you’ll have a physical sense of the money that is leaving your hands with each purchase.

19. Automate your savings

Another great way to help with your budgeting is to automate your savings. Depending on your checking or savings account, you may be able to set up automatic transfers every month. An example of this would be an automatic monthly transfer of $100 into your savings account or emergency fund. Another method to automate savings is to split your paycheck into two different accounts each payroll period, this way a portion of your money goes directly into a savings account where it is out of sight and out of mind.

That way, you can rest easy knowing that your savings goals are being met without you even having to lift a finger, allowing you to focus on other aspects of your financial health, like saving money or earning extra income.

Why you should start budgeting as a young adult

As a young adult, you may feel that budgeting is something that can wait. But by putting off prioritizing your financial health, you’ll be missing out on a wide range of benefits, including:

• Financial stress relief: Taking the time to plan your finances and set spending limits can help you get a birds-eye view of your finances so you have a better understanding of what you can afford. This can help prevent the money stress that can come from poor money management.
• Debt-free living: A large benefit of budgeting is that it allows you to allocate specific amounts of money to help pay off your debts. By prioritizing debt payments early in your life, you can limit the money wasted on interest payments.
• Earlier retirement: When it comes to retirement, the earlier you start saving, the earlier you can retire. Because of this, taking control of your spending at a young age can help maximize your retirement savings.
• Increased savings: By automating your savings and starting an emergency fund during your budgeting process, you can increase your overall savings.
• Preparation for the future: Similar to planning for retirement, setting a budget can help you be better prepared for the future, whether you’d like to purchase a home or go on an international vacation.
• Long-term growth: If you start taking your finances seriously at a young age, you can reap the benefits of time, leading to increased growth compared to starting years down the line.

When it comes to budgeting for young adults, remember that the earlier you start, the better. Whether you’d like to quickly get out of debt or take the money you’ve saved to grow your wealth with long-term investing, focusing on budgeting is a great first step to getting your finances in check.

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Budgeting for young adults FAQs

Still have more questions about budgeting advice for young adults? We’ve got answers.

How do you keep track of a budget?

You can keep track of a budget in many ways, including using a pen and paper, spreadsheets, budgeting templates, a bullet journal, or budgeting apps.

Is the 50/30/20 rule realistic?

While the 50/30/20 rule can be a realistic option for some, it may not work for everyone’s specific financial situation. Because of this, prioritize following a budgeting plan that works best for you and your financial goals.

What is the 70% rule for budgeting?

The 70% rule for budgeting is when you allocate your money as follows:

• 70% for all spending
• 20% for saving and investing
• 10% for debt payments

The post Budgeting for Young Adults: 19 Money Saving Tips for 2024 appeared first on Stash Learn.

A financial plan is a way to assess your current financial situation, identify long-term financial goals, and create a road map to achieve them. A good financial plan not only considers your current finances—including your cash flow, budget, debt, and savings—but also your long-term financial goals like saving for retirement. 

In this post, we’ll break down the necessary steps to create a financial plan, including:

• 1. Find your net worth 
• 2. Examine your cash flow 
• 3. Identify your financial goals
• 4. Build an emergency fund 
• 5. Contribute to an employer-sponsored retirement plan
• 6. Pay down high-interest debt  
• 7. Invest to build wealth 
• 8. Periodically review and adjust your financial plan 

Dive into a more thorough breakdown below as we help answer the question: what is a financial plan? 

8 essential financial planning components

Financial planning is like a road map to help you meet both your short-term needs and long-term goals. While every financial plan is different, they typically include the following: 

• Your net worth: your assets (things you own) minus your liabilities (debts) 
• Cash flow and spending analysis: your flow of money coming in and out each month (or year) and analysis of spending patterns
• Financial goals and priorities: your financial goals, both big and small, short term and long term 
• Budget and savings plan: your current cash flow and financial goals can guide how you set up your monthly budget 
• Debt management: any debts you currently have and a plan to pay them down. 
• Retirement plan: a plan for saving a portion of your income (15–20%) for retirement, ideally in an employer-sponsored retirement account like a 401(k) or IRA
• Long-term investing: additional outside investments to further build wealth, such as index or mutual funds  
• Tax reduction strategy: a strategy for minimizing taxes on personal income

Remember, there’s no template for the perfect financial plan—it should be customized to fit your unique circumstances and priorities. Review each financial plan component and adjust as necessary. 

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How to create a financial plan in 8 steps

Personal financial planning is an ongoing process and should be highly unique to your needs. That said, addressing the following steps can help you create a well-rounded plan. 

1. Find your net worth 

Find your net worth by assessing your current assets and liabilities. Assets are anything of value that you own, like a home, car, cash savings, or investments. Liabilities include anything you owe money on, like credit card debt, student loans, car loans, or mortgages. 

To find your net worth, subtract your total liabilities from your total assets. This gives you a clearer picture of your current financial health.

2. Examine your cash flow 

A financial plan can’t exist without first knowing where your money is going each month. Review how much you earn and spend to determine how much you could reasonably save and invest on a monthly basis—or where you could cut back to save and invest more.

Start by documenting your mandatory monthly expenses like rent or mortgage payments, home or car insurance, bills, and utilities. Then, factor in other costs like food and groceries, transportation, and subscriptions before moving onto additional spending categories like clothes, travel, and entertainment. Subtract your expenses from your income to see what’s leftover. 

This should give you a better idea of exactly where your money is going each month. From here, you can assess if your current spending aligns with the financial goals you’ll outline in the next step. 

3. Identify your financial goals  

You can’t make a financial plan without first knowing what your financial goals are. Your financial goals are simply the things you hope to accomplish with your money, both short term and long term. Ultimately, it means considering what you want in life and how you can put your money to work to get there. On a high level, consider the following: 

• What do I want to achieve? 
• What’s most important to me? 
• What type of lifestyle do I want to lead? 

Use these questions to make a list of goals, and break them down by short term, medium term, and long term: 

• Short-term financial goals can be achieved in one to three years (i.e., building an emergency fund).
• Medium-term financial goals can be achieved in 3-5 years (i.e., saving for a down payment on a home).
• Long-term financial goals can be achieved in 10+ years (i.e., retiring by 45).

Are you hoping to pay off debt or build an emergency fund? Those are examples of short-term goals. Long-term goals could include saving for retirement, saving for your future children’s college funds, or building a dream home in a new city. 

Determine how much each goal will cost and the time frame for when you hope to achieve it. The more specific your goals are, the easier it will be to take action on them. 

4. Build an emergency fund 

If you don’t already have an emergency fund, prioritize building one. Ideally, it should be enough to cover three to six months of living expenses, but if you can’t afford that yet, you can start small and add more over time. Stashing away even just $1,000 can help cover any small emergencies, sudden medical procedures, or unexpected repairs. You can incrementally add more to your fund over time. 

5. Contribute to an employer-sponsored retirement plan  

If it’s available to you, the next step is to ensure you’re contributing to an employer-sponsored retirement plan like a 401(k)—especially if your employer offers a matching contribution. If they do, prioritize contributing at least the minimum amount needed to get the match, as that match is essentially free money. 

Even if you have high-interest debt, you should still prioritize contributing to an employer-sponsored retirement account (at least the minimum amount to get the match). The reason is because employer matching funds are tax-free, risk-free, guaranteed returns—often at a higher rate than your debts.   

6. Pay down high-interest debt 

Once you’re taking advantage of your employer match, you should make a plan for tackling any debt. Prioritize high-interest debt first, as you could be paying double or triple what you actually owe due to high interest rates. In any case, a good starting point is to make the minimum monthly payments on all of your debts. 

There are a variety of approaches to paying off debt, from increasing your monthly credit card payments, getting a debt consolidation loan, or using the snowball method or avalanche method. Choose the approach that works best for you, but remember to pay off the most demanding debt first. Ultimately, the goal is to become debt-free as soon as possible, so figure out how much you can feasibly allocate toward debts each month and get started. 

7. Invest to build wealth  

Make a plan to invest in the stock market based on your financial goals and risk tolerance. Regardless of your specific long-term financial goals, planning to have enough income in retirement is key to any well-rounded financial plan. 

This could include various savings accounts and retirement accounts like 401(k)s and individual retirement accounts (IRAs), which are a good starting point for your retirement savings. From there, you can add other accounts to fit your goals. While there are countless ways to invest, ETFs or mutual funds make excellent long-term investments due to their stable growth over time. 

Rather than putting all your eggs in one basket by investing in a single stock, ETFs or mutual funds contain shares of hundreds of different companies within a single fund, instantly diversifying your portfolio. This makes them a great choice for new investors who don’t have the time or experience to analyze individual stocks but want a reliable way to invest for the long term. A diversified portfolio will help you grow your investments steadily over time.

8. Periodically review and adjust your financial plan 

Regularly check in on your financial plan to track your progress toward goals and make any adjustments. This may include altering timelines for certain goals, setting higher savings minimums, or increasing your investments or rebalancing your portfolio. 

You might find that you don’t have the same priorities five years down the road, and life is full of unexpected circumstances that can impact your plan. Stay flexible and expect to revise your plan based on your unique experiences. 

Here are some check-in questions to consider (or questions to regularly ask a financial advisor): 

• How is my current portfolio working toward my goals?
• What major life events are approaching (if any) that I should plan for (starting a family, moving cities, starting a business, etc.)? 
• Are my current spending and saving habits serving the lifestyle I want to live?
• How do I feel about my current budget?
• Are there any upcoming big purchases (over $500) that I should be aware of?
• What is my top spending category? Does this feel aligned with what I value?
• Can I increase my automated savings/investments?

Committing to annual check-ins ensures your financial plan remains aligned with your goals. 

Additional financial planning considerations 

The steps above will position you for financial success early on. 

Once you’ve made progress with your initial goals and investments, consider these additional financial plan components:

• Risk management planning: you may already have home or car insurance, but don’t forget about life and disability insurance, personal liability coverage, and property coverage to further protect you in the event of unexpected emergencies. 
• Tax reduction planning: once your investments are set, you can move on to more advanced goals like creating a tax reduction strategy to minimize taxes on personal income. 
• Estate planning: having a plan for who will inherit your estate (your possessions and valuables) might seem irrelevant if you’re young, but you’ll eventually need to consider this important financial plan component. This ties into your generational wealth goals that will directly impact your family and loved ones, including your will. 

Remember, the only asset more valuable than money is time. The steps above are key to protecting all the hard work you’ll put into the rest of your financial plan. If you’re feeling overwhelmed at the thought of navigating a financial plan on your own, a financial advisor can be an incredible resource. 

Eventually, you may consider eliciting some outside help from any of the following types of financial advisors: 

• Traditional financial advisor: a financial advisor can help with all aspects of your financial life, including saving, investing, insurance, and other forms of planning. If you have a complicated financial situation, they also offer specialized services like tax preparation and reduction or estate planning. 
• Online financial planning services: instead of visiting a financial planner in person, you can access the same services virtually. Most offer the same services as a traditional advisor, such as investment management and helping you build a financial plan. 
• Robo-advisor: if you’re only looking for help managing or building your investment portfolio, a robo-advisor can help—and at a low cost. A robo-advisor automatically builds your portfolio based on your investment preferences, and manages it on your behalf. Robo-advisors can be a less expensive, more accessible avenue for investors who don’t want to cover the cost of a personal financial advisor.

If you choose to go with a traditional financial advisor, we recommend fee-only advisors who are fiduciaries—meaning they’re legally obligated to act in your best interests. When looking for a financial advisor, be sure to find one who cares about your big picture: paying off debt, having emergency savings, covering tax bases, and building wealth for the long term.

At the end of your financial plan, you’ll have a strong understanding of where you are financially, where you want to be, and how you’ll get there. While finances as a whole can be complicated, the financial plan components are quite simple—and once you get started, you’ll feel more empowered to build the financial life you deserve. Successful wealth building doesn’t happen overnight, but planning for the long-term will pay off in big ways down the road. 

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FAQs about financial planning

Find answers to any lingering questions about financial planning below.

What is the purpose of a financial plan?

A financial plan is a road map for putting your money to work in a way that serves the life you want to lead, both now and in the future. Achieving short-term and long-term goals, gaining control over your finances, and ensuring financial security during retirement are all key purposes of a financial plan. 

Why is financial planning important? 

Financial planning is more than just accumulating wealth—it’s about using that wealth intentionally in a way that supports your core values and dreams in life. When you have a financial plan, you’re more likely to put your money toward only the things that serve your highest goals. Financial planning also helps reduce stress about money. 

What are the types of financial planning?  

There are a variety of types of financial planning, including cash flow planning (your monthly income and expenses), investment planning (using index or mutual funds to achieve long-term wealth goals), insurance planning (prioritizing health and life insurance), and tax planning (strategically minimizing income taxes). 

The post What Is a Financial Plan? A Beginner’s Guide to Financial Planning appeared first on Stash Learn.

When your income barely covers your monthly expenses, it can be tough to find extra money to put into savings. Yet putting aside money for emergencies and future goals is an important part of building long-term financial security. The good news is that there are several strategies you can use to cut costs and begin saving.  

In this article, we’ll cover these savings tips:

1. Estimate your income
2. Identify your fixed monthly expenses
3. Manage your variable expenses
4. Don’t forget about periodic expenses
5. Prepare for unexpected expenses
6. Compare your income and expenses
7. Choose your budgeting method
8. Remember to budget for discretionary spending
9. Implement the 30-day rule
10. Try a cash diet
11. Delete online payment info
12. Plan out meals to reduce food waste
13. Be strategic at the grocery store
14. Make more coffee at home
15. Reduce restaurant spending
16. Use a cashback credit card
17. Opt for thrift stores and local shops
18. Use browser extensions for online shopping
19. Explore community events and free concerts
20. Compare car insurance plans
21. Maintain a good driving record
22. Take a close look at your coverage level
23. Remove policy add-ons you don’t need
24. Switch to LED bulbs
25. Optimize laundry habits
26. Adjust your refrigerator temperature 
27. Use your dishwasher’s air-dry setting
28. Manage home’s temperature
29. Change furnace filters regularly
30. Conduct a home energy audit
31. Cancel unnecessary subscriptions
32. Look for ways to save on essential subscriptions
33. Choose a debt repayment strategy
34. Consider debt consolidation
35. Establish an emergency fund
36. Plan for short-term goals
37. Set medium-term goals
38. Focus on long-term goals
39. Check your current savings account interest rate
40. Switch to a high-yield account for better earnings
41. Automate transfers to your savings account
42. Define your financial goals and values
43. Limit your time on social media
44. Have a weekly money date
45. Celebrate your financial wins

Track your spending against your income

Scouring through a list of all the best ways to save money can be fun. But before start trimming down your spending, you need to get a clear picture of where your money is going every month. So, the first step in saving money is to track your spending and compare it to your income. 

Here’s how.

1. Estimate your income

Income is all the money you bring home. You need a clear picture of what’s coming in to make sure you have enough to cover your expenses and savings goals. Make a list of all sources of income, which might include:

• Your net pay from your job 
• Extra cash you make from a side hustle or passive income stream
• Child or spousal support
• Disability or veterans benefits
• Dividends or other income from investments

2. Identify your fixed monthly expenses

Fixed expenses are your life’s must-haves. They’re usually consistent every month. Understanding these is crucial for creating a budgeting plan and avoiding credit card debt. Common expenses include: 

• Rent or mortgage
• Utilities, like electricity, water, and gas
• Phone and internet
• Health insurance
• Healthcare, like prescriptions and regular doctor appointments
• Minimum debt payments, such as student loans and car payments
• Transportation, like bus fare, gas usage, car insurance
• Childcare and school tuition
• Streaming services and subscriptions
• Membership fees, like a gym or co-working space 

3. Manage your variable expenses

Variable expenses are just like they sound: spending that varies from month to month. While the amount of money you spend may change, you can get an average by tallying up what you’ve spent over the last six months and dividing by six. Expenses you may want to capture:

• Groceries
• Dining out
• Entertainment
• Pet costs, such as food, grooming, doggy daycare
• Home maintenance
• Medical and veterinary bills
• Travel
• Gifts
• Personal care and wellness

4. Don’t forget about periodic expenses

Periodic expenses occur less frequently, so they’re easy to forget about. But you’ll need to add them to your budgeting plan if you want a complete picture of your finances. The key is to break these costs down into how much they cost monthly. 

For example, if it costs $120 a year to renew your car’s tags, divide that amount by 12 to get $10 a month; that’s how much money you’d need to put aside each month to have the amount you need when the bill comes due. Check your records for expenses like:

• Annual vehicle registration
• Annual tax preparation
• Quarterly utilities
• Subscriptions that renew annually
• Car maintenance
• Home maintenance
• Periodic healthcare, like new glasses or annual physicals 
• Clothing and shoes
• Household items and furniture

5. Prepare for unexpected expenses

Unexpected expenses like emergency repairs and medical bills are unpredictable. Creating an emergency fund can be a good way to cover these costs without having to rack up credit card debt. Some unexpected expenses you could save for include: 

• Car or home repairs
• Medical and dental bills 
• Unplanned travel
• Emergency vet bills
• Weather emergencies
• Replacement appliances
• Unexpected sudden loss of income

6. Compare your income and expenses

Once you’ve gathered the info about your income and expenses, it’s time for some simple math. Add up all your monthly expenses, including averages for variable expenses and periodic expenses. Then tally up your monthly income. 

When you compare the two numbers, ideally your income will be larger than your expenses. If it’s not, you may want to consider how to save money by reducing discretionary spending or trimming the cost of necessities.

Create a budget that works for you

With your list of income and expenses in hand, you’ll be ready to make a budget. In its simplest form, a budget is a list of your planned monthly income and expenses. Once you set it up, you can track spending in real-time, compare it to your plan, and adjust as needed. 

Making and sticking to a budget is half the battle of saving money. It gives you a clear picture of your finances in real time and helps you plan for your goals, like getting out of debt, saving up for a vacation, or building an emergency fund. 

It also allows you to manage short-term spending, like whether you can order take-out for dinner without putting yourself in a pinch when your car payment is due. 

7. Choose your budgeting method

There are many approaches to budgeting, including budgeting for young adults. While they all have benefits, what matters is finding one that works for you. Here are a few popular budgeting methods you might try:

• 50-30-20 budgeting: You categorize your expenses and allot income accordingly: 50% to needs, 30% to wants, and 20% to saving and investing.
• Zero-based budgeting: You assign every dollar to a specific expense so that the difference between your income and expenses is zero. 
• Pay yourself first method: Each month you first set aside money for saving and investing, which cuts spending and prioritizes your long-term goals.
• Envelope method: You allocate funds to expense categories and put the money into literal or digital envelopes; when an envelope is empty, your spending on that category is done for the month.

