While each investor may have their own approach to investing, there are some best practices that have been honed over time by those with years of experience.
That’s not to say that one investing strategy is right and another is wrong, or that any strategy is more likely to succeed than another. When it comes to putting your money in the market, there are no guarantees and no crystal balls. But understanding some basic guidelines that have stood the test of time can be beneficial.
Basic Investing Principles
Following are a few fundamentals that hold true for many people in many situations. Bearing these in mind won’t guarantee any outcomes, but they can help you manage risk, investing costs, and your own emotions.
1. The Sooner You Start, the Better
In general, the longer your investments remain in the market, the greater the odds are that you might see positive returns. That’s because long-term investments benefit from time in the market, not timing the market.
Meaning: The markets inevitably rise and fall. So the sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.
In addition, if your investments do see a gain, those earnings generate additional earnings over time, and then those earnings generate earnings, potentially increasing your returns. This is similar to the principle of compound interest.
2. Make It Automatic
One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.
Investing in this way also allows you to take advantage of a strategy called dollar-cost averaging, which helps reduce your exposure to volatility. Dollar cost averaging is when you buy a fixed dollar amount of an investment on a regular cadence (e.g. weekly or monthly).
The goal is not to invest when prices are high or low, but rather to keep your investment steady, and thereby avoid the temptation to time the market. That’s because with dollar cost averaging (DCA) you invest the same dollar amount each time, so that when prices are lower, you buy more; when prices are higher, you buy less. 💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
3. Take Advantage of Free Money
If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match. That’s a risk-free return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.
Recommended: Investing 101 Guide
4. Build a Diversified Portfolio
By creating a diversified portfolio with a variety of types of investments across a range of asset classes, you may be able to reduce some of your investment risk.
Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.
Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.
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5. Reduce the Fees You Pay
No matter whether you’re taking an active, passive, or automatic approach to investing, you’re going to have to pay some fees to managers or brokers. For example, if you buy mutual or exchange-traded funds, you will typically pay an annual fee based on that fund’s expense ratio.
Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.
6. Stick with Your Plan
When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like How can investments lose so much value so quickly? Will they ever go back up? What should I do?
During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.
The takeaway? Investments fluctuate over time and managing your emotions is as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, and don’t impulsively buy or sell just because the weather changes, so to say. 💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
7. Maximize Tax-Advantaged Accounts
Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or eliminate them entirely, are so valuable to investors.
The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:
• Workplace retirement accounts such as 401(k), 403(b), etc.
• Health Savings Accounts (HSAs)
• Individual Retirement Accounts (IRAs), including Roth IRAs, SEP IRAs, SIMPLE IRAs, etc.
• 529 Accounts (college savings accounts)
Recommended: Benefits of Health Savings Accounts
8. Rebalance Regularly
Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.
To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.
9. Understand Your Personal Risk Tolerance
While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions – then you might want to tilt your portfolio more conservatively.
Ideally, you’ll land on an asset allocation that takes into account both your risk tolerance and the amount of risk that you need (and are able) to take in order to meet your investment goals.
If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses), you might consider taking a more aggressive approach to investing.
The Takeaway
The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
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Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
The Secure 2.0 Act aims to help Americans save for retirement through new policy changes and government incentives, but one provision taking effect next year is working toward something more: narrowing the racial wealth gap.
Section 101 of Secure 2.0 requires companies to automatically enroll eligible employees into 401(k) or 403(b) plans, starting after Dec. 31, 2024, citing auto-enrollment’s effectiveness at boosting the participation rate in workplace retirement plans for Black, Latino, and lower-wage employees.
Participating in a retirement plan through work may be one of the easiest ways to prepare for the future, but historically, participation has varied. A 2023 study by T. Rowe Price found that participation in an employer-sponsored retirement plan was highest for white people at 57.7% but lowest for Black people at 40.5% and Hispanic people at 31.9%.
That auto-enrollment provision is well-intentioned, says Yemi Rose, but it needs to be part of a bigger solution.