8. Remember to budget for discretionary spending

While budgeting for the necessities, be sure to include space for some discretionary spending in your budget too. This promotes healthier spending habits, as it can be easier to stick to your spending plan when you have money specifically set aside for fun. Also, it can give you a bit of a buffer if you underestimate your needs in one of your budget categories.  

Cut out impulse purchases

Everyone has those moments: the last thing you want to do after a long day is cook dinner, so you open a restaurant delivery app and unwittingly spend a good chunk of your grocery budget on one meal. Or an ad for a cool jacket pops up on your screen, you click the link, and suddenly you’ve spent money you’d planned to put in savings on something you don’t really need. 

Impulse spending is only human, but it also creates a huge barrier to saving money. Consider trying these tricks to help you put the brakes on that spur-of-the-moment spending that undermines your budget plans.

9. Implement the 30-day rule

If you find you want to make an unplanned purchase, set the money aside and wait 30 days. This is known as a 30-day spending rule. If after a month you still want to buy the item, go ahead. But you may find that the delay takes some of the shine off of the thing that seemed so appealing at first glance, and a month later you might decide to put that money into your savings account instead.

10. Try a cash diet

A “cash diet” is where you commit to only making impulse buys in cash. Build it into your budget with an “allowance,” then take the money out in cash at the beginning of the month. Swiping a card makes impulse spending that much easier, but handing over actual cash has a greater psychological impact and makes you stop and think about the purchase more carefully. 

11. Delete online payment info

The more effort it takes to shop online, the more likely you’ll be to pause and think about whether you truly want to fork over your money on a whim. Delete your saved debit or credit card information on any website where it’s stored and forget the autofill option; when you want to buy something, get your physical card and enter the number. That little work might prod you to think about your budget and saving goals.

Look for ways to save on food

If you’re like most people, food is one of your three biggest spending categories. Between groceries and dining out, it can add up quickly. Here are a few ways to trim down food costs.

12. Plan out meals to reduce food waste

Feeding America states that America wastes 80 million tons of food, totaling $444 billion, each year. The USDA adds that the average American family of four loses $1,500 to uneaten food per year.

Planning out your meals and snacks for the week helps prevent groceries from being wasted. For instance, if a recipe calls for half a head of cauliflower, you can plan to use the other half later in the week instead of watching it go bad in the fridge.

13. Be strategic at the grocery store

Efficient grocery shopping and meal planning can lead to significant savings. Here are some other ways to help keep your grocery costs down and foster better savings habits:

• Scan sale circulars and grocery store apps to find the best deals, and use print or digital coupons. 
• Consider shopping at several grocery stores to get the best price on different items, if time allows. 
• Check your pantry before heading to the store so that you don’t double up on products you already have.
• Shop from a list, which will help you avoid impulse spending on products that grocers put in special displays.
• Purchase items in larger quantities and use them in several meals throughout the week or freeze portions for later use.
• Buy store brands or generic brands instead of name-brand products. Most have the same ingredients.
• Keep grocery trips down to once a week, if possible, which will force you to use up the food you already have at home.
• Shop online and pick up your groceries to avoid the temptation of going off your list while browsing the shelves.

14. Make more coffee at home

It’s probably not a good idea to cut out a coffee shop for good. It’s a cozy experience all in itself. But frequent visits to the coffee shop can quickly add up, especially when a large oat milk latte can easily cost $7, plus tip. Consider brewing more coffee at home and treating yourself to your favorite coffee shop once or twice a week.

15. Reduce restaurant spending

Dining out often can significantly impact your budget. Limit restaurant spending by exploring new recipes at home, opting for takeout over dine-in to avoid additional costs like tips, or taking advantage of restaurant deals and specials.

You don’t have to cut out restaurant food completely. Start with small amounts. Try to eat out one or two fewer times per week than you do now. Over time, continue to trim it back until your food budget is where you want it to be.

16. Use a cashback credit card

For necessary purchases like grocery shopping, consider using a cashback credit card. These cards return a percentage of the amount spent, reducing the overall cost and potentially saving you money over time. 

Only use this strategy if you’re sure you can pay your credit card balance in full each month. Otherwise, stick with your debit card or look for a debit card that earns rewards. 

Discover ways to save on shopping and entertainment

There are tons of ways to save on shopping and entertainment. Explore these practical tips to cut down your expenses while still having fun.

17. Opt for thrift stores and local shops

Skip the brand names and shop at thrift stores and local stores in your own city instead. You’ll find unique items at lower prices and keep your shopping cart total low. Plus, you’re supporting the community!

If you find yourself on a wedding guest list, use online thrift stores like Poshmark and Tradesy to snag the perfect outfit at a discount.

18. Use browser extensions for online shopping

Online shopping is convenient but can lead to overspending. To avoid this, use browser extensions. They help compare prices and find discounts, ensuring you don’t miss out on lower prices and keep those small amounts from adding up.

19. Explore community events and free concerts

One of the easiest expenses to reduce is entertainment costs. Your own city likely offers numerous free attractions and activities. 

• Explore local parks or community spaces for a change of scenery without the added expense. 
• Visit museums with no admission fees and community centers that host free events. 
• Look for free concerts that not only offer entertainment but also provide a chance to socialize and discover local talent.

Save money on car insurance 

There are many avenues to explore when looking at how to save money on car insurance: comparing plans, maintaining a good driving record, and taking a close look at your coverage level and add-ons.

20. Compare car insurance plans

Even if you’re happy with your current insurance company, requesting quotes from several other companies might reveal opportunities for saving money if you switch. You can also call your current insurer and ask if you’re eligible for any discounts; they’re often willing to offer an incentive to keep your business. 

21. Maintain a good driving record

Car insurance rates are based on several factors, including your driving record and your credit score. That means being a safe driver and improving your credit can save you money on car insurance. 

22. Take a close look at your coverage level

If you don’t have an outstanding loan on your car, another way to save money is to change the type of coverage you carry. Generally, there are three types of coverage available: 

• Liability insurance: Liability covers only the other person’s damages if you get into an accident; this is the minimum level of coverage required by law.
• Collision insurance: Collision pays to repair damage to your car if it crashes into another vehicle or object.
• Comprehensive insurance: Comprehensive covers damages and pays if your car is stolen or damaged by storms, vandalism, or hitting an animal. 

Collision and comprehensive insurance never pay more than what the car is worth. So, if you have an older car that’s worth less than your deductible plus the cost of annual coverage, you might be paying more than you need to; you could save in the long run by only carrying the liability insurance mandated by your state.

23. Remove policy add-ons you don’t need

Review your current policy to see if you’re paying for any add-on services that you don’t need. Many policies offer extras like rental car reimbursement, roadside assistance, or windshield repair. If you’re paying for them, consider whether they’re really worth the cost. 

Once you finish this process for car insurance, do it again for life insurance, home insurance, and any other policies you have.

Reduce your energy costs

Saving money on electricity can add up over a year. Much like with groceries, one of the simplest ways to start is to reduce waste. A few simple habits can boost efficiency and shave dollars off your bill.

24. Switch to LED bulbs

LED bulbs use 75% less energy than incandescent bulbs. Making the switch can work wonders in helping you cut down on your electricity bill.

25. Optimize laundry habits

Wash your clothes in cold water and avoid overfilling the dryer to conserve energy. Adopting these simple habits can significantly lower your energy consumption and reduce your utility bills.

26. Adjust your refrigerator temperature 

Maintain your refrigerator at 37°F and your freezer at 0°F, and clean the coils periodically to ensure optimal efficiency. Proper temperature settings and regular maintenance can help prevent unnecessary energy use and prolong the life of your appliance.

27. Use your dishwasher’s air-dry setting

Use the air-dry instead of the heat-dry setting on your dishwasher to save energy. This small adjustment can make a noticeable difference in your energy bill without compromising the performance of your dishwasher.

28. Manage home temperature

Close shades on hot days and turn off the air conditioner when not needed to reduce cooling costs. Being mindful of home temperature and making adjustments based on the weather can lead to substantial energy savings.

29. Change furnace filters regularly

Regularly changing your furnace filter ensures it runs efficiently, saving you money in the long run. A clean filter improves air quality and allows the furnace to heat your home more effectively, avoiding unnecessary energy waste.

30. Conduct a home energy audit

If you own your home, consider making energy-efficient updates. Your local utility company or a professional home inspector can conduct a home energy audit and tell you how much energy your home uses, where inefficiencies exist, and which fixes you should prioritize to save energy. 

Review your current subscriptions

Have you been keeping up with your Mandarin lessons, or is it time to let go of that language-learning app? When you turn on the TV, how many services do you rarely, or never, actually use? 

31. Cancel unnecessary subscriptions

When you’re looking for savings opportunities, review all your subscriptions. Keep the ones you use at least three times a week and cut ties the rest. Look at things like phone apps, music services, TV and movie streaming, print and digital publications, and any free trials you signed up for but forgot to cancel. What do you really use and need? Cancel subscriptions that don’t enhance your life.

32. Look for ways to save on essential subscriptions

There may be ways to save money on some of the subscriptions you want to keep. For example, some services have multiple tiers or allow you to share an account with friends and family to split costs. Also, some phone or internet plans have a streaming service included. Check to see if your library has a video or music streaming app.

Pay off high-interest debt

Whether it’s personal loans, student loans, auto loans, credit card bills, or mortgages, around 340 million Americans carry some form of debt. Saving money can be a struggle when your budget is burdened with monthly payments. Credit card debt is often a particularly tough hole to dig out of; the average credit card interest rate is 27.81% as of January 2024.

33. Choose a debt repayment strategy

The sooner you make a plan to get out of debt, the sooner you can stash more money away in your savings account, emergency fund, and investments. If your budget allows, start paying down your high-interest debt like credit cards, personal loans, and car loans. Doing so can also help you improve your credit score.

But which loans should you tackle first? There are two popular approaches:

• The avalanche method is focused on paying off the debt with the highest interest rate because that higher rate costs you more money the longer you hold the loan.
• The snowball method is based on paying off your smallest balance first, then moving on to the next-highest balance, to give you a sense of momentum and accomplishment.  

34. Consider debt consolidation

Debt consolidation can be a useful strategy for managing and reducing your debt. It involves combining multiple debts into one, often with a lower interest rate, making it easier to manage and pay off. This method can help reduce your monthly payments and save you money on interest over time, enabling you to allocate more funds towards savings.

Set realistic savings goals

Your monthly budget is a plan for what you’ll do with your money. That includes covering necessities like rent, groceries, and utilities as well as discretionary purchases. But your budget isn’t only about spending; it’s also your plan for saving up. So when you’re planning how to allocate your income, be sure to budget for savings. 

In addition to asking how to save money, ask yourself why you want to save money. That’s how you determine your goals, and saving up can feel more achievable if you determine specific, realistic aims.

35. Establish an emergency fund

When the unexpected strikes, your emergency fund is there to cover expenses that you might otherwise have to put on a credit card or leave your budget squeezed. Keep your emergency fund in a savings account so it’s easy to access in the event of things like a big car repair, medical bill, or even covering living expenses in the event you’re laid off. 

Ideally, you’ll have enough money to cover six months of living expenses in your emergency savings. That may sound like a large sum, but if you put a little aside each month, you may be surprised at how quickly it adds up.

36. Plan for short-term goals

Think about what you want to save for in the next one to three years. Maybe it’s fun stuff, like a vacation, a new bike, or a gaming console. You might want to save for practical things, like replacing your aging car or moving into a bigger apartment. 

For each goal, figure out how much money you’ll need, how long you’ll save, and how much you’ll have to set aside each month to get there. 

37. Set medium-term goals

Saving for things three to five years in the future is also more achievable when you set specific goals; your motivation to keep saving may be stronger if you can picture what you’re going for. You might save for a downpayment on a house, remodel if you already own a home, or start a small business

38. Focus on long-term goals

When you think a decade or more into the future, goals might be harder to picture, but saving for them now can help you get there. Building up retirement savings and paying for your children’s college education are big targets, so focus on consistently saving a certain amount over time. When the far-off future arrives, you’ll be better prepared for it.  

Open a high-yield savings account

If you’re wondering how to save money more quickly, think about interest. When your money earns money, you add more to your nest egg without lifting a finger. The higher your savings account’s interest rate, the more your money will grow. And with compound interest, the interest you’ve earned also earns interest, so your savings grow even more rapidly. 

39. Check your current savings account interest rate

If you’re keeping a large amount of money in a basic savings account at a big bank, you could be missing out on some serious earning potential. In December 2023, the average national bank savings account interest rate was only 0.47%, and it was a meager 0.01% at the largest banks.

If you don’t know your current savings account interest rate, log into your dashboard or look at your latest bank statement. While you have your bank accounts pulled up, review your checking account to see if you’re being charged any pesky bank fees that could be hindering your ability to save money. 

Use a high-yield savings calculator to see if you could be earning more.

40. Switch to a high-yield account for better earnings

If your current savings account isn’t earning much, take 15 minutes today to sign up for a high-yield savings account. A high-yield savings account can help you reach your short-term savings goals and build your emergency fund faster. 

These accounts work just like regular savings accounts; some have minimum balance requirements or monthly fees, but many don’t. With the proliferation of online banks and credit unions, there are a growing number of options; some online banks offer high-yield savings accounts with annual percentage yields of 4% or more. 

Curious about other ways to put your idle cash to work? Learn more about this investment.

41. Automate transfers to your savings account

Saving up money is an exciting idea in theory; in practice, though, it can take a lot of discipline. That’s where automatic transfers come in. Setting up an automatic monthly transfer from your checking account to your savings account is an effortless way to make sure you don’t accidentally spend. 

Another option is to have your employer direct deposit a certain percentage of your paycheck into your savings account. As the old saying “out of sight, out of mind” goes, tucking away your funds before you see them will help to reduce the likelihood that you’ll spend all of your money each month.

Stop trying to keep up with the Joneses

Your college roommate is posting photos from another Caribbean vacation. Meanwhile, you’re clipping coupons and eating leftovers for lunch. When you compare your life to what everyone else around you seems to have, it can lead to anxiety and poor self-esteem. 

Trying to keep up with the Joneses can lead you to torpedo your financial plan, spend money on things you don’t really want, and even accrue unmanageable levels of debt. 

Learning how to save money isn’t just about the logistics of budgeting and adding to a bank account. It’s also about adopting a mindset that puts your financial priorities first:

42. Define your financial goals and values

Get clear about your money values and both the short-term and long-term financial goals you’re working toward. This clarity will help you stay focused on your priorities, rather than getting swayed by others’ spending habits.

When you see someone else splurging, picture the things you’re saving for. This mental imagery can act as a powerful motivator and reinforce your commitment to your financial objectives.

43. Limit your time on social media

Minimize your time on social media and unfollow accounts that make you feel envious or discouraged. Reducing exposure to ostentatious displays of wealth can help alleviate the pressure to conform to societal spending norms.

Associate with people who have similar values and personal finance goals. Being around individuals with comparable financial mindsets can help reinforce your saving habits and reduce the temptation to overspend.

44. Have a weekly money date

Make a weekly date with yourself to update your budget and check on your progress. Regularly monitoring your financial situation keeps you informed and motivated to achieve your set savings goals. If you have a partner or spouse, be sure to include them. Only if they know your household financial goals and the steps you’re taking to achieve them, can they make fully informed spending decisions with household dollars.

45. Celebrate your financial wins

When you achieve something, whether it’s hitting a set savings goal or coming in under budget on your groceries, celebrate your accomplishment. Acknowledging your successes, no matter how small, can boost your morale and keep you motivated on your savings journey.

Save and invest for the long haul with Stash

Once you get clear on your goals and figure out how to save money in ways that work for you, you may find yourself looking for more ways to work toward your long-term financial health. And that could include investing. 

If that sounds daunting, you’re not alone: 90% of Americans say they want to invest, but nearly half don’t know where to start. Stash makes it easy to begin putting your money into the market with automated investing and fractional shares that allow you to become an investor with as little as $5.

The sooner you start saving money and investing, the longer your money has to grow. Whatever methods you use to save, and no matter how small you start, taking the first step can set you on the course toward long-term success. 

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Frequently asked questions about how to save money

What is the 30-day rule?

The 30-day rule is a simple budgeting technique where you wait 30 days before making a non-essential purchase. If you need help controlling impulse purchases, this rule is a good one to use. It helps you determine whether the item is a true necessity.

How can I save $1000 fast?

To save $1,000 fast, consider cutting non-essential expenses, selling unused items, working extra shifts, or finding additional sources of income. Creating a budget and tracking expenses can also help you best save for your goals.

How can we save money in the current economy?

In the current economy, you can save money by reducing discretionary spending, shopping smarter with discounts and coupons, and prioritizing needs over wants. Consider refinancing high-interest loans and consolidating debt to further reduce expenses.

How can I save money with high inflation?

During high inflation, prioritize essential expenses, and cut back on non-essential spending. Consider buying store brands instead of name brands, and look for discounts and sales. Also, keep money in interest-bearing accounts to offset the impact of inflation.

Is it safe to keep money in the bank during inflation?

Yes, keeping money in the bank is generally safe during inflation due to the FDIC insurance protecting deposits up to $250,000 per depositor, per bank. However, the purchasing power of your money may decrease, so consider diversified investments to hedge against inflation.

The post How to Save Money: 45 Best Ways to Grow Your Savings appeared first on Stash Learn.

In this article, we’ll cover:

• Why you need an emergency fund
• When emergency funds come in handy
• How much you should save up
• How to build your emergency fund
• Where you can keep your savings
• Emergency savings vs other savings

Why you need an emergency fund

Without emergency savings, you wind up sacrificing your future plans to stay afloat during a time of need. Think of your emergency fund as a double-pronged defense: it protects you in the moment when unforeseen expenses arise and safeguards your ability to build long-term financial health.

• Avoid racking up debt: An emergency fund prevents you from relying on credit cards or loans for unexpected expenses, so you don’t have to accumulate debt, pay interest on loans, or risk damaging your credit score.
• Don’t deplete your savings: Instead of withdrawing money you’ve earmarked for other savings goals, an emergency fund ensures you have a separate cache in case of a crisis.
• Protect your investments: With an emergency fund, you won’t be forced to liquidate investments before you’d planned to, potentially taking a loss in the process.
• Maintain peace of mind: Knowing you have money in reserve reduces the worry that a financial emergency could undermine your financial stability, especially during challenging times.

When to use an emergency fund

An emergency fund is a safety net to cover large expenses, generally over $1,000, or to sustain you if you lose your income. It’s crucial to use it only when it’s truly urgent and necessary; if you deplete your emergency savings for non-essentials or to cover normal monthly expenses, the money won’t be there when you genuinely need it.

Emergency expenses

An unexpected expense is just that: unexpected. That means you can’t necessarily anticipate what you’ll need emergency savings for. That said, there are some common scenarios in which people rely on an emergency fund. 

• Major car repairs: Situations like a car accident, engine failure, or a transmission issue can all pose a high financial toll.
• Home repairs: Whether you’re a homeowner dealing with a failing furnace or a renter fighting a bedbug infestation, unexpected home repairs can be costly.
• Medical emergencies: Health is unpredictable. From sudden surgeries to treatments not covered by insurance, medical expenses can take you by surprise.
• Unplanned travel: Sometimes, urgent trips are unavoidable. Whether it’s attending a family emergency, a funeral, or assisting a sick loved one, having funds set aside can ease the journey.

Income loss

Even the most stable-seeming job can go up in smoke, so it’s important to be prepared for the possibility of unemployment. If you face a sudden loss of income due to layoffs or health issues, an emergency fund can help cover your living expenses without going into credit card debt while you find a new job. 

Emergency cash is especially crucial if you’re self-employed or a gig worker, since government financial aid options like unemployment or disability benefits might not be available to you.

How much money should you have in your emergency fund?

A widely accepted rule of thumb is to keep three to six months’ worth of living expenses in your bank account for emergencies. The reasoning is that it can take many months to find a job, so you want to have enough to cover your living expenses in case of unemployment.

The exact amount for a healthy emergency fund will vary for everyone. To get a ballpark figure for yourself, jot down all your monthly expenses and multiply that by three (for the conservative side) or six (for a more comfortable cushion). The number you come up with might seem like a lot of money, and you may want to whittle it down by subtracting expenses you’d temporarily cut if you lost your job, like entertainment or treats. 

For example, say your total expenses add up to $5,000 a month. You’d need between $15,000 and $30,000 in your emergency fund to cover three to six months of living expenses. But if you were to remove some discretionary spending from your budget, you may find that $10,000 or $20,000 would be enough to get by if you tighten your belt.  

In reality, however, six months of living expenses sounds like an intimidating savings goal for most people. The good news is, you don’t need a specific amount of money to start an emergency fund. If you just start saving a portion of your paycheck based on what you can afford, your fund will grow over time.

How to build an emergency fund

Like any financial goal, building an emergency fund may sound daunting at first, but it’s much more accessible when you have a plan and tackle it in small chunks. 

The key is saving consistently and gradually increasing your contributions as you’re able.

Make a budget you can stick to

Building a budget is the foundation of managing your day-to-day spending, paying down debt, and working toward your savings goals. There are many different budgeting strategies out there, such as the 50/30/20 rule, the envelope method, and zero-based budgeting. The best approach for you is the one you can stick with. Include a line item in your budget specifically for your emergency fund so you’re adding to it bit by bit every month.

Automate your savings

One of the smartest moves you can make for your savings is to automate your contributions. By setting up a direct deposit from your paycheck into your savings account, you can tuck a portion of your earnings directly into your emergency fund before you even see it, thereby reducing the temptation to spend that money. Over time, this consistent, automated approach can significantly grow your emergency savings without feeling the pinch.

Take advantage of windfalls

Sometimes life drops a financial bombshell, but every so often you get a pleasant surprise as well. Windfalls like tax refunds, bonuses, and gifts are an opportunity to bolster your emergency savings. When you find yourself with extra money, consider channeling a portion into your emergency fund. Allocating windfalls to your savings can accelerate your fund’s growth, getting you closer to your financial goals without affecting your regular income.

Trim your expenses

Every dollar saved can be a dollar earned for your emergency fund. By reviewing and cutting back on non-essential expenses, you can free up more money for your savings. From cutting back on discretionary spending to reducing the cost of monthly expenses, look for practical ways to save money and funnel the extra cash into your emergency savings.

As you begin reviewing your spending habits, you might find some easy wins—such as canceling unused monthly subscriptions or seeking out the most cost-effective car insurance provider—these small changes can quickly reduce your total spending and free up dollars to grow your emergency fund.

Where to keep your emergency fund

When storing your emergency savings, two principles are key: liquidity and growth. Liquid means you can access your funds quickly and easily, without facing penalties. And growth is all about earning money on your savings. 

While it’s essential for your emergency cash to be accessible, you don’t want it to sit idle in your checking account. Opting for an interest-bearing savings account can help your emergency fund grow more quickly without you having to lift a finger.  

• Savings accounts: A traditional savings account offers a safe place for your money, typically with minimal or no fees. Many banks offer options with a low minimum required deposit; the trade-off is that these bank accounts usually pay lower interest than other short-term ways to grow your money.  
• High-yield savings accounts: These are similar to regular savings accounts, but offer a higher interest rate. This means your money can grow faster over time. Some might have higher minimum balance requirements or monthly fees, so be sure to read the fine print.
• Money market accounts: A money market account combines features of both checking accounts and savings accounts. Typically offering higher interest rates than standard savings accounts, they may also come with checks or debit cards. However, they might require a higher minimum balance and have monthly limits on transactions, making your emergency fund less liquid.

Emergency savings vs. other savings

Saving money is all about planning for the future, whether it’s unanticipated expenses or things you know you’ll need or want. An emergency fund is one component of an overall savings strategy; be sure you understand how it differs from other types of savings funds so you can plan accurately for all your financial goals.  

• Emergency fund: Emergency savings are for unexpected and significant expenses, typically those over $1,000, or even much more.  
• Rainy-day fund: Tailored for smaller unforeseen expenses, a rainy-day fund can cover living expenses you may not have accounted for in your budget. For instance, if there’s an out-of-the-blue spike in your water bill or a surprise visit to the vet, this fund comes to the rescue.
• Sinking fund: This is your planned savings pool. It’s for anticipated expenses you know are coming down the road, like regular vehicle maintenance, holiday gifts, or a vacation. When you have a solid emergency fund, you can rest assured you won’t have to siphon money away from these savings goals if you’re in a financial pinch. 
• Retirement savings: Preparing for your golden years is a marathon, not a sprint. Many people opt for tax-advantaged retirement accounts like IRAs or 401(k)s to maximize their savings. Withdrawing funds early can have substantial financial repercussions, so it’s extra important to rely on your emergency fund instead of tapping into retirement savings in a crisis. 

Protect your present and future with an emergency fund

An emergency fund equips you to navigate life’s uncertainties with confidence. And it also prepares you to work toward your longer-term financial health. Knowing you have a buffer to weather a financial storm empowers you to focus on saving and investing money to reach your bigger goals. 

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By understanding your income and expenses, you can create a budget using the 50/30/20 budgeting rule and determine just how much of your paycheck you should save or invest each month.

In this article, we’ll cover:

• Saving with the 50/30/20 budgeting rule
• When to break the 50/30/20 budgeting rule
• What to do with your savings
• Where to keep your savings

Determine your income and expenses

The first step to any savings strategy is to create a budget that will allow you to plan a specific amount to save after your expenses are covered each month. To get started, you’ll want to understand your income and expenses. That’s how much money is coming in and where it’s currently going. 

A good way to do this is to add up your income and expenses for the last two to three months, then calculate the average to get a sense of your usual monthly financial picture. Looking at a few months’ worth of financial records helps ensure you capture expenses that don’t come up every single month, and it’s especially important if you don’t make a consistent paycheck. 

To identify income, add up all the money you take home, which might include your paycheck, money from a side hustle, and payments from things like child/spousal support or government programs. Then take a look at your expenses: everything you’re spending your money on, including both necessities like bills and groceries as well as discretionary spending on things you want but don’t necessarily need. 

With a clear picture of your income and expenses in hand, you’ll be prepared to create your budget. 

Use the 50/30/20 budgeting rule 

The 50/30/20 budgeting rule can help you determine how much of your paycheck you should save by assigning every dollar you make to a bucket, determined by the percentage of income. 50% of your paycheck goes to your needs, 30% to your wants, and 20% to your savings/investments. 

What you consider a need versus a want is inherently personal and based on your unique situation and goals. For example, the nature of your work may require you to purchase a more powerful laptop. For you, that’s a need if you cannot do your work without it. Someone else may be able to accept a cheaper alternative, and a nicer computer would be considered a want.

Here’s how the buckets break down:

• 50% to needs: Everybody has different needs, but you can think about them as your necessary expenses. Typical needs often include rent or mortgage payments, utilities, insurance, car payments, groceries, debt payments, etc. Depending on your circumstances, needs also may include recurring medical costs, caretaking for a child or family member, education-related costs, public transportation, pet costs, tithing, and more. Look at your recurring expenses over the past few months to identify the expenses you have to cover each month and include them in your needs category. 
• 30% to wants: This category incorporates things like hobbies, vacations, dining out, streaming services, gym memberships, and recreational activities. The breakdown could end up encompassing many small expenses, like eating out, or a few larger ones, like a vacation or phone upgrade. Remember, it’s only a “want” if it isn’t necessary. For example, if you have to go to physical therapy to treat a medical condition, that’s a likely need, not a want. If you prefer the gym treadmill to running outside but could take the alternative, a gym membership may be just a want. It depends on what’s truly important to you.
• 20% to savings and investments: How you save and invest can also look different. You may want to focus on short- or medium-term saving goals like education expenses, a house or car, and building your emergency fund. Or you might want to invest for the long term with a brokerage account, an IRA or 401k for retirement, or an investment account for your children’s future education. Whether you’re saving for short-term goals or investing in your long-term financial future is very dependent on your situation. It is recommended that you start by building an emergency fund with enough savings to cover up to six months of expenses before moving on to other savings goals. 

When to break the 50/30/20 budgeting rule

Of course, how much of your paycheck you should save will depend on several factors, and the 50/30/20 rule doesn’t have to be exact. You may need more than 50% of your income to cover your needs, or you may need to save/invest more than 20% of your income to reach your goals. If you have a lot of debt or live in a high-cost-of-living city, for example, you may end up committing 60% of your income to needs, 20% to wants, and 20% to savings/investments. Or, if you’re saving for something important, you could rethink your breakdown and temporarily use a 50% needs, 20% wants, and 30% savings strategy. 

The 50/30/20 budgeting rule is a framework, and how you adjust it is dependent on your financial situation, lifestyle, savings goals, and needs. Here are a few specific scenarios in which you might want to allocate your income to categories a bit differently.   

High or low expenses vs. income

If your expenses are more than 50% of your income, you’ll need to adjust your budget strategy to compensate. First, identify what expenses are wants versus needs. If they’re mostly needs, adjust the 50% to cover the amount required. If they’re mostly wants, look for opportunities to reduce these costs to get closer to 30%. Even if you can’t commit 20% of your monthly income to savings/investing, you can still find ways to save money. Your priority is creating a realistic budget that works for you; saving 10% of your paycheck, or even just $10 or $20 a week, will build up over time. 

If your needs are less than 50% of your income, you have an opportunity to put more money into savings and investments. This is a chance to avoid lifestyle creep, which is when you artificially inflate your needs or wants to fit a higher income, and instead double down on achieving your financial goals. For instance, if you get a raise at work, you might consider putting some of that additional income toward your savings goals instead of increasing discretionary spending.

Large amounts of debt

If you have a lot of debt, especially high-interest debt, it may make sense to focus on paying down your debt before committing to saving 20% of your income. You’ll still want to maintain a healthy emergency fund, as emergencies can’t be avoided or predicted, but devoting more of your income to paying off debt faster will help you pay less in interest over time and could relieve some pressure on your budget. You can utilize the avalanche method, in which you pay your debts from the highest interest rate to the lowest, or the snowball method, where you pay down debts from the smallest to the largest amount. Once you’ve paid off your debt, you can re-adjust the framework and commit more money toward your savings goals or investing. 

Two-income households

How much of your paycheck should you save versus your partner or second-income earner? You can adjust your approach to the 50/30/20 budgeting rule to accommodate dual-income households. If both parties are earning roughly the same income, one earner could cover your household’s basic, necessary expenses in the 50% needs category. The second earner could commit their income to wants and savings/investing. This won’t work for all financial situations, but it can be a helpful framework for applying the 50/30/20 budgeting rule when sharing expenses. 

What to do with your savings

How you use your savings will depend on numerous factors. Emergency savings, a house fund, saving for education, and saving for your children or other family members are all common savings goals. There is no one-size-fits-all savings amount, and you should always factor in the stability of your employment situation and your lifestyle when setting your savings goals to ensure they’re realistic and achievable.

Build an emergency fund

First things first, focus on your emergency fund. The size of your emergency fund can depend on your current income, your existing savings and investments, how many dependents you have, and more. It’s recommended that you maintain an emergency fund with up to six months’ worth of expenses. That way, if you suddenly lose your job, your car breaks down, or you have a medical emergency, you don’t have to panic or go into debt to get by. 

An emergency fund is different from a rainy day fund; the latter is usually smaller and designed to cover more predictable, lower-cost things like car maintenance and your dog’s yearly vet visit. 

Set savings goals

Of course, determining how much of your paycheck you should save is only the first step; you still have to determine what you’re saving for. You’ll likely have short-term, mid-term, and long-term savings goals. Short-term goals are generally achieved in 12 months or less and might include things like planting a garden in the spring, saving for braces, upgrading your computer, taking a vacation, or saving for holiday gifts. Mid-term goals are a little further out: usually about one to three years. This can be something like putting a down payment on a house, moving to a different city, getting a new car, having or adopting a child, or having a wedding. Creating a sinking fund is best for these types of savings goals.

Remember, what you see as a short- or mid-term goal will depend on your income, other expenses, and timeline. Whatever the case, having specific saving goals can motivate you to stick with your plan and put that money aside instead of spending it.  

Invest for the long term

Long-term financial goals typically focus on retirement planning, wealth building, and financial freedom. These savings goals take a longer time to achieve but are well worth the work. They often look like contributing to a retirement account, building a diversified investment portfolio focused on long-term gains, or investing in an account for your child’s education. Often, people work toward these long-term goals by investing rather than keeping money in the bank, where inflation may outpace the interest earned. 

Where to keep your savings

While you technically can save your money in any account, there are some account types that amplify your savings because they earn interest or returns. When selecting what account to put your savings in, you’ll want to think about potential returns, how likely you’ll need to access that money, and how long you want it to stay in the account. 

• High-yield savings account: A high-yield savings account is best for short- to mid-term savings. These accounts act much like traditional savings accounts but pay more in interest. Like a traditional savings account, you may be limited to six monthly withdrawals, but your money can be accessed quickly if needed. A high-yield savings account can provide competitive returns, but remember that most interest rates are variable, so they could drop at any time.
• Certificates of Deposit (CDs): A certificate of deposit, or CD, is essentially a loan you extend to the bank. Your deposit earns a fixed interest rate for a set period of time. You’ll generally get higher interest than a traditional savings account, but you often can’t access that money without paying a penalty before the end date. The term length can vary from a few months to a few years. A CD can be a great place to store money you’re confident you won’t need to access before the term is up.  
• Retirement accounts: Retirement accounts like a 401k, IRA, or Roth IRA are for your long-term investments. These tax-advantaged investment accounts have deposit and withdrawal limits; typically, you can’t cash out your investments before age 59 ½ without incurring substantial penalties. You only want to invest money in these accounts that you won’t need to access before retirement. 
• Brokerage accounts: A brokerage account is a taxable investment account you use to buy and sell securities. Unlike a retirement account, you can invest as much money as you want and withdraw that money before retirement. A brokerage account can be a good vessel for mid- and long-term goals but comes with risks, as you can lose the money you invested. These accounts also aren’t tax-advantaged, so you’ll pay taxes if your investments receive dividend or capital gains payments, or if you sell securities that have gone up in value resulting in an investment gain.

Ready to start saving?

Once you’ve created a budget, you should be able to confidently decide how much of your paycheck you should save based on your personal circumstances. But your budgeting and savings journey isn’t over. The amount you save will likely shift as your income, expenses, and savings goals change. Budgeting and saving for young adults will likely look different from the approach that works for people in their 30s, 40s, and beyond. You can adjust your strategy to reflect your ever-evolving financial landscape by periodically asking “How much of your paycheck should you save?” with a fresh perspective.

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Budgeting doesn’t have to be complicated. This guide will take you through the process, including six steps for learning how to make a budget you can stick to.  

In this article, we’ll cover:

• What a budget is
• The importance of budgeting
• Calculating your net income
• Recording your spending habits
• Predictable vs. variable expenses
• Balancing your budget
• Types of budgeting
• Setting goals for your budget

What is a budget?

In its simplest form, budgeting is just figuring out how much you make and how much you spend and then using that information to inform your future financial decisions. Your budget allows you to plan how you’ll spend your income and keep track of money coming in and out. Tracking your spending lets you see your true financial picture in real-time so you can make informed choices. And planning ahead gives you a chance to put money toward your longer-term goals, like paying off credit cards, saving for a downpayment on a house, or planning for retirement.  

Why budgeting is important

Why learn how to make a budget? The short answer is that knowledge is power. It can be difficult to exercise control over your money until you have a clear picture of your finances. However, the benefits of budgeting extend far beyond just gaining financial control. Let’s dive into the specific advantages and rewards that come with implementing a budget.

Improved financial security

Let’s face it, life can be unpredictable. But with a budget, you can gain control over your finances and build a safety net. By understanding your financial situation, you can build an emergency fund to handle unforeseen circumstances, such as medical emergencies, car repairs, or job loss. This financial security provides peace of mind and reduces the stress that comes with financial uncertainty.

Reduced stress

Financial stress can take a toll on your well-being. Whether you’re living paycheck to paycheck or worrying about money in general, it can be overwhelming and emotionally draining. A budget gives you a clear overview of your income, expenses, and financial goals. It helps you identify areas where you can cut back, eliminate unnecessary debt, and save for the future. With a budget in place, you can make informed financial decisions and eliminate the anxiety that arises from financial instability.

Better decision-making

Picture this: you’re equipped with a budget that serves as your compass. It guides you to make intentional choices aligned with your goals. When you have a budget, every financial decision becomes more deliberate and informed. By tracking your spending habits, you become aware of patterns and identify areas where you may be overspending. This knowledge empowers you to make adjustments and allocate your resources according to what truly matters to you.