“I don’t think anybody’s surprised to say if we automatically enroll people that we’re getting more enrollment,” says Rose, the Maplewood, New Jersey-based founder of OfColor, a startup that supports employees of color in building financial awareness. However, he says that getting enrolled and participating in a retirement plan in and of itself doesn’t solve the hard, more pressing money issues.
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A glimpse into the retirement gap
One driver of retirement inequality could be income inequality. According to the Federal Reserve 2022 Survey of Consumer Finances, white families had an average pre-tax income of $164,550 compared with $70,950 for Black families and $71,550 for Hispanic families.
With less money to begin with, challenges such as inflation, higher interest rates and student loan repayments can put a lot of demand on the dollars coming in, says Greg Ward, a certified financial planner with Financial Finesse based in Charlotte, North Carolina.
He says common financial priorities for communities of color also include providing for family at home or overseas, and saving for their children’s education.
When there’s pressure to meet current financial obligations, skipping retirement savings or dipping into them might seem to offer relief, Ward says.
A 2023 report by the Sloan School of Management at MIT found that Black employees were twice as likely as white workers to take an early withdrawal of at least $1,000 from their retirement savings. Hispanic workers were 21% more likely.
Another Secure 2.0 provision, effective this year, removes tax penalties for some hardship withdrawals, but that’s sticky, too, said Hui-chin Chen, a certified financial planner and managing partner at Pavlov Financial Planning in Arlington, Virginia, in an email interview.
“Flexibility to withdraw may be an incentive to contribute to retirement accounts,” she said. “However, having that flexibility doesn’t mean you should exercise it when you don’t need to. Investing for the long-term in retirement accounts is still recommended.”
Beyond competing financial priorities, a lack of trust in institutions may also cause some to hesitate before participating in a retirement plan.
Chen said that immigrants who have arrived in the U.S. as adults have less time to save for retirement, and they might be more hesitant to take advantage of a retirement system they do not understand.
Rose also says lack of institutional trust can play a role in 401(k) participation rates. A worker might start a job expecting to see a certain amount in their paycheck, and when it’s less than they thought because of 401(k) deductions, they might get upset, he says.
“It’s a confirmation bias like, ‘Oh, my goodness, they’re taking more money from me.’”
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Secure 2.0: part of a bigger solution
Despite reservations about auto-enrollment, Rose says he still went to Capitol Hill to push for Secure 2.0 to be passed.
“In one sense, yes, we have more people enrolled,” he says. “But at the same time, you might also start to see more distributions in the form of a hardship or a loan. So you really have to kind of solve it from both ends.”
Part of that solution is raising financial awareness and literacy in communities of color, especially when it comes to preparing for retirement, he says.
Jamia Erickson, a senior financial advisor at Thrivent, based in Rochester, Minnesota, suggested small steps for those who find it hard to save for retirement by taking advantage of compound interest.
“I know it sounds cliche, but it works,” she said in an email interview. “Even if it’s $25 a month, start contributing to a retirement account.”
And while Erickson said that people shouldn’t rely on legislation when it comes to their future, she does tell people to ask questions of financial advisors and to do their research.
“Retirement planning is highly complex, so you shouldn’t feel like you have to know it all,” she said. “And because it’s such a major part of your life, asking questions will allow you to make more informed money decisions that ultimately help you achieve what you want in life.”
The late January auction of iconic Hamptons estate ‘La Dune’ marked the first time a property was included in an art auction at Sotheby’s. The $88.48 million winning bid on ‘La Dune’ also made the estate the most valuable property ever auctioned live at Sotheby’s.
‘La Dune’ was included in Sotheby’s weeklong ‘Visions of America’ auction, which included art and luxury items that showcased “the heights of American craftsmanship in the finest art and objects.”
The estate consists of two residences on a four-acre property on Gin Lan in the Southampton area of Long Island. The residences were offered individually and collectively via Sotheby’s Concierge Auctions in partnership with Harald Grant of Sotheby’s International Realty, Tim Davis of The Corcoran Group, and Cody Vichinsky, the president and founding partner of Bespoke Real Estate.
Bidders from North America and the Caribbean competed for the residences in the auction room, on the telephone via a team of specialist and online. Ultimately, both residences sold to a single bidder, with the winning bid being 121.2% higher than the opening bid.