Ability to achieve financial goals

A budget serves as a roadmap for reaching your financial aspirations. Whether your goals include paying off debt, saving for a dream vacation, saving for a down payment on a home, funding a child’s education, or planning for retirement, a budget provides a structured approach to allocate funds towards these objectives. It helps you track your progress, make necessary adjustments, and stay motivated on your path to financial success.

Enhanced control and discipline

Setting a personal budget promotes discipline and self-control in managing your finances. It encourages you to prioritize expenses, distinguish between needs and wants, and resist impulsive spending. By consciously allocating your income, you gain control over your money and avoid the pitfalls of overspending or unnecessary debt. Over time, budgeting becomes a habit that empowers you to make smart financial choices that align with your values.

Improved relationships and communication

Money matters can strain relationships. Budgeting is not only a personal endeavor but can also benefit relationships. It fosters open communication about money between partners or family members, ensuring everyone is on the same page regarding any financial goal, spending limits, and saving strategies. Budgeting encourages accountability and cooperation, leading to stronger relationships and shared financial success.

6 Steps to budgeting your money

Step 1: Calculate your monthly net income

You may have heard the terms “gross income” and “net income.” Gross income is the total amount you earn before taxes, benefits, and other payroll deductions are taken out. Net income is the amount of money you actually take home every month after taxes and deductions. For budgeting, you want to identify your net income.

If your sole source of income is a job with a regular paycheck, it’s pretty straightforward: tally up the total amount of all your paychecks during a month. Your employer typically subtracts taxes and other deductions from your base salary before issuing your paycheck. 

You might have additional sources of income, so be sure to include those when calculating your monthly net income. This might include things like:  

• Alimony payments and/or child support 
• Government payments, like disability or veterans benefits
• Passive income, such as income from rental properties 
• Any money you earn from a side hustle or gig work

Step 2: Gather and record your expenses

Once you know how much money is coming in, figure out how much money is going out. Make a list of everything you spend money on every month and about how much you’re spending: bills, necessities, discretionary spending, etc. It can be tough to remember everything, so do some digging by looking at your records. 

You might start by reviewing statements from the accounts you use to pay for things, such as:

• Bank accounts
• Credit cards 
• Digital payment apps

Other useful information about expenses might be found in statements or receipts from:

• Car payments
• Car insurances
• Mortgage documents
• Utility bills
• Investment accounts
• Email receipts 

After your initial pass at tracking your expenses, consider some of the following options to help automate your tracking:

• Embrace budgeting apps: These user-friendly apps often allow you to link your bank accounts and credit cards and automatically categorize transactions and provide a visual representation of your spending patterns.
• Leverage online banking tools: Your bank’s online platform can have a treasure trove of features to help you track expenses. Explore the tools provided, such as spending categorization, transaction history, and spending alerts. 
• Use expense tracking spreadsheets: If you prefer a hands-on approach, a spreadsheet can be your best friend. Create a personalized template with columns for date, description, category, and amount. Enter your expenses regularly and categorize them accordingly. 
• Use the envelope system: The envelope system is a physical method where you assign cash to different envelopes, each labeled with a specific spending category. Whether it’s groceries, transportation, or entertainment, this system allows you to visualize your available funds and make mindful spending choices.
• Keep your receipts: Make it a habit to collect and store receipts for your purchases. Create a designated email folder for digital receipts and store your physical receipts in an envelope or folder.
• Account for cash transactions: Cash can be elusive when it comes to tracking expenses. Stay on top of it by jotting down cash transactions in a small notebook or using a budgeting app that allows manual entry.

Remember, effective expense tracking is crucial for accurate budgeting. Choose a method that works best for you and consistently track and categorize your expenses. Regularly reviewing your spending habits will provide valuable insights for making informed financial decisions and adjusting your budget as needed.

It can be helpful to look through 12 months of records to get a full picture of your spending. Some expenses vary from month to month, and any bill or subscription renewal that recurs yearly will only show up as a charge in one month over the course of the year. Budgeting requires being aware of and anticipating these expenses so you can plan for them. 

Step 3: Categorize fixed expenses vs. variable expenses

Among the easiest expenses to track are those that occur at regular intervals with the same amount, like rent or mortgage payments, your phone bill, and streaming services. These are called fixed expenses, and because they’re predictable, planning for them tends to be easier. 

Variable expenses, on the other hand, shift from month to month. They fall into two categories:

• Predictable expenses that you know will occur even if you don’t know the specific amount, like groceries or utility bills
• Unpredictable expenses that you can’t easily anticipate, such as home and car repair or health care emergencies

Expenses in the first category may vary from month to month but will typically stay within a certain range. The longer you track your spending, the better a feel you’ll get for how much to set aside for these categories. However, even these expenses can sometimes surprise you, as when gas prices suddenly rise. 

Unpredictable expenses are more challenging to budget for. If you own a car, you can reasonably assume that at some point it will need repairs, but you don’t know when or how much money it will cost. For this reason, many budget experts suggest building an emergency fund for contingencies. 

To get you started, here are some examples of different types of expenses: 

Step 4: Calculate your monthly income and expenses

This step is often referred to as balancing your budget; it can be the most sobering part of the process, but it may also be the most useful in planning for the future. If you want to gain any benefit from learning how to budget, you’ll need to be honest with yourself about your income and your spending habits. 

Add up all your monthly income and expenses, then subtract your expenses from your income. The number will tell you whether you’re in the red or in the black. Now it’s time to balance your budget.

• If you’re spending less than you earn, your income is enough to cover all your usual expenses. You can use your discretionary funds to store up for emergencies or start building your nest egg by saving or investing your money. 
  
• If you’re spending more than you’re taking in, you’re living beyond your means, and paying for things with credit cards can hide this fact for only so long. The good news is that learning how to budget will make it easier to gain control of your money. Look over your spending to see if there are areas where you can cut back, paying close attention to your non-essential spending. If you find that your spending is already at the bare minimum, you may want to look for additional sources of income.   

• You may also find that you’re generally in the black, but not by much, or that some months you come out ahead and some months you’re in the red. Reducing your spending on nonessential items might help you spend less than you earn more consistently and make it easier to plan for the future.

Step 5: Choose your budgeting method

You now have a clear picture of your financial situation; it’s time to start planning and tracking your spending. There are several approaches to budgeting, and each has its advocates. It’s up to you to find the method that works best for your circumstances and personality. You might even find that combining elements of different methods makes sense for you. What’s important is that you find a way of budgeting that you can commit to over the long haul.  

Here are some popular budgeting methods you might want to try out:

• 50-30-20 budget: The 50-30-20 budget helps you set your priorities by clearly laying out how much of your monthly income you should spend on each of three categories: 50% to needs, 30% to wants, and 20% to investing and saving. One advantage of the 50-30-20 budget rule is that it provides clear guidelines for your monthly spending while leaving flexibility to adjust as you continue learning how to budget for your personal circumstances.
  
• Zero-based budget: A zero-based budget is just what it sounds like: you assign every dollar of income a category until you hit zero. That includes all your expense categories: necessities, nonessential spending, investing, saving, and emergency funds. Some people enjoy planning with this level of specificity because it can help you feel in control and be disciplined about paying down debt or saving money. That said, you’ll need to track your spending extra closely to make sure you stay on target.
  
• Pay yourself first method: The pay yourself first budgeting method is oriented toward saving and puts your long-term financial goals at the top of the list of funded categories. Essentially, you begin your budgeting process each month by setting aside money for saving and investment. By prioritizing this part of your budget, you can keep your focus on building wealth; some people find it easier to cut down their spending on unnecessary things when the big picture is top-of-mind. 
  
• Envelope method: The envelope method is a classic approach that allocates the money you have on hand to your expense categories. In the most literal form of this budget, you put physical cash into envelopes marked with categories. Then, when it’s time to spend, you take the cash out of the relevant envelope; when the envelope is empty, your budget for that category is used up for the month. The envelope method is the conceptual basis for a lot of budgeting apps, including the Stash partitions feature.   

Step 6: Set realistic financial goals for yourself and stay motivated

Once you learn how to make a budget, the final step is to put your new budget plan to use. That means tracking your spending regularly, planning out your budget for each month, and readjusting as you learn. 

One of the keys to maintaining a budget is motivation: What are you trying to achieve financially? It could be a goal as modest as saving for a new couch or as ambitious as starting your own business. Keeping your focus on why you’re budgeting, and what you hope to get from it, can help you commit to the process.

Here are some tips to help you establish goals that align with your current financial situation and increase your chances of success:

SMART goal setting

Utilize the SMART framework when setting your financial goals. By making your goals specific, measurable, achievable, relevant, and time-bound, you’ll have a solid foundation for success:

• Specific: Clearly define what you want to achieve. Instead of a vague goal like “save money,” specify an amount or percentage you aim to save.
• Measurable: Make your goals quantifiable. This allows you to track your progress and know when you’ve achieved them.
• Achievable: Set goals that are realistic and within your reach. Consider your income, monthly expenses, and financial obligations when determining what you can reasonably accomplish.
• Relevant: Ensure that your goals are relevant to your financial situation, values, and long-term aspirations.
• Time-bound: Set a deadline for achieving your goals. This provides a sense of urgency and helps you stay focused.

Break goals into smaller milestones

Breaking larger goals into smaller, manageable milestones can make them less overwhelming and more attainable. For instance, if your goal is to save $10,000 for a downpayment on a house, break it down into monthly or quarterly savings targets.

Align Goals with Personal Values and Priorities

Consider your personal values, aspirations, and priorities when setting financial goals. Determine what truly matters to you and what you want to achieve in the long run. Aligning your goals with your values will provide a strong sense of purpose and increase your commitment to following your budget.

Remember, the purpose of setting financial goals is to provide direction, motivation, and a sense of accomplishment. Regularly review and reassess your goals as your financial situation evolves. Stay committed to the process and celebrate your progress along the way.

1/4

Quiz

 

With the 50-30-20 budget, 20% of your income should go to:

Savings

Needs

Bills

Wants

Savings. 50% of this budget goes toward fixed or essential expenses (needs), 30% goes toward variable or flexible expenses (wants), and 20% goes toward savings.

2/4

Quiz

 

True or False: Everyone should use the same budget template.

True

False

False. You should tailor your budget to your life and your needs. If you want to prioritize your savings over your “wants”, that’s up to you!

3/4

Quiz

 

Which of the following would be included in your fixed or essential expenses?

Shopping

Retirement

Rent

Going out to eat

Rent. This expense stays the same month-to-month and is essential.

4/4

Quiz

 

Which of the following is another example of a budget you might use?

The piggy bank budget

The zero-sum budget

The credit card budget

The shoe-string budget

The zero-sum budget. With the zero-sum budget, you give every dollar a job and the objective is to get to $0 every month.

 

Quiz

 

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How to budget for beginners

If planning and tracking your spending is new territory, the steps above will get you started on the right foot. It may be helpful to keep in mind that you don’t have to get every detail correct from the very beginning. Your budget will always be changing to reflect your circumstances, and the more you use it the more accurate it will become. So get started now and give yourself permission to learn as you go.    

The best budget is the one you stick to

Just by deciding to learn how to budget, you’ve taken an important step toward improving your financial well-being. Budgeting will do you the most good if you can make it a lifelong habit, and taking a long-range perspective can allow you some leeway. If you overspend in a category one month, try to figure out whether you’re underestimating how much you need or if you can adjust your habits to spend less. Eventually, you’ll start to get a sense of the difference between what you need and what you want. Even the simplest budget can change your approach to spending,  saving, and investing for the long-term if you’re willing to commit to it over time.  

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The Financial Independence, Retire Early (FIRE) movement is a philosophy dedicated to aggressive budgeting, extreme saving, investing, and retirement planning. The goal is to achieve financial freedom that allows you to retire far earlier than traditional savings methods would allow. 

In this article, we’ll cover:

• What the FIRE movement is
• How  the FIRE movement works
• Common FIRE movement philosophies
• Who the FIRE movement attracts
• Tips for participating in the FIRE movement

What is the FIRE movement?

FIRE stands for Financial Independence, Retire Early. The goal is to save up enough money so you no longer need to work and to do so much younger than the traditional retirement age of 65. Financial independence is achieved when you can cover all your living expenses with your savings and investment income so that you can retire early.

Exactly who started the FIRE movement is unclear, but many of the concepts underlying it come from Your Money or Your Life, a 1992 book by Vicki Robin and Joe Dominguez. The book’s core premise is that people should evaluate their expenses in relation to the number of working hours it took to pay for them. For example, if you want to buy shoes that cost $100, and you make $25 an hour, are those shoes worth working for four hours of your life?

FIRE is a long-term strategy that involves maximizing income, reducing costs, and aggressive saving and investing. There are three common kinds of FIRE strategies to choose from. 

• Fat FIRE: Those attempting Fat FIRE want to retire early but maintain their current standard of living. This requires substantial savings, heavy investing, and generally a high income, as the focus is more on maximizing income and investment returns than reducing expenses.
• Lean FIRE: Lean FIRE is the opposite of Fat FIRE, and is the more traditional FIRE strategy. When you Lean FIRE, you’re willing to pursue a minimalistic lifestyle in order to retire early. Some people will live on as little as $25,000 per year, even if their income is many times more than that.
• Barista FIRE: This approach balances the techniques of Fat FIRE and Lean FIRE. These individuals are willing to “partially retire,” quitting their full-time job and supplementing their retirement with part-time work or passive income in order to live below their means without committing to an extremely frugal lifestyle. 

How does the FIRE movement work? 

There are three major elements to any FIRE strategy: reducing expenses, increasing income, and investing as much money as you can in a mix of taxable and tax-advantaged accounts. 

To achieve financial independence and retire early, you’ll need to understand how much you need to retire, actively manage your current lifestyle and expenses, and stick to a strict savings and investing strategy. 

• Thorough planning: The FIRE movement stresses the importance of having a detailed financial plan and sticking to it long-term. That requires close attention to personal finances, including detailed retirement planning and precise budgeting for how every penny is spent, saved, and invested. 
• Financial discipline: The goal is to maximize the money coming in, minimize the money going out, and optimize where your money is stored and invested. You can’t casually participate in the FIRE movement; it requires consistency and discipline. That said, you can use a lot of the FIRE concepts to improve your own financial situation, even if you aren’t following the philosophy to the letter.
• Dedicated investing: Investing is at the core of retirement planning. But when you pursue FIRE, you can’t rely solely on traditional retirement strategies. Retirement accounts like 401(k)s and traditional and Roth IRAs come with steep penalties for withdrawing money before age 59½, and you can’t start drawing social security until age 62. So FIRE followers need a taxable brokerage account that can provide income when they retire early. FIRE followers also have to invest a larger portion of their income than is traditionally recommended in order to retire more quickly. 

Core FIRE movement techniques

FIRE followers have put together a handful of specific strategies for achieving the level of financial independence needed for early retirement. 

The rule of 25

If you want to retire early, you need to know how much money you need to live after you stop working. The rule of 25 states that you’ll need to save up 25 times of your annual expenses before you retire. You can calculate this number for yourself by estimating your monthly expenses, multiplying them by 12 to get your annual expenses, and then multiplying that number by 25. 

Here’s an example:

• Monthly expenses = $5,000
• Annual expenses = $5,000 x 12 = $60,000
• FIRE number = $60,000 x 25 = $1.5 million

The rule of 25 provides the key financial goal for the FIRE method: the amount of money you have to save up before you can retire. Of course, the rule makes several assumptions, so think of it as a goalpost for planning instead of a fixed number. This rule doesn’t account for inflation or significant lifestyle changes, like new chronic illnesses or substantial changes in annual costs. It’s also designed to cover 30 years of retirement. Depending on how early you plan to retire and how circumstances change over time, you may need to adjust your target number.  

The 4% rule

The 4% rule states that retirees can withdraw 4 percent from their savings and investment accounts every year in order to have enough money to live on for 30 years. This means withdrawing 4 percent in year one and then adjusting for inflation in subsequent years. 

For example:

• Value of savings and investments: $1.5 million
• Annual withdrawal in year one: 1,500,000 x .04 = $60,000
• Annual withdrawal in year two (assuming 2% inflation): $60,000 x 1.02 = $61,200 

The 4% rule is designed to be general. So, when building your personal FIRE strategy, test out a couple of variations to see what might work for you. Maybe you need closer to 5% to 6% or can get away with as low as 3.5% depending on the lifestyle you plan to have in retirement. 

The power of compounding growth

Compounding is when your interest and returns from one period earn additional interest and returns in subsequent periods. Essentially, it’s a percentage of money you gain on top of what your principal investment earns. Compounding can be a powerful tool to get you closer to early retirement and financial freedom. 

The power of compounding relies on long-term savings and investments. Interest on savings, dividend income from stocks, and returns on investments must stay invested in order to earn additional returns. The sooner you start investing, the longer your money has to grow and compound. 

Tax efficiency

Traditional retirement accounts come with tax advantages that help you keep more of your money instead of spending it on taxes. But if you withdraw money before you’re 59½, you lose those advantages and have to pay penalties. FIRE followers often seek to retire much earlier than that, so they diversify where they invest so they can reap tax benefits while also generating enough income to cover their expenses between early retirement and traditional retirement age.  

• Tax-advantaged retirement accounts: IRAs and 401(k)s can help lower your taxable income and allow for tax-deferred or tax-free growth on investments as long as you don’t withdraw money early. FIRE investors often leverage these accounts to save for their retirement expenses after age 59½, while planning to withdraw from their brokerage account after they retire but before they hit that milestone.
• Health savings accounts (HSAs): Healthcare expenses are an important consideration in planning for your later years, and HSAs can provide significant tax savings on money you spend on qualified medical expenses. First, you fund the HSA with pre-tax money, reducing your taxable income each year you contribute. Second, you don’t have to pay taxes on money you withdraw from the account as long as you spend it on qualified healthcare expenses. And finally, the funds in your HSA can be invested, and earnings are not taxed if they’re spent on qualified medical expenses. 
• Tax-efficient investments in brokerage accounts: While a brokerage account doesn’t offer any particular tax advantages, FIRE investors can look for tax-efficient options. Holding investments for more than a year generally lets you pay the lower long-term capital gains rate on returns, as does earning qualified dividends. Index funds, exchange-traded funds (ETFs), and some mutual funds may also be more tax-efficient because they might trigger fewer capital gains. 

Who is the FIRE movement for?

People who follow the FIRE movement would rather live frugally and be very disciplined about their personal finances so they have more years of their lives free from the obligation to work. FIRE followers often forgo living in high-cost areas, owning new cars, taking vacations, dining out, and spending on entertainment to accomplish this goal. 

Each individual has their own definition of early retirement; some people see age 55 or 50 as attainable, while others aspire to leave the workforce much younger. Regardless of the specific goal, anyone who can live well below their means to reach financial independence can follow the principles of the FIRE movement. For a real-life example, check out the story of one couple who used the FIRE movement to pay off $200k of debt and move toward financial independence.  

Limitations of the FIRE movement

While anyone can technically pursue financial independence and early retirement, it can be a difficult path, and there are a number of barriers that can make achieving FIRE more difficult. These include financial burdens beyond one’s control, like extensive or chronic healthcare needs, familial obligations, high student loan debt, and unpredictable life events and emergencies. Additionally, pursuing FIRE can require a high income that may be more difficult to obtain for those coming from historically oppressed populations, lower socioeconomic backgrounds, or those who face barriers working traditional jobs. 

In reality, FIRE isn’t necessarily attainable for everyone. That said, even those who can’t commit fully to a FIRE method can use elements of the philosophy to improve their overall financial situation. 

Tips for participating in the FIRE movement

• Create and stick to a budget: Building a budget that includes detailed plans for spending, saving, and investing is fundamental for following the FIRE method. If you already have a budget, you might need to heavily rework it or start from scratch to make sure you’re allocating enough money each month toward your retirement goals, debt repayment plans, emergency fund, and other financial goals. 
• Determine your retirement needs: If you want to retire early, you’ll need to plan meticulously. Start by understanding when you want to retire and how much money you’ll need. Then you can work backward, using the rule of 25 and the 4% rule to determine what income and savings rate you need. A retirement calculator can help you zero in on those numbers based on your individual goals and circumstances.
• Save or invest 50% to 70% of your income: To successfully FIRE, you’ll need to save and invest as much as you can. The usual rule of thumb is to save 20% of every paycheck, but those participating in the FIRE movement usually aim for 50-70% of their income instead.
• Pay off your mortgage: You can dramatically reduce your post-retirement expenses by paying off your mortgage early. This has the dual advantage of reducing how much you pay in interest on your mortgage overall and reducing your monthly post-retirement expenses by eliminating a mortgage payment from your budget. 
• Minimize expenses and spending: FIRE is a long-term goal, and requires significantly trimming short-term spending. To successfully FIRE, you’ll need to reduce your expenses and save as much money as possible. You’ll also need to track expenses carefully to ensure you don’t derail your plans. Many people use cash or a debit card instead of a credit card to help curb the potential for overspending.
• Get out of debt: Debt can quickly douse your FIRE strategy. The sooner you get out of debt, the sooner you can start putting the money you’re spending on interest payments toward your retirement savings. Paying off high-interest debt through the avalanche method can help you spend less on interest payments overall.
• Build up your emergency fund: An emergency fund helps you avoid going into debt or draining your savings and investment accounts when unexpected expenses come up. Most experts recommend you maintain enough for three to six months of living expenses in your emergency fund. For those pursuing FIRE, it’s generally recommended to stash enough money to live on for 12 months if possible.
• Plan for medical needs: While it’s not possible to anticipate exactly what your healthcare needs will really be in the future, they’re an important factor in understanding how much money you’ll need to live on in the future. If you have known medical expenses, factor those into your FIRE strategy. Take advantage of an HSA and maintain an emergency fund to prepare for medical expenses. Remember, you don’t qualify for Medicare until you’re 65, so you’ll have to be able to cover all your medical expenses in the meantime. 
• Start investing with a brokerage account: Think of your brokerage account as a bridge to carry you from your early retirement age to 59½, when you can withdraw from tax-advantaged accounts penalty-free. Take the number of years you have between those ages and multiply it by the annual retirement income withdrawal you determined using the 4% rule. For example, say you want to retire when you’re 54½ and will need $60,000 a year to live on. Since you’d need to draw from your brokerage account for five years, you’d need about $300,000 in that account. 
• Contribute to tax-advantaged retirement accounts: You can have multiple tax-advantaged retirement accounts, so explore all your options. Traditional and Roth IRAs have different tax advantages; you might leverage one or both to get the most tax benefits. If your employer offers a 401(k) plan, you might want to take advantage of it as well, as it comes with an entirely different set of benefits and limitations compared to IRAs. 
• Diversify your investments: To ensure your investments will carry you through retirement, you’ll want to reduce risk by diversifying your portfolio. This means spreading your holdings across different asset classes so major changes in one company or sector don’t have as significant an impact on the overall value of your investment portfolio.

How to make the FIRE movement work for you

FIRE isn’t for everyone, but its philosophies can benefit even those who don’t want to commit to the movement fully. The core concepts of decreasing expenses in order to save and invest can help anyone improve their personal finances and work toward a greater sense of financial freedom. 

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Wintertime brings a host of holidays and celebrations, with gift exchanges, holiday meals, and festive gatherings to mark the end of another year. But the merrymaking also comes with the reality of extra costs. In 2023, average holiday spending is estimated to be $1,530 per household for gifts, travel, and entertainment. Without a budget for these expenses, the holiday season can put a strain on your finances, and even lead you into credit card debt. But with a bit of careful planning for holiday expenses, you can craft a holiday budget that ensures you savor the season’s delights without stressing over money.

In this article, we’ll cover:

• Benefits of holiday budgeting
• How to make a holiday budget
• Avoiding debt during the holiday season 
• Tips for saving on holiday expenses
• How to save up for holiday expenses

Benefits of holiday budgeting

No matter what traditions you observe, extra expenses can quickly mount during the holiday season. Creating a budget can help ensure you have money to spend on festivities, start the new year in a solid financial position, and keep stress from souring your celebrations. 

• Ensure your expenses are covered: A holiday budget safeguards the money you need for your regular living expenses and bills, preventing you from unintentionally spending it on holiday extras. 
• Protect your savings and investments: By allocating funds specifically for holiday spending, you can avoid the temptation to dip into your savings or disrupt your investment plans. 
• Avoid going into credit card debt: With a budget, you’re less likely to rely on credit cards which can leave you with high-interest debt lingering long after the holiday season ends.
• Reduce stress: Knowing you have a plan for your holiday spending can lift a weight off your shoulders. A budget removes the guesswork and lets you enjoy the holidays without the nagging worry of overspending.

How to make a holiday budget in 3 steps

The goal of a holiday budget is to allocate a percentage of your income and savings to holiday spending while maintaining enough money for your other financial commitments. If you already have a budget, now’s the time to work holiday expenses into your plans. Be sure to integrate specific line items for things like gifts, travel, and entertainment into your existing budget. 

And if you haven’t yet established a monthly budget, the holidays are an opportune time to start. Making a holiday budget may help you start a long-term budgeting habit. 

1. Define your holiday spending categories

The holidays can bring a wide array of expenses unique to each person’s traditions; without a detailed plan, it’s all too easy to overlook certain costs. To know exactly what you should budget for your holidays, first, determine what your typical holiday spending looks like based on previous years. Then think about what you’re planning to do this year and make a list of all your anticipated expenses.   

A reasonable budget for the holidays depends on the traditions you observe and what’s important to you. Consider planning for these common seasonal purchases:

• Holiday gifts: Think of everyone on your gift list, as well as presents you’ll buy for things like office gift exchanges or Secret Santa gifts if you celebrate Christmas.
• Greeting cards: Be sure to consider the cost of both cards and postage if you’re mailing holiday greetings.
• Dining and groceries: Include the costs of dining out as well as money for extra groceries if you’re hosting gatherings. 
• Entertainment and activities: Check the cost of tickets and entry fees for the events you plan to attend this season. 
• Decorations and attire: Remember to include expenses for replacing worn-out decorations, as well as special clothing you may need for a holiday party.
• Holiday travel: If travel is on your agenda, plan for the cost of tickets and accommodations, and remember additional expenses like travel insurance and pet care while you’re away.
• Charitable donations and tips: Giving back is an important part of the holiday spirit for many people, so budget for donations you want to make and tips for service workers. 

2. Fund your holiday budget

Once you’ve identified the various expenses that the holiday season entails, the next step is to determine how much you’ll need for each and ensure you have the funds set aside. 

• Determine spending limits for each category: Look back at last year’s spending to help gauge what you might need this year. This historical insight can serve as a baseline for setting spending limits for each category of your holiday budget.
• Reduce your expenses: To free up funds for your holiday spending, look for ways to save money on other expenses. You might want to make temporary sacrifices in some areas to make room for holiday purchases. 
• Tap into extra money: If you receive any extra income during the holiday season, such as a bonus from work, you could use it to bolster your holiday budget. You may also want to look for additional sources of money, like old gift cards that still have a balance or picking up a short-term side gig. 
• Take unpaid time off into account:  If you’ll be taking unpaid vacation time for holiday travel or observance of special days, remember to factor the reduction in income into your budget. 

3. Track and control your spending

Amidst the bustle of holiday shopping, it can be easy to lose track of your planned spending limits. By tracking your spending meticulously, you can be sure you don’t blow your holiday budget.  

• Consider a budgeting app: A budgeting app can give you real-time insight into how much you’re spending by automatically tracking every transaction. This constant monitoring can alert you to issues so you can adjust your spending habits before they become a concern.
• Try a mini envelope budget: Envelope budgeting involves allocating cash into different envelopes for each spending category. By using this approach for your holiday expenses, you can physically see what you have left to spend, which can be a powerful deterrent from going over budget.
• Use your debit card, not your credit card: While it’s tempting to defer the cost of your holiday expenses by putting them on your credit card, relying only on your debit card can help you ensure you’re only spending money you have in the bank. If you can find a debit card that offers rewards, all the better.
• Remember the reason for the season: It’s easy to get caught up in the thrill of holiday spending and forget the reason you’re celebrating in the first place. Before you decide on a purchase, reflect on whether it adds meaning and joy to your personal experience of the holidays.  

Don’t let debt put a damper on your holidays

If you defer paying for your holiday expenses, the joy of the season can turn into the stress of lingering debt when the new year dawns. By planning and spending within your means, you can create lasting memories without the worry of paying off debt once the holiday lights dim.

Avoid credit card debt

Credit card debt can be particularly insidious during the holiday season. It’s easy to swipe now and worry later, but this can lead to a significant financial hangover. In 2022, 35% of U.S. consumers found themselves saddled with debt from holiday spending. Credit card debt in particular often carries high interest rates, which can quickly compound, making it harder to pay off in the long run. 

Beware of buy now, pay later offers

Buy now, pay later (BNPL) offers might seem convenient to spread out holiday expenses, but they come with caveats. These plans allow you to purchase items immediately by paying for just a portion of the cost and then paying off the rest in installments. While this can make large purchases seem more manageable, it can also lead to spending beyond your means. If you’re not careful, BNPL plans can accrue interest or fees, and missed payments may impact your credit score. It’s crucial to fully understand the terms and consider whether the long-term costs are worth the short-term convenience.

Tips for saving on holiday expenses

The holiday season doesn’t have to be synonymous with extravagant spending. With a few smart strategies, you can trim your holiday expenses without diminishing the sparkle of your celebrations.

How to save on holiday gifts

• Arrange a gift exchange: Organize a gift exchange among your family or friend group where every individual draws a name. This way, everyone receives something special, and each person only needs to purchase one gift, keeping expenses down. 
• Set spending limits: If you’re exchanging gifts with someone, agree on a spending cap that works for your holiday budget. This way, no one feels pressured to overspend, and everyone can enjoy the spirit of giving without financial stress.
• Give as a group: If you want to present someone with a high-cost gift, consider pooling resources. For example, joining forces with siblings or cousins to buy a collective gift for a parent or grandparent allows for a more substantial present without the full burden falling on one person.
• DIY your gifts: Handmade presents are not only personal and thoughtful, but may also be kinder to your wallet. Crafting or baking homemade gifts can also be a fun event to enjoy with family or friends, adding a low-cost activity to your holiday season.

How to save on other holiday expenses

• Go the potluck route: If you’re hosting a holiday gathering, consider making it a potluck. With each guest contributing a dish, you save money on groceries and add variety to the feast.
• Find free fun: Look for no-cost holiday activities in your community. Free events like tree-lighting ceremonies, holiday markets, and winter festivals can create cherished memories without expensive tickets or entry fees.
• Take inventory of what you have: Before rushing out to buy new decorations or holiday attire, scour your home storage for forgotten holiday treasures. Reusing and repurposing decorations and clothing can save you money while being environmentally conscious too.
• Make your own decorations: Gifts aren’t the only holiday cost that can benefit from a DIY mindset. Find free online tutorials for crafting holiday decor to adorn your home; just be careful not to overspend on supplies. Plus, a decoration-making party can be an inexpensive holiday activity, and could even become a treasured tradition.
• Trim travel expenses: What you should budget for a holiday vacation depends on multiple factors, but how you get there and where you stay are often the two biggest expenses. If you’re flying, research the travel dates with the lowest costs; if you’re driving, maximize fuel efficiency. You might also consider staying with family or going in with others on a short-term rental instead of shelling out for a hotel. If you do opt for a hotel, remember to include the cost of lodging tax in your budget.     

How to save on holiday shopping

November and December are the biggest months of the year for retail businesses. Alluring sales and an onslaught of ads can easily send you into a holiday shopping frenzy that undermines your budget. To avoid being swept up in the fray, go into your shopping excursions with thoughtful strategies to bolster your self-control.

• Avoid impulse buys: Don’t let sales and flashy marketing tempt you into an unplanned spending spree. Remember, retailers are great at creating a sense of urgency for holiday shoppers. Before you head to the store or browse online, make a list, check it twice, and have a plan for sticking to your budget for each item.
• Be prudent with promos:  Promotional emails and texts can alert you to genuine savings, but they might also entice you to buy things you don’t need. If you find that these messages trigger unnecessary spending, consider unsubscribing during the holiday season.
• Treat yourself sparingly: It’s easy to be drawn to items for yourself while shopping for others. Bookmark the things you’re interested in and revisit them after the holidays so you can use gift cards or take advantage of post-holiday sales.
• Watch out for Black Friday and Cyber Monday mania: The days after Thanksgiving have become holidays in and of themselves as stores kick off the holiday shopping season with the promise of huge savings on hot items. While you can find significant discounts, not all deals are as good as they seem, and it’s easy to buy more than you’ve budgeted for in the face of the hubbub. To save money on Black Friday and Cyber Monday, plan your purchases ahead of time, compare prices, and stay focused on the items on your list instead of impulse purchases.  

How to save up for holiday expenses

Setting aside money in advance of the holiday season can alleviate the financial pressure of end-of-year expenses. By saving up for the holidays throughout the year, you’re less likely to feel the pinch when the festive months roll around.

• Start saving early: Start saving up for holiday expenses long before the season starts. A budgeting framework like the 50/30/20 rule can guide you on how much of your paycheck you should regularly put into savings throughout the year. 
• Create a holiday sinking fund: A sinking fund is a dedicated savings pot for a specific goal. Building up a sinking fund specifically for your holiday budget can help you spread the cost of holiday expenses over time, making them more manageable when the season starts.
• Do your holiday shopping all year long: If you identify your holiday expenses early, you can spread your spending out over time. That way you can take advantage of a great deal on a perfect present to stow away for gift-giving time or shop post-holiday sales for discounts on things you’ll want for the following year.     
• Grow your money in an interest-bearing account: Placing your holiday savings in an account that earns interest, such as a money market or high-yield savings account, allows your money to grow through the year. Compounding interest can add a little extra to fund your holiday budget. 

Think beyond your holiday budget

Adhering to a holiday budget is more than just a seasonal discipline; it’s a practice that safeguards your financial health well into the future. When it comes to good money management, planning ahead is key. While you build your holiday budget, consider mapping out January’s expenses as well to give you perspective on the impact your holiday season financial decisions will have on your longer-term savings and investment objectives. With a well-managed holiday budget, you can ensure that the joy of the season transitions seamlessly into a prosperous new year.

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You want to be better with money but don’t know where to start. This year, with high inflation, the return of student loan repayments, and global uncertainty—perhaps your finances have paid the price. 

All that to say: Improving the bottom line has never been harder for hardworking Americans.

So in service of helping you get on track, Stash collected 100 of the best financial tips you’ll want to implement going into 2024—advice that will lessen the burden on your wallet and make it possible for you to get closer to your money goals.

Our Stash 100 tips are simple, jargon-free, and easy to follow. Bookmark them, share with your friends, and scrawl them on your mirror. It’s advice that will lessen the burden on your wallet and, even more importantly, put your mind at ease as you tackle the world ahead.

Investing 

1. Invest now. The sooner you start investing, the greater your earning potential.

2. Invest for the long-term with a buy-and-hold approach, and put your money to work. 

3. Invest regularly, and it becomes a powerful new habit that compounds your success. 

4. Diversify. Choose a variety of investments with different risks to reduce your risk of loss and reduce swings in your account value.

5. Choose low-fee ETFs. It’s safer to invest in ETFs, or baskets of assets, than in any one asset. 

6. Take advantage of dollar-cost averaging, which is periodically buying certain stocks or other assets using a set amount of money on a schedule. You’ll buy assets when the price is low and when it’s high without being driven by emotion. 

7. Combat inflation by investing your cash. Keeping too much money on-hand allows inflation to erode its value over time.

8. Don’t be afraid to invest. Having some cash is important, but keeping all your money on the sidelines can put you at risk for missing out on tens of thousands, or even millions of dollars over the course of your lifetime.

9. Keep your emotions in check. Avoid impulsive decisions based on fear or greed, and instead focus on your long-term goals and intentions. 

10. Don’t panic sell just because an investment is down. Knee-jerk reactions can derail your investing success.

11. Leave day-trading behind. You can be a great investor without being a frequent trader. In fact, trading less often can often be a better investment strategy. 

12. Focus on goals. Understand your objectives and time horizon to help you determine what combination of investments is right for you.

13. Park your cash in short-term Treasurys if you think you will use it within a year. 

14. Learn the value of compound interest, or when interest earns interest because it remains invested. It allows your money to grow exponentially over time. 

15. Avoid concentration risk. Buying individual stocks can be fun, but you shouldn’t invest more than 2% of your portfolio in any one stock.  

16. Automate your investments. Then check in at least once a year or when you have a major life change to make sure your investing strategy still makes sense for you. 

17. Understand and minimize what fees you are paying on your investments. Compare similar funds’ expense ratios and look out for commissions and other hidden fees. 

18. Don’t trust anyone that tells you they know how the market or a stock will perform in the future. No one has a crystal ball. 

19. Remember that investing is a marathon, not a sprint. Get-rich-quick schemes often end up in losses.

Retirement Planning 

20. Save for retirement. The years pass faster than you expect.

21. Start by saving 1% of your salary if that’s all you can afford now, and work your way up in 1% increments. Saving for retirement may feel like a luxury or impossibility, but any amount of savings is better than none. 