“The remarkable final sale price for ‘La Dune’ reflects its stunning design, exclusive address, and historic pedigree,” said Chad Roffers, the founder and CEO of Sotheby’s Concierge Auctions, who recently appeared on HousingWire’s Power House Podcast. “It’s a result that our team, as the world’s leading luxury property auctioneer, is best positioned to obtain. We deal in real market value, which is ultimately measured by what a group of qualified bidders are willing to pay for a unique, one-of-a-kind piece of real estate like ‘La Dune.’”
Boasting more than 11,000 square feet with 10 bedrooms, eight bathrooms and staff quarters, ‘La Dune’s’ main house was designed by Stanford White. The second residence, which was built in 2001, was designed by French architect Francois Cartoux.
“I am pleased to have partnered with Sotheby’s Concierge Auctions on yesterday’s sale of the iconic ‘La Dune’ residence,” Grant said in a statement. “This extraordinary oceanfront compound represents one of the finest offerings in the Hamptons; it is no surprise that this auction resulted in a record sale.”
The $88.48 million sale includes a 12% buyer’s premium that goes to the auctioneers and the real estate brokers who marketed it. ‘La Dune’ has been listed on and off since 2016, and was once asking $150 million.
In 2022, Sotheby’s Concierge Auctions broke the world record for the most expensive residence ever sold at auction and the highest sale for any U.S. property listed that year, with the successful auction of the $141 million California estate, known as ‘The One.’
Calvin Cordozar Broadus Jr., aka Snoop Dogg, has had many impressive wins over his long-spanning career. However, there’s one notable triumph that often flies under the radar – his real estate prowess.
While he’s been dropping beats, he’s also dropped and set firm roots in a sweet neighborhood.
Believe it or not, he bought the property for less than $1 million.
The palatial estate was reconstructed to ensure it was fit for one of the OG kings of hip-hop. It has now doubled in value, thanks to major improvements and additions to the property.
While Snoop has multiple mansions, his Diamond Bar, California home has been his main residence for over 20 years! Some celebs buy, sell, and trade their houses like it’s a game of Monopoly but Snoop likes to chill back and enjoy when he’s found a good deal.
Before this bargain purchase, the rapper also had another Californian mansion under $1 million, which he sold for more, earning him around $2 million. His real estate moves are as slick as his rhymes!
Snoop Dogg’s first-ever mansion in California
Snoop was discovered by hip-hop legend Dr. Dre back in 1992. He was signed to Death Row and soon dropped his debut album Doggystyle.
After his career took off, he purchased his first mansion in California for $660,000. The Mediterranean-style home originally had 3,700 square feet of living space and was later expanded to 6,527 square feet.
This major renovation saw the value of the home shoot up, enabling Snoop to sell the house for a nifty profit in 2007.
The eight-bedroom home is located in a cul-de-sac in a quiet neighborhood in Claremont, California. Snoop proudly showcased the property in an episode of MTV Cribs and also introduced his family and pack of dogs to the audience.
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His longtime Diamond Bar mansion was purchased for only $720,000
Following the sale of his first mansion, Snoop moved to Diamond Bar, where he bought his beloved home for $720,000.
The gorgeous mansion that has been serving as Snoop Dogg’s house for well over 20 years now has about 4,000 square feet of living space and sits on 2.8 acres of land in a gated community.
The four-bedroom, four-bathroom mansion offers luxurious living, with a spacious living room, a formal dining room, a modern kitchen, and a library.
Outdoors, there is a large pool with a jacuzzi, an outdoor patio, and a basketball court. As the home is on top of a hill, panoramic views of the area surround the property.
Snoop loved the community so much that he bought another house on the same street, just minutes away from his main mansion.
According to reports, he only uses his second house as a place where he can relax, play, and work on his music. The three-bedroom house was transformed into a fully functioning recording studio with the best equipment.
See also: 12 most expensive rapper houses: Drake, Jay-Z, and Kanye in the lead
If you didn’t know yet, then let us tell you – Snoop