22. Use standard guidelines for retirement planning: Consider setting aside 15% of your pre-tax salary for retirement if you want to retire in your 60s and maintain your lifestyle. 

23. Calculate a personal retirement goal. If you aren’t sure, retirees typically spend between 70-80% of their pre-retirement income to maintain a similar lifestyle. You can also multiply how much you think you’ll spend every year of retirement by 25, and start there. 

24. Does your employer offer a retirement plan? Evaluate the investment options because every plan is different. Then choose one that’s appropriate for you, and never let your contributions sit idle. 

25. Don’t leave money on the table. Prioritize taking advantage of any employer match offered in your retirement plan. 

26. Consider multiple accounts. If you’re eligible for an employer-sponsored plan like a 401(k) and an individual retirement account like a traditional or Roth IRA, you may want to take advantage of both simultaneously—they each have their own pros and cons. 

27. Add social security benefits into your calculations by checking your Social Security Statement at SSA.gov. Guaranteed monthly income in retirement can help you maintain your retirement nest egg much longer.   

28. Healthcare related costs are retirees’ largest annual expense. Consider investing in a Health Savings Account (HSA) if you have access to a high deductible health plan. They have great tax benefits and will help offset those large expenses in your golden years. 

29. Try to avoid touching your retirement accounts, and learn about the tax implications and penalties associated with different retirement account withdrawals. Retirement funds are generally only accessible without penalty after you turn 59.5. 

30. Plan to retire early? Understand the tax rules and penalties of accessing your investments, and consider having alternate investment accounts that you can withdraw from first if need be.   

31. Avoid cashing out your retirement plan when changing jobs (it’s called an early distribution), which can tack on taxes and fees. Roll that money into an IRA or your new company’s 401(k) plan and allow the money to continue to grow. 

Financial Wellness 

32. Honor the principles of saving and investing. It’s not about how much you make—you can make a million dollars a year and still be flat broke if you spend it all. 

33. Set SMART savings goals. Make goals Specific, Measurable, Achievable, Realistic & Timely. This will help keep you motivated and aware of your progress.  

34. Establish an emergency fund as priority one. A good rule of thumb is to save between 3-6 months worth of your essential expenses. 

35. Eliminate stress over your bills by setting up automatic payments. 

36. Avoid the pitfalls of the U.S. post office by opting for direct electronic payments.  

37. Save money by changing banks. You may reduce expenses like monthly fees by switching banks or using an online financial institution for your checking and savings accounts.

38. Earn money on your cash. Set aside what you need for regular spending, then maximize the interest you earn on excess cash by comparing high yield savings accounts, money market funds, and U.S. Treasurys. 

39. Pay yourself first. Sometimes an employer can deposit a percentage of your paycheck directly into your savings or investment account, or set up an automatic transfer for when your paycheck hits. 

40. Check your pay stub regularly. Ensure that deductions are accurate and tax withholding seems appropriate. Consult HR right away if something seems off.

41. Protect what you have. Insurance is an often overlooked part of financial health. Whether it’s adequate health insurance, car insurance, homeowners, life or disability, set yourself up for unexpected life events.

42. Jumpstart your child’s long-term savings with a custodial account.

43. Talk to your kids about money. Teaching financial skills such as budgeting at a young age can help lead to strong financial habits as they grow. Celebrate milestones together to model diligence. 

44. Acknowledge your hard work when you hit a savings balance or come in under budget. It’ll keep you motivated for future success.  

45. Take security seriously. Use strong passwords, two-factor verification, and secure internet connections when managing your finances online. 

46. Be vigilant about phishing scams, especially approaching the holiday season when fraud activity tends to increase. It can be very hard, if not impossible, to get stolen money back.

Budgeting

47. Create a budget to help you understand where your money goes every month. One way to do it: Take the money that hits your bank account, minus your expenses, equals what’s available for your goals. 

48. Keep budgeting simple with the 80/20 approach: Save 20% of what you make so you limit the rest of your spending to 80% of your income. You can also get even more detailed with the 50/30/20 rule.

49. Keep a money journal and track all of your expenses—but don’t let it overwhelm you. The goal is to build awareness of your spending habits.

50. Create funds for large and irregular expenses like the holidays, travel, camp, or car maintenance. Set aside money each paycheck or month so that the money is available when you want it.

51. If taxes aren’t automatically deducted from your paycheck, set aside part of your paycheck so you don’t find yourself in trouble come filing season. 25-35% is a good starting point (refer to last year’s taxes or speak with your accountant for a more precise estimate).

52. Make a shopping list in advance—and stick to it! Studies show you can save yourself from unplanned purchases when you have it in-hand. 

53. Overspending? Try the 30-day rule. If you want to make an unplanned purchase, set the money aside for 30 days, then revisit. Often you’ll find the impulse to spend has gone away and you’re able to avoid unnecessary purchases. If waiting 30-days feels unrealistic, start with 48 hours. 

54. Delete your online payment info. The more effort it takes to shop online, the more likely you’ll be to pause and think about whether you truly want to buy it.

55. Sometimes it’s the right time for a “cash diet.” Commit to only making purchases in cash. You’ll likely spend less even on planned purchases like groceries, and it guarantees you won’t spend more than you’ve budgeted.

56. Swap your credit card for a debit card: Research shows that consumers spend less when they see real money immediately leaving their bank account. Pay down your credit card more frequently for a similar effect. 

57. Buy store brands instead of name-brand products with the same ingredients. Tiny savings add up on frequent purchases. 

58. Beware of BOGO “deals.” Slow down and consider the price of one item; often they are marked up to cover the cost of the discount. 

59. The best rates on hotels sometimes come 15 days before you travel. Make a refundable reservation far in advance, and then check the rates again leading up to your trip. If rates have dropped, cancel the original booking for free and lock in the lower rate. 

Debt

60. Take inventory. Make a list of your debts, such as credit card bills, student and auto loans, and mortgages, and include the lender, balance, interest rate, payment date, and monthly payment amount. Then take action.

61. Consider using the debt snowball or avalanche methods to prioritize which debt to pay down first. Each approach targets focusing on one debt at a time, rather than making extra payments on multiple obligations each month. 

62. Try to avoid paying more in interest and fees. While consolidating debt can be a smart solution, doing so in a high interest rate environment might mean more dollars out of pocket now. Beware of committing to a higher minimum monthly payment if cash flow is tight.

63. Pay off your high interest rate debt—such as credit card debt—first. You’ll save more by paying off credit card balances than you can realistically expect by investing those dollars in the stock market instead. A credit card balance can also bring down your credit score.

64. Take advantage of debt that works in your favor. Low-interest, installment loans like mortgages (especially those that are fixed and below 5%) and auto loans can help you build credit. 

65. Don’t pay more than the minimum required for low-interest, fixed-rate loans. If your fixed rate loan is low enough, invest the extra dollars for a higher return. 

66. Pay extra attention to variable interest rates to avoid fluctuating payments that are out of your control. 

67. Considering a new debt? Practice paying for it. Set aside a monthly payment for a few months for insight into how a new financial expense will impact your finances. 

68. A car payment doesn’t have to be an indefinite expense. Try to keep a 60 month loan or less, and continue to drive the car once it’s paid off. 

69. Zero-percent interest car loans may mean the car price itself is marked up or there’s some other catch. 

70. Beware of credit card rewards. Avoid spending more than you would typically spend just for the rewards. Buy the perk with cash—save your bottom line.

71. Refinance. When your credit score goes up or your cash flow improves, you may be eligible for a better rate on your existing loans. Run the numbers to see if it makes sense—this strategy may have upfront costs but could lower your monthly payments.

Credit

72. Not sure how to build good credit? You’re not alone. Consider using a secured credit card, which requires payment upfront. Make sure to understand the fees.

73. Lean on family or friends to build your credit. Asking someone with strong credit to cosign for you can help you obtain a better rate, or faster approval, than what you may be able to secure on your own. 

74. Build better credit in a short amount of time when you are added as an authorized user on someone else’s account. Note: Credit scores become intertwined, and both can be negatively impacted if someone doesn’t pay the bill on time. 

75. Take good care of your credit to be eligible for loans with more favorable rates. Pay bills on time and keep your outstanding balances low compared with your limits (this metric is called credit utilization). 

76. Remember that your credit score isn’t private. Think of it as a financial report card that can be shared with future employers, landlords, and lenders. 

77. When you open a credit card, use it responsibly. Charge at least one expense per month, like gas, and pay it off in full if possible. Then continue to pay it off in full every month. 

78. Carrying debt does not benefit your credit. Credit card interest compounds daily, working against you because the debt adds up rapidly. 

79.Set a reminder to check your credit report for free once a year with these three credit bureaus: Experian, Equifax, and Transunion. Or check annualcreditreport.com, which is a one-stop-shop. 

80. Dispute credit report errors. If there’s any incorrect information, contact the credit bureau directly.

81. Ask for a credit line increase. A good repayment history, higher income and/or higher credit score can warrant an increase. A higher limit can help your credit too, as long as you don’t spend more and raise your average balance. 

Homebuying/Home ownership 

82. Renting may be smarter—most homebuyers don’t break even for five years. If you expect to move sooner, consider renting instead.

83. When thinking about home-buying, cap your housing costs. Target a total monthly payment of no more than 28% of your gross monthly income towards a home. This should include principal, interest, taxes and insurance (PITI). 

84. Know what you have available for a down payment, and what you can afford monthly for your mortgage. Keep both in mind when trying to determine your price range. 

85. Negotiate your interest rate, and shop around. The process can be tedious, but every point negotiated down on your mortgage can be a huge cost savings. 

86. Do your research before making an offer. One tried and true way to value a home is looking at “comps,” which are comparable homes in the area that recently sold.

87. Understand PMI. Private mortgage insurance is an additional monthly cost assessed by a lender in the event you put less than 20% down. It may not be a reason to wait until you can afford more, but you’ll want to budget for the extra monthly cost, which is usually 0.5–1.5% of the cost of the mortgage each year.

88. Don’t overlook closing costs, which usually range between 3-5% of the purchase price. Example: if you want to make a 10% down payment, you’ll need between 13-15% of the purchase price in cash to complete the transaction. For a more exact estimate use a closing cost calculator specific to your state. Don’t forget moving costs.

89. Get pre-qualified and include it in your offer. Obtaining pre-qualification (not to be confused with pre-approval) can start the process of determining what you can afford, and it should not impact your credit or require underwriting. 

90. Build a home emergency fund for the things you need to repair and replace, ongoing costs, and one-time costs, too. Plan for overages when setting a budget for home renovations. 

Taxes

91. Keep track of deductible expenses throughout the year to maximize your tax deductions, especially if you’re self-employed. A standard deduction is applicable to everyone; other deductions—like large medical expenses and charitable donations—are relevant only if you decide to itemize your deductions. 

92. Know the tax implications of different retirement accounts. Investing into a traditional 401k or IRA can reduce your current taxes, which saves you money now, but in retirement, you’ll have to pay taxes on your withdrawals. Compare that to a Roth 401k or IRA, which won’t reduce your current taxes, but investments will grow tax free and you’ll save on taxes in the future.

93. Consider investing into a 529 plan for your children’s education. In some states, 529 plan contributions are tax-deductible and your investments grow tax-free.

94. Save on childcare. If you have kids and pay for daycare or camps, save on your taxes by contributing to a Dependent Care Flexible Spending Account (DCFSA.) Money is added directly through your paycheck pre-tax and can be used to reimburse you for your childcare related costs.

95. Self employed and/or experience a major life event? Tax professionals are a worthy investment. Not only can they make sure you file your taxes accurately, they can also help you make strategic money decisions throughout the year. Make sure their expertise is relevant to your situation. 

96. A large tax refund isn’t necessarily something to celebrate, as it typically means you overpaid the government during the year. Think of it as an interest-free loan to the government—not the prize you’re hoping for. 

97. Getting a tax refund year after year after year? Adjust your tax withholdings with your employer to keep more of it each paycheck. 

98. Use tax software to simplify the filing process. Depending on your income, you may be able to use some services at no cost. Find more information at irs.gov.

99. Keep copies of your tax returns for reference (digital is okay!). Up to seven years is suggested if you worry about being audited. Lenders typically only ask for a two-year history when applying for a loan.   

100. Make tax filing easier. Create a physical or digital folder and collect all tax related documents over the course of the year and you’ll stress less in spring. 

BONUS: Holiday

101. Set and stick to a holiday season budget. In addition to gifts, include travel and transportation, new clothes, holiday bonuses, decorations, and fun activities (like ice-skating). Be specific. 

102. Make a list of gift recipients and a spending limit per person.

103. Shop early. You’ll avoid rush delivery costs and needing to search for last-minute, expensive alternatives.

104. Book travel as soon as you can and be flexible with your schedule for better deals. 

105. Hosting doesn’t have to be expensive. Price shop and avoid recipes with too many new ingredients. Consider a pot-luck option instead of trying to do it all yourself.

106. Shop online. You’ll avoid impulse purchases, and it’s easier to search for discounts and price comparisons. Many online retailers offer free shipping during the season. 

107. Get creative. Thoughtful gift giving doesn’t have to cost you a lot of money. You can make gifts, like art, a note or baked goods, or you can gift time by offering to babysit/pet sit or help someone with other household chores. 

108. Suggest a gift exchange. Suggest a white elephant or secret santa so everyone only needs to buy one gift that will likely be more thoughtful and exciting to receive. 

109. Avoid (or limit) self-gifting. Retailers will be bombarding you with “deals.” Resist sales and unneeded purchases. Unsubscribing works wonders.

110. Celebrate late. Consider doing your holiday gatherings a few weeks later, allowing you to book less expensive travel and buy up gifts at post-holiday sales. 

111. Be selective. You don’t have to say ‘yes’ to every invitation, or include everyone on your guest list. Keep gatherings intimate, and choose only the events you want to attend most when choosing how to allocate your dollars.  

112.  Reflect and evaluate what worked this holiday season, then eye January as an amazing time to commit to new financial goals. 

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While the exact parameters that distinguish an economic downturn from a true recession are debatable, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The typical rule of thumb for determining whether a period constitutes a recession is whether it includes two or more consecutive quarters of decline in a country’s gross domestic product (GDP). Often, these periods aren’t officially labeled as recessions by economists until they are already well underway or have ended entirely. It’s important to remember that recessions are natural and temporary phases in the business cycle, and though they may come with hardships, they are typically succeeded by periods of economic growth.

In this article, we’ll cover:

• What happens in a recession
• Downturns vs. recessions vs. depressions
• What causes recessions
• Recessions and the business cycle
• Signs of a recession
• How a recession may affect you
• How to invest in the face of a recession

What happens in a recession

Recessions are complex events that can be triggered by various factors, from financial crises to external shocks. While each recession has distinct characteristics and causes, varying in length and severity, a few trends are common across all of them.

• GDP falls: GDP, which measures the total value of goods and services produced in a country, typically drops during a recession, indicating a weakening of the nation’s overall economic health.
• Economic activity declines: Businesses might reduce production due to decreased demand, leading to a slowdown in various sectors of the economy.
• Unemployment rate rises: As companies cut back on production or even shut down, job losses become more prevalent, leaving a higher percentage of the population without employment.
• Interest rates may decrease: The Federal Reserve might choose to lower interest rates in an effort to boost economic activity.
• Consumer spending shrinks: Uncertainty and financial concerns during a recession often lead consumers to cut back on their expenditures, further slowing down the economy.

Economic downturns vs. recessions vs. depressions 

Economic downturns, recessions, and depressions are all periods of economic contraction. Ultimately, their differences lie in their duration, intensity, and impact on the broader economy.

• Economic downturns: These are short-term declines in economic activity, often accompanied by bear markets. While they can lead to recessions, it’s possible for the economy to recover before that happens. The U.S. has experienced a number of downturns throughout history, with bear markets lasting an average of about 9.5 months, though many are much shorter. 
• Recessions: Going into a recession means that an economic downturn extends into a more prolonged and pronounced drop in economic activity. Since 1980, the U.S. has faced five recessions of varying durations, with the shortest lasting just six months and the longest extending to 18 months. On average, U.S. recessions have lasted about 11 months.
• Depressions: Depressions are the most extended and severe economic contractions. The U.S. has experienced only one depression, known as The Great Depression, which began with a profound stock market crash in 1929 and lasted for about a decade. This period was marked by extreme unemployment, a significant drop in consumer spending, and widespread bank failures.

Examples of past recessions

Each recession in the U.S. has been unique in its cause, duration, and impact on the global economy. Three significant recessions identified by the NBER in the recent past have left a lasting mark on the country’s economic landscape.

• Dot-Com Recession: Occurring between March and November 2001, this seven-month-long recession was a result of the bursting of the dot-com bubble of the 1990s. The overvaluation of tech companies led to a sharp stock market decline, impacting the broader economy.
• The Great Recession: Spanning from December 2007 to June 2009, the Great Recession was primarily caused by the subprime mortgage crisis, leading to significant job losses and a global banking crisis. Lasting 18 months, it’s the longest recession the U.S. has experienced since World War II.
• COVID-19 Recession: Triggered in early 2020 by the global outbreak of the COVID-19 pandemic, this recession saw a sharp decline in economic activity due to lockdowns, travel bans, and business closures. While its exact duration is still debated, the most severe stages occurred between February and April 2020.

What causes recessions

No two recessions are identical. They often arise from a unique combination of factors that work together to turn a mild economic downturn into a pronounced economic contraction. A few factors often contribute to the onset of a recession. 

• Sudden economic shocks: Unexpected events that disrupt the normal flow of the economic cycle,  like natural disasters, terrorist attacks, or health crises, can shake consumer and business confidence, triggering a reduction in spending and investment.
• Excessive, widespread debt: When households, businesses, or governments take on too much debt, they may need to cut back on spending in order to pay it off, leading to a significant dip in overall economic activity.
• Asset bubbles: Bubbles occur when the prices of assets, like real estate or stocks, soar far above their fundamental value. Asset bubbles often arise in a specific industry or sector. When these bubbles inevitably burst, those who invested heavily can face significant losses, companies go out of business, and a ripple effect may impact other sectors of the economy as well, leading to an overall economic slowdown.
• Excessive inflation: During periods of high inflation, prices of goods and services rise too quickly, eroding consumer purchasing power. The Federal Reserve may then choose to raise interest rates in an effort to curb inflation, which can result in reduced borrowing and spending.
• Runaway deflation: The opposite of inflation, deflation is a prolonged drop in prices. While it might seem like a good thing, deflation can lead to reduced consumer spending as people wait for prices to fall further, causing a vicious cycle of economic contraction.

How recessions fit into the business cycle

The business cycle is a natural ebb and flow of economic activity, characterized by periods of growth and decline. Recessions are a pronounced form of natural contractions, representing a significant dip in the cycle. The NBER plays a pivotal role in determining the start and end dates of U.S. recessions by breaking the business cycle into four primary phases:

• Expansion: Marked by increasing economic activity, the expansion phase is a period of economic growth and prosperity. This is an ideal economic stage for business growth, often featuring rising employment rates and bolstered consumer confidence. As demand increases, businesses raise prices, causing inflation.
• Peak: The peak of the business cycle is the zenith of the expansion phase, where economic activity reaches its maximum, right before starting to fall off. This phase is characterized by high levels of production, employment, and the highest prices, with no room for further expansion.
• Contraction: Following a peak, the economy starts to slow down. This period sees a decline in GDP, employment, and other economic indicators. If this contraction is prolonged and severe, it can lead to a recession.
• Trough: The trough is the lowest point of the contraction phase, when economic activity bottoms out before starting to rise again. From here, the business cycle moves back into the expansion phase, marking the beginning of economic recovery.

Signs of an impending recession

While it’s impossible to predict recessions with absolute certainty, economists and financial experts often turn to specific indicators that hint at economic turbulence ahead. 

• Inverted yield curve: Typically, long-term bonds have a higher yield compared to short-term bonds. But when short-term bonds yield more than long-term ones, it’s called an inverted yield curve. Historically, this inversion has preceded recessions, as it indicates a lack of economic confidence.
• Declining consumer confidence: When consumers are pessimistic about the future of the economy, they tend to spend less and save more. A sustained drop in consumer confidence can lead to an economic contraction.
• Increasing unemployment: A rising unemployment rate can be a sign that businesses are cutting back on staff due to decreased demand or revenue. Persistent high unemployment can contribute to reduced consumer spending, which may exacerbate an economic slowdown.
• Stock market drops: While stock markets can be volatile regardless of the larger economic landscape, a prolonged and significant drop in stock prices overall can sometimes precede a recession and might be a sign of continued decline.

How a recession may affect you (and how you can prepare)

A recession affects the average person in a variety of ways. You might feel a financial pinch, as job security becomes uncertain and daily expenses seem to loom larger. While it’s natural to be concerned, there are proactive steps you can take to navigate challenging times and prepare for an impending recession.

• Build an emergency fund: An emergency fund acts as your financial safety net, ensuring you have funds to cover unexpected expenses or income loss. Especially during uncertain times, having three to six months’ worth of expenses can provide peace of mind and financial stability. 
• Pay off debts: Reducing debt, especially high-interest credit card debt, can free up income and reduce stress on your personal finances. By tackling your debt, you’re not only improving your financial health, but also making yourself less vulnerable during an economic downturn. 
• Start saving money: Plan for what a recession would do to your current budget and savings goals and take action ahead of time. By cutting down on expenses and setting aside a portion of your income regularly, you’re building a buffer that can be invaluable during tough times.

How to invest if you’re worried about a recession

When economic clouds gather, it’s natural to feel uneasy about your investments. Remember that market fluctuations are a part of the investment journey, and before making any hasty decisions, you might want to consult with a financial advisor who can provide tailored advice for your situation. Instead of panicking when the stock market dips, consider these strategies to safeguard, and possibly even grow, your portfolio during a recession.

• Ride out the downturn with long-term investing: Historically, markets have shown resilience over extended periods. Focusing on long-term investing may allow you to weather short-term volatility and potentially benefit from the average stock market return over time.
• Seek out “recession-proof” stocks and funds: Some sectors tend to be more resilient during economic downturns. Identifying and investing in stocks that tend to hold value in a recession might help shield your portfolio against market turbulence. 
• Consider defensive stocks for your portfolio: Defensive stocks are shares in companies that provide essential goods and services, like utilities or consumer staples. Because of their relatively stable demand, adding them to your portfolio may reduce your vulnerability in the face of economic flux.
• Capitalize on inflation before it drops: Some securities can actually benefit from inflation. Investing in things like Treasury Inflation-Protected Securities (TIPS), I-bonds, and value stocks when inflation is rising before a recession might offer a hedge against decreasing inflation rates later. 
• Evaluate short-term investment options: If you’re apprehensive about locking your money into long-term investments during uncertain times, consider short-term, lower-risk options. Instruments with fixed interest rates, such as CDs and T-bills, can be a way to secure higher interest rates before they potentially drop in a recession. 
• Diversify your portfolio: Spreading your investments across various asset classes and economic sectors can reduce risk. Especially during a recession, a diversified portfolio can help mitigate losses and position you for growth when the economy recovers.

Holding steady in the face of a recession

Economic downturns and recessions are inherent phases of the business cycle. Though they present challenges, remember that they’re followed by seasons of growth and rejuvenation. When you understand what a recession is, you’ll be more prepared to anticipate downturns and prepare.

As an investor, maintaining a clear strategy, staying informed, and resisting the urge to make impulsive decisions can help you pave the way for long-term success. With a good grasp of the cyclical nature of the economy, you can navigate the turbulence of recessions with more confidence.

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The post What is a Recession? appeared first on Stash Learn.

If you’ve been watching the market, you know that a recession has been in the forecast for most of 2023. Although the economy has grown at a modest pace throughout the year, inflation and higher interest rates from the Federal Reserve have taken a toll on consumer spending, income, and production. And, whether current conditions are a short-lived downturn or another recession looms in the future, preparing now can help you weather whatever economic ups and downs may come. 

If you’re unprepared for an economic downturn, you’re likely to experience consequences with potentially negative long-term financial impacts. But with some proactive readiness, you can avoid the financial vulnerabilities associated with job loss, financial instability, and other recession-driven hardships. These eight steps will help you make a plan to ride out an economic decline with confidence.

In this article, we’ll cover:

1. Understanding your finances
2. Creating a budget to stick to
3. Building your emergency fund
4. Getting rid of high-interest debt
5. Living below your means
6. Avoiding new financial commitments
7. Securing your career
8. Why you should continue to invest

1. Review your finances

First, evaluate your current situation. Compile a comprehensive overview that includes income, expenses, liabilities, and assets.

• Income: Total up your income from all sources, including your salary and any additional money you bring in from things like side gigs, child-support payments, and government benefits programs.
• Expenses: List all your monthly expenses and how much you spend on them. Categorize them into two groups: necessities like rent/mortgage, utilities, and groceries, and discretionary spending like entertainment, dining out, and treats.  
• Debt: Gather the current balances and interest rates of all your debts. Be sure to include every kind of debt, such as credit cards, auto loans, personal loans, medical debt, mortgages, and student loans. 
• Savings and investments: Add up the balance in all your savings and investment accounts; don’t forget to include any retirement accounts you have.  

This information allows you to lay out a financial plan to guide you through a potential recession, as well as look ahead to long-term goals. Consider creating a visual representation like a spreadsheet or financial statement that allows you to assess your situation at a glance. 

Having all of this information in one place can keep you from making panicked financial decisions in the face of economic uncertainty. Determine where you could make cutbacks if needed now, instead of scrambling to make ends meet if your income decreases or disappears later. 

2. Create and stick to a budget

Making a budget is a fundamental step in planning how to prepare for a recession, particularly if you’re new to managing your personal finances. When uncertainty looms, there’s no better time to track and adjust your spending habits. Understanding your cash flow today and where you could potentially cut back tomorrow is vital, especially if your job is recession-sensitive. 

Start building your recession-friendly budget by subtracting all your monthly expenses from your income; this will tell you whether you’re living within your means or need to trim expenses. With that information in hand, you can establish monthly spending limits for each expense category and set savings goals. This is the time to decide if you want to cut down on your spending in certain areas so you can bolster your emergency fund so you have more of a cushion in case of recession. 

You may want to use the 50-30-20 budget guideline to simplify the process. Assign 50% of your income to essential living expenses like housing, food, utilities, and debt. Devote 30% to things you’d like to spend money on but could ultimately do without, and 20% to savings goals, your emergency fund, and long-term investments. 

3. Build your emergency fund

Financial curveballs like unexpected expenses and job loss could have a bigger impact during an economic downturn. A solid emergency fund provides a safety net you can use to handle those crises without going into credit card debt or wiping out your other savings.

Building an emergency fund can be especially important during a recession, when economic decline can undermine job stability. The rule of thumb is to save up three to six months’ worth of living expenses so you can cover your bills in case your pay is reduced or you get laid off. While you might be able to receive unemployment benefits if you lose your job, they may not cover all your essential expenses or float you for as long as you need. Unemployment usually replaces only half your income and ends after 26 weeks in most states, so chances are you’ll need the extra money in your emergency fund to get by until you find a new job. 

While three to six months of living expenses may seem like a lot to save up, you can make it feel less daunting by breaking that larger goal into smaller ones based on priorities. You might start by saving enough to pay rent for three months, then setting aside enough for your essential bills, and so on. Just getting started is what matters most.

If you want to grow your emergency fund faster, consider cutting some discretionary expenses and putting that money toward your emergency savings. If you get a bonus, tax refund, or other windfall, add it to this savings goal. Keeping your fund in a high-yield savings account can also help amplify your savings by earning interest, as well as ensuring your money is easy to access when you need it.

4. Prioritize paying off high-interest debt

High-interest debt is expensive, and it can keep you stuck in a rut of never-ending monthly payments that strain your budget and undermine your savings goals. Credit cards, personal loans, unsecured lines of credit, and payday loans are generally classified as “bad debt” because they tend to have high interest rates and steep late fees; the interest rates are also variable, meaning they could skyrocket at the lender’s discretion. Bad debt can even negatively affect your credit score if you’re late on a single payment. 

If you’re worried about how to prepare for a recession, getting out of debt as soon as possible may be high on your priority list. And paying off credit card debt might be extra important: the average credit card rate in the U.S. is 27.80% as of November 2023. Even if you currently have a low rate, credit card issuers often hike their rates when the Federal Reserve raises interest rates during periods of inflation. 

Consider attacking your high-interest debt before recession strikes by using the avalanche method. This debt-repayment strategy prioritizes paying off your highest-interest debts first in order to reduce the overall amount you spend on interest over time. As you pay off each debt, the extra money rolls down to the next, and the impact becomes greater over time. Here’s how works:

1. Organize your debts by interest rate, highest to lowest.
2. Make the minimum monthly payments on all of your debts, except for the highest-interest one.
3. Every month, pay extra on your highest-interest debt. 
4. When the first debt is paid off, put the amount you’d been paying on it toward the debt with the next-highest interest rate. 
5. Repeat the process until all of your debts are paid off.  

Here’s an example of the avalanche method in action. Imagine you have the following debts and can afford to put an extra $110 a month, over and above the minimum payments, toward paying them off.

After eight months, the credit card would be paid off, so you’d start paying an extra $150 on the personal loan; $150 is the total of the credit card’s minimum payment and the extra avalanche payment.

Once the personal loan is paid off, you’d put an extra $190 toward the unsecured line of credit until all your debts are satisfied.

5. Spend less and stay frugal

While you don’t need to deprive yourself of every little luxury, it does help to adopt a frugal mindset while preparing for a potential recession. Reducing discretionary expenses can help you put more money toward your emergency savings. 

When looking for ways to save money, use the financial plan and budget you’ve already created to distinguish between needs and non-essential wants, then make some choices in the name of frugality. Dining, entertainment, and impulse buying are some of the most common culprits in a ballooning budget, so many people find that reducing these expenses can have a big impact.

• Limit dining out: Meal planning and cooking at home takes more time than dining out or ordering in, but it saves money on food costs in the long run. You might be surprised at how much you really spend in this category. If your parent ever said, “We have food at home” when you wanted to stop at the drive-through, you might want to adopt that adage yourself.
• Reduce entertainment expenses: Spending on events, travel, and hobbies can add up quickly, but you can have fun without breaking the bank. Keep an eye out for low-cost entertainment alternatives like home streaming services, free community events, or hobbies that don’t require expensive supplies. 
• Suspend subscription services: There are a vast number of options for entertainment delivered right to your home: movie and music streaming services, mobile apps and games, monthly product deliveries, and many more. In many cases people rarely use most of the services they subscribe to. Review all of your subscriptions and consider canceling or temporarily suspending those that don’t truly feel worth the money.
• Curb retail therapy: Everyone wants a little treat from time to time, but impulse buys and regular retail therapy can take a toll on your budget. Remove the temptation to buy on impulse by deleting your payment information from websites that store it, and carry only cash when you’re shopping in person so you can’t spend more than you have in your pocket. Institute a 24-hour rule before you buy something that’s not in your budget; you might find that the urge to spend fades if you wait a day. 

6. Avoid new, big financial commitments

When preparing for a recession, signing up for new expenses puts you on the hook for things you might not be able to afford if your cash flow starts to dry up. Avoid making new financial commitments, especially those with high monthly payments or interest rates. Forgo taking on new debt, stick with your roommates or your parents for a little while longer, and say no to pouring money into risky new ventures. 

• Mortgages: The beginning of a recession often sees rising interest rates, so the timing isn’t great for locking yourself into a fixed-rate mortgage. Instead of buying real estate, save for a downpayment so you can buy that house when conditions are more favorable. 
• Car loans: Getting more miles out of your current car instead of buying a new one keeps you from signing up for payments you may not be able to afford if recession hits. Funnel the money you’d spend on those car payments into your emergency fund or a sinking fund you can use to repair your existing vehicle. 
• Large personal loans: Going into debt should be a last resort when preparing for a recession, and that includes borrowing significant sums of money for non-essential purposes. If you need a personal loan to buy something, it may be wiser to put that purchase on hold and save up for it instead so you’re not committed to monthly payments and interest.
• Business ventures: Starting a new business is a risk under any circumstances, but even more so during a recession. An economic downturn is likely to significantly curb consumer spending, leaving you without the customers and cash flow you need to succeed. Use this time to shore up your business plan and save so you can launch your venture when economic indicators are more favorable.

7. Cushion your career

Financial preparedness includes both enhancing your job security and focusing on career development, just in case you need to make an unexpected change. When you make yourself indispensable in your current position, you might be in a better position to weather potential layoffs. But if you do wind up in the market for a new job, ongoing professional development efforts could help you get noticed and hired faster. In either case, it’s important to know your industry, stay up to date with trends, learn new skills, and network before a recession hits. Consider taking these steps to stay ahead:

1. Diversify your skill set: Identify and acquire skills that are in demand across various industries. Diversifying your skill set can make you more adaptable during economic downturns, especially if your specific industry takes a harder hit.
2. Update your resume: Job searching can be stressful, especially when you haven’t updated your resume in a while. Give yourself some peace of mind and polish it up now. You’ll be more prepared to make a move, whether your company decides to downsize or an unexpected job opportunity pops up.
3. Network, network, network: Landing a job often comes down to knowing the right people. Building a strong network of professional relationships can lead to new opportunities or fortify your job security in the midst of a recession. Stay in touch with colleagues on LinkedIn, join professional organizations, and attend industry conferences to grow your network.
4. Stay informed about your industry: It pays to know what’s going on. Don’t ignore company news and industry reports. Stay informed about the health of your industry overall and monitor economic indicators so recession doesn’t take you by surprise. 
5. Deliver your best work: It may be difficult to stay positive and productive at work with economic uncertainty on the horizon. However, consistently delivering high-quality work, being flexible with company changes, and projecting optimism can enhance your professional reputation with your colleagues and boss. It can also help you obtain the glowing recommendation you need to snag your next job.

8. Continue to invest what you can

Perhaps the most important thing for investors to remember when recession looms is this: don’t panic. Even when the stock market is in a slump, don’t abandon your investing plans. While it may be stressful to see the value of your portfolio drop, remember that economic downturns don’t last nearly as long as periods of economic growth. A long-term investment strategy is intended to help you ride out market volatility and natural fluctuations in the business cycle, including a recession. 

As long as your spending is under control and your emergency fund is solid, continuing to invest now can help you work toward retirement and other far-off goals. Keep making your regular contributions to 401(k) and IRA. If you want to make adjustments to the holdings in your brokerage account, you might consider defensive stocks and other investments that may perform well in a recession to further diversify your portfolio. You might also want to talk with a financial advisor about the options that best align with your goals and risk profile. 

When recession looms, take the long view

Determining how to prepare for a recession involves taking stock of where you are now as well as your long-term goals. When you’re uncertain about the immediate future, it can help to get a firm handle on your personal finances to build a solid budget, emergency fund, and plan for paying off debt. 

At the same time, remind yourself that economic recessions are temporary and recovery will follow. Staying invested throughout the ups and downs of the market cycle is key to reaching long-term investing success. 

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Are you trying to set up a budget that works? Looking to invest your income for the first time? Developing your big-picture financial plan? Whenever you’re making money decisions, financial goals can guide you.

Financial goals are your personal saving, spending, and investing targets. They might be things you want to achieve in the short term, a bit further down the road, or even far into the future. Goals help you determine how to allocate your income among expenses, how much to save and invest, and what success looks like. Your financial goals will be as unique as you are. Determining them can help you understand and achieve the financial future you want.

In this article, we’ll discuss:

• How to determine financial goals 
• Types of financial goals
• How to set successful financial goals

How to determine your financial goals 

How you build your money strategy is largely driven by your financial goals. When you know what you’re working toward, you can more easily make financial decisions that support your values and ambitions. Most people have multiple short, mid, and long-term goals at any given time. 

The financial goals you set will be driven by things like your lifestyle, plans for the future, where you live, family structure, and so on. They’re also contingent on your financial situation, including income, expenses, and debt. Rather than comparing yourself to other people, focus on working toward achievements that are realistic and meaningful for you. 

Keep in mind that your goals will likely shift over your lifetime as your circumstances change. For example, changes in income, family dynamics, health, and even the economy can directly impact your goals. 

The 3 types of financial goals

You can break your goals into three broad categories based on timeline, and you might take a different approach for goals in each category differently.

• Short-term financial goals: These are smaller financial targets that can be reached within roughly a year. In addition to saving over time, many people fund these goals with a one-time windfall like a tax return or bonus. 
• Mid-term financial goals: Mid-term goals are typically larger goals that will take one to five years to achieve. Having a longer timeline allows you to put your savings into an interest-bearing account or short-term investment to help your money grow. 
• Long-term financial goals: These goals will take more than five years to achieve, are higher financial targets, and will require a long-term commitment to saving and investing on a regular basis.

Examples of financial goals

So, what are the financial goals you should set? The answer to that question is unique to every individual, and it’s based on both practical considerations like age and income as well as personal hopes and desires. For most people, it makes sense to set a couple of short, mid, and long-term goals at the beginning of their financial planning journey. Then, you can check in on your goals periodically to make sure they still make sense for your overall financial plan. The examples of financial goals below can help you start thinking about the goals that make sense for your life. 

Why financial goals matter

Delayed gratification can make saving and investing hard. You have to give up spending in the short term for gratification down the road. That’s why setting goals is so important. It gives you something to work toward that makes resisting the urge to spend your money worth it. Financial goals provide purpose and energize your money moves so you can work toward the future of your dreams.

Goals also make your financial planning concrete. You’re not just saving miscellaneous sums of money for a vague future use. You have a savings plan in place to achieve something that will bring you joy or comfort. And you know exactly how much you’re trying to save.

How to set financial goals you can stick to

Your financial goals need to be realistic and motivating in order to work. So you must consider several factors when setting your goals, including your current income, expenses, and debts, as well as the life you want to live. Here are six tips for setting financial goals you can achieve. 

1. Make your goals specific and measurable

Start by making a list of goals, categorized into short, mid, and long-term. Determine the required amount and ideal timeline for each goal. The more specific you are, the more effective your financial planning can be. For example, if you want to replace your old car, research the kinds of vehicles you might want to buy and how much they cost, and consider when you’ll need to make the purchase based on how much life is left in your current car.

2. Build savings into your budget

Having a budget not only helps you manage your day-to-day spending but also enables you to plan for the future. Once you understand how much money you have left over at the end of the month after core expenses and bills, you can assign a chunk of every paycheck to each goal. You may be unable to save for everything at once, so you’ll want to prioritize. Start with your financial security goals, like an emergency fund and paying down debt, and work out from there. Once you feel financially stable, you can pivot to saving for more fun milestones alongside your very long-term goals, like retirement.

3. Establish an emergency fund

Building an emergency fund is often one of the first financial goals people work toward. That’s because having the money you need to cover an emergency can protect your other goals. An emergency fund exists so that unexpected expenses like a leaky water heater, car repairs, or medical bills don’t have to come out of your house fund or long-term savings. Experts recommend having three to six month’s worth of living expenses in your emergency fund. Once you hit that mark, you might want to focus your savings efforts on other goals, but be sure to replenish your emergency fund any time you have to spend some of it. 

4. Understand your timeline

Goals work better with a deadline. If they aren’t time-sensitive, it’s too easy to procrastinate. But if you set unrealistic deadlines, like saving up $5,000 in two months, you’ll likely never be able to achieve them. So it’s important to understand when you need the money for a goal and how much time you have to save it up. For instance, say you want to pay off $12,000 of student loan debt in one year. You’d need to spend $1,000 a month, plus interest, on those payments. If there’s no room in your budget for that, adjust your timeline to reflect what’s reasonable for your income. You might also have goals with set-in-stone deadlines, like the deposit on a new apartment when your lease is up. Work backward from that date to figure out how much money you have to save each month to have enough. 

5. Set realistic amounts

It’s one thing to dream big, but turning those dreams into reality means getting real. For each of your goals, calculate how much money you’ll actually need. For instance, say you want to put a down payment on a house in five years. Do some research to find out how much money you’ll actually need for the kind of house and location you want. If the amount is more than you can save up in that timeframe, make adjustments based on your personal priorities; you might decide to look in a cheaper area, go for a condo instead, or tighten your budget so you can put more money into savings.  

6. Revisit your goals regularly

You don’t want to set and forget your financial goals. Check in quarterly or a couple of times a year to update your goals based on shifts in income, plans, lifestyle, or new opportunities. For example, you may have been saving to buy a new car in three years, but wind up moving to a city with great public transportation, so you decide to shift your savings to a different priority. Similarly, as you achieve your goals, you can continue to add new ones, so you’re always working toward something. You have the freedom to adjust your financial goals to fit your ever-changing needs. 

The role financial goals play in your big-picture plan

Financial goals don’t have to be limited to things you want to save up for. Goals are part of an overarching financial plan that charts your current and future fiscal landscape. In addition to savings goals, you might work toward other financial goals like:  

• Getting out of debt 
• Building your financial literacy 
• Starting a rainy day fund
• Planning for retirement
• Investing in the stock market
• Reducing spending
• Improving your credit score
• Growing your money
• Preventing lifestyle creep
• Sticking to your budget
• Increasing your income
• Building generational wealth

Take control of your future with your financial goals

You don’t have to map out your entire future to start setting and achieving financial goals. You can start small: maybe for now you stash aside money for a weekend road trip next summer, start paying a bit more toward your credit card balance, and contribute a bit of each paycheck to your 401(k). As you get more confident with your budget and check some goals off your list, you can think bigger and plan further out. When you set specific, realistic goals, you’ll be equipped to take control over your finances now and over the long haul. 

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If you’re new to investing, compounding should be at the start of any investing discussion. Compounding refers to earning interest on top of the interest you’ve already accumulated from previous periods, and it’s a way to potentially magnify your savings over time just by staying invested in the market.

If you can understand compounding as a beginner, it allows you to get excited about the possibilities of investing and set expectations about how that money can grow over time.

So, what is compounding?

Simply put, compounding is the percentage of money you earn on top of your original investment (aka your principal investment) plus its earnings from previous periods. It can be calculated by banks or financial institutions on a daily, monthly, or annual basis. 

How does compound interest work?

Compounding interest is the interest on a loan or investment found by the initial principal plus the interest accrued from preceding periods. 

The principal is compounded because it’s periodically increased by a percentage (i.e., adding 10% each month). This differs from linear growth when the principal is increased by a fixed number (i.e., adding 10 each month). Let’s look at an example: 

Imagine that you deposited $100 in a savings account that accrues 10% interest annually. After one year, you’d have $110 in that savings account. After two years, though, your interest would have compounded, and you’d have $121.

That’s because you’re not just earning 10% interest on your initial deposit ($100)—you’re earning interest based on your new total earnings ($110). So after two years, you’ll earn your 10% interest based on your new total of $110. Here’s a breakdown of how those earnings could compound over time: 

Initial deposit: $100

Year 1: $100 + (100 x 10%) = $110

Year 2: $110 + (110 x 10%) = $121

Year 3: $121 + (121 x 10%) = $133

And after 10 years of compounding at a rate of 10%, your $100 deposit would grow to $259.37. That’s the power of compounding in action.

So, what does compounding have to do with you and your money? 

Compounding can either work for you or against you, depending on whether it’s for an asset or a liability. The example above shows how compounding works in your favor if it’s for a savings deposit or investment (assets). 

But it can also apply to liabilities, like money owed on a loan—when compounding interest is accrued based on your unpaid principal plus interest charged over time. In this case, the compounding interest means the amount you owe increases (compounds) over time. Compounding money when it comes to accounts with debt is something you want to avoid. 

The compound interest formula

The formula to calculate compound interest is A=P(1+r/n)nt.

• A = the total amount of money accrued on your principal plus interest, after n years 
• P = principal (the initial investment or deposit) 
• r = interest rate (in decimal form) 
• n = number of compounding periods (how often the interest is compounded per year) 
• t = time in years (how long the principal remains invested/deposited)  

Let’s put this formula into action with some concrete numbers. Say you deposit $500 into a savings account with a 5% interest rate that compounds monthly for 10 years. So: 

• P = $500 
• r = 0.05 
• n = 12
• t = 10

Now let’s plug those numbers into the compound interest formula: 

A = P (1 + [r / n]) ^ nt

• A = $500 (1 + [0.05 / 12]) ^ (12 * 10)
• A = $500 (1.00417) ^ (120)
• A = $500 (1.64767)
• A = $823.84

In 10 years, your new total is $823.84—your principal plus $323.84 in interest. 

Compound interest vs. simple interest

Simple interest is interest that’s paid only on the initial principal of a loan, and not on any interest from previous periods. That means the interest isn’t compounded. 

Going back to our $500 savings deposit example, a deposit of $500 with a 5% interest rate would mean earning $25 a year, every year. Instead of the earned interest being added back into the principal (compound interest), simple interest is calculated based on the original principal alone.  

Here’s how to calculate simple interest: 

A = P (1 + rt) 

• A = the total amount of money accrued after n years, including interest
• P = principal (the initial investment or deposit) 
• r = interest rate (in decimal form) 
• t = time in years (how long the principal remains invested/deposited)  

We can see that this formula is just a simplified version of the compound interest formula. Here’s what it looks like using our $500 example: 

A = P (1 + rt) 

• A = $500 (1 + [0.05 * 10]) 
• A = $500 (1 + 0.5) 
• A = $500 (1.5)
• A = $750

Ten years of earning 5% simple interest on your $500 deposit yields an extra $250 earned. 

Compound returns

The answer to “what is compounding” is incomplete until we also understand the element of compound returns.  The magic of compounding is revealed when it comes to compound returns on your investments in the market. 

When you keep reinvesting the dividends you earn, your returns have the chance to compound significantly over time. And if you’re a young investor who still has a ways to go until retirement, your opportunity to accumulate long-term wealth grows exponentially. 

Timing is everything when it comes to compounding. The sooner you start investing, the more time that money has to grow. Even a small amount a day can add up to sizable returns thanks to the power of compounding. Here’s a brain teaser to prove it: 

If you were offered the choice of $100,000 today, or a penny today with the amount you receive doubled every day for a month (a penny on the first day, 2 cents on the second day, 4 cents on the third day, etc.), which would you choose?

Surprisingly, it’s smarter to start with the penny, because by day 31, you’d have more than $10 million. That’s the magic of compounding. 

Examples of compounding

As we mentioned earlier, compound interest can work for you or against you, depending on whether you’re investing money or owing money. Here are some  examples of compounding in different types of accounts: 

• Savings and checking accounts: Making deposits into an interest-bearing account like a savings account means that interest will be added to your balance, allowing your money to grow over time. 
• Tax-advantaged retirement accounts (401(k)s and Roth IRAs): Investments in accounts like a 401(k) or a Roth IRA also compound over time, and you can grow your balance faster if dividends are reinvested regularly. 
• Student loans, mortgages, and other personal loans: Compound interest works against you when you’re borrowing money. Compounding on loans means any unpaid interest for a given period is added to your loan balance, from which future interest charges are accrued. 

Best practices for approaching compound interest

Any new investor should apply the power of compounding if their goal is to accumulate long-term wealth. Use these tips to reap the full benefits of compound interest and allow your money to work for you: 

• Start early: The sooner you start investing, the longer your money has to grow. Every day you wait is a missed opportunity to benefit from the power of compounding. 
• Pay off debt: Since compounding works against you when you’re borrowing money, prioritize paying down any debts to avoid paying more over time. 
• Focus on the long term: Time is on your side when it comes to compound interest. Instead of going after short-term gains or cashing out when the market is high, learn to ride the waves of the market and give your money time to grow. 

• Look at APY, not APR: Focus on annual percentage yield (APY) rather than APR when comparing accounts. The APY provides a more accurate view of expected interest earnings, whereas APR accounts only for the simple interest rate. 
• Choose accounts that compound interest daily: Compounding frequency is the interval at which your interest is paid out. The more often interest is paid, the greater returns you’ll see from compound interest—look for accounts that compound daily rather than quarterly or annually. 

The concept of compounding reveals why investing can be a smarter path to building wealth than simply saving. Not to mention, one of the keys to maximizing your financial potential is to save or invest money early and often.

If you’re looking for extra support, consider turning to a platform like Stash—users can automate the investing process with the help of Auto-Invest, which can save or invest money for you automatically.

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Compounding FAQs

Have more questions along the lines of “what is compounding?” We have answers.

What is the rule of 72?

The Rule of 72 is a calculation that estimates how long it would take for an investment to double in value as a result of compound interest. Here’s the formula:

Years to double = 72 / rate of return on investment (the interest rate) 

In other words, you can find the number of years it would take to double an investment by dividing 72 by the interest rate. 

How can investors receive compounding returns? 

Investors can receive compound returns through dividend payments. If you’re investing in stocks and the value of a stock grows over time, you can earn compound interest by reinvesting your profits. 

If payouts are made in cash, they will need to be manually reinvested in order to potentially earn additional compounding returns. Mutual funds, on the other hand, often offer automatic dividend reinvestments in order to earn compound returns.  

What type of average is best suited for compounding?

For investments that have compounding, the time-weighted rate of return (TWR)—also known as the geometric average—is best suited for calculating average returns. It’s able to provide a more accurate estimate of returns by isolating returns that were affected by cash flow changes, balancing out the distortion of these growth rates. 

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Your retirement savings goal may sound simple: save enough money to retire comfortably when you no longer receive a regular paycheck. But determining exactly how much money you need for retirement, and how much you should have tucked away now to be on track, can be a bit more complicated. 

Understanding the benchmarks of average savings at various stages of life is like having a compass guiding you through the complex landscape of retirement planning. It enables you to assess your own financial standing within the context of your age group.

Keep in mind that how you plan for your retirement will depend on many factors unique to your situation, so take averages with a grain of salt.

In this article, we’ll cover: 

• The average retirement savings by age
• How much you need to retire
• Retirement accounts
• Tips for saving for retirement

What is the average retirement savings by age?

Based on data from the 2019 Survey of Consumer Finances by the Federal Reserve System (the Fed), here’s the average amount people have in retirement savings based on age group.  

For added context, about 28% of non-retired adults do not have any retirement savings, according to the Fed’s 2023 Economic Well-Being of U.S. Households Report. 

How much money do you need to retire?

The average retirement savings by age may give you a benchmark for comparing your savings to other people’s, but those figures don’t necessarily reflect the recommended retirement savings by age. You’ll need to do some calculations to figure out how much money you need to retire comfortably based on your current income and the age at which you plan to retire.

Experts suggest that people need about 80% of their annual pre-retirement income to maintain their living standard after retirement. For example, if your gross income is $100,000 a year, you’ll need at least $80,000 annually to maintain that lifestyle after you retire.

You can then apply the popular 4% rule, which assumes you’ll live for 30 years after retirement and make an average 5% return on investments. The 4% rule states that you’ll want to withdraw 4% of your retirement savings annually. So, for an $80,000 annual withdrawal in retirement, you’d need savings of around $2 million when you retire ($80,000 / 0.04). 

Of course, the amount of money you need to retire depends heavily on factors unique to your life, such as the age at which you retire, your tax bracket, and your assets and debts. The annual income you’ll need in retirement is also affected by lifestyle factors like where you live, healthcare expenses, and whether you downsize to reduce your expenses.  

Remember that the money in your retirement account may not be the only source of income after you leave the workforce. You may receive social security benefits, have a pension, or earn passive income through things like rental properties. 

Finally, you may also want to think of your retirement savings goals in terms of your entire household’s needs. If you live with a spouse, partner, or partners, consider the combined income and savings of all the earners in your household, as well as any differences in how far each person is from retiring, when calculating your savings goals. 

How much of your income should you save for retirement?

Many advisors recommend you save 10-15% of your gross income for retirement starting in your 20s. If you start investing later in life or want to retire early, it may make sense to up your investments to 20% or more of your income if possible. 

Realistically, not everyone can afford to put aside that much of their paycheck. Saving as much as you can now, and increasing that amount as you’re able, can still help you work toward your goals. What matters most is that you start saving what you can as early as you can. Because retirement investing takes place over such a long period of time, your savings will be heavily impacted by compounding. The earlier you invest, the more you can earn on that money over time. 

Retirement account types

Keeping your retirement savings in a tax-advantaged retirement account can help your money grow over time. According to a 2022 report from the Fed, among those with retirement savings, 54% of non-retired adults had money in an employer-sponsored plan such as a 401(k) or 403(b), and 34% reported having money in an individual retirement account (IRA). 

Roth vs. traditional IRA retirement accounts

An IRA is a tax-advantaged retirement account. There are two primary types of IRAs, a Roth IRA and a traditional IRA, each with unique features and benefits.

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401(k) vs. IRA retirement accounts

Employer-sponsored retirement accounts, like a 401(k), offer distinct features compared to IRAs. Many employers offer a matching benefit in which they match the contributions you make to your 401(k) up to a certain percentage of your salary. 

401(k) rollovers

Because a 401(k) is employer-sponsored, you may lose some control of it when you leave your employer or risk not accounting for it in your retirement planning. Often, investors will initiate a 401(k) rollover when they leave a job, moving the money in the account into their new company’s 401(k) or rolling it into a traditional IRA. This has the benefit of giving you control over how you’re investing you money and consolidating your retirement accounts.

Tips for saving for retirement

A 2023 Gallup survey revealed that only 43% of non-retired adults expect a financially comfortable retirement, and 71% of non-retired adults are at least moderately worried about being able to fund their retirement. Not everyone knows how to start investing for their retirement or how much they should invest. 

The good news is, you don’t have to create a comprehensive financial plan or have all the answers to start putting away money for your future. Try these tips to get the ball rolling toward your goals.

• Make regular contributions to your retirement accounts. Build retirement savings into your monthly budget and put aside a bit of money from every paycheck. The slow-and-steady approach can make it less daunting to hit your goal.
• Take advantage of employer matches. If your employer matches some of your 401(k) contributions, make sure you’re contributing at least as much as they match. Your employer’s contributions are like free money to bolster your retirement savings.
• Invest extra when you can. When you get a bonus or a surprise windfall, consider putting a chunk of that money into your retirement account to give yourself a boost toward reaching your goals.
• Increase your savings when you get a raise. To avoid lifestyle creep and bolster your investments, bump up your contribution percentage when you get a raise. For instance, if you get a 3% raise, consider increasing your retirement contributions by 1%. 
• Automate your retirement investments. If you have an IRA, set up direct transfers so that your contributions are automatically taken out of your bank the same day you’re paid. That way you won’t be tempted to spend that money, and saving will feel more effortless. 
• Take advantage of different investing options. Various types of retirement accounts have different advantages, so consider investing in both a 401(k) and an IRA if you have the option. You can also invest in stocks and other securities through a brokerage account; this avenue doesn’t confer tax advantages, but it can be an additional way to build long-term wealth.
• Revisit your retirement plans annually. Did you move to a cheaper part of town? Get a new job? Buy a new house? Change marital status? As you age, your debts and assets change, which could call for adjustments to your retirement plan. 

Start working toward your retirement goals now

Are you ahead of the average retirement savings by age? Feeling behind? Whatever the case, it’s never too late or too early to start putting aside money for your golden years. 

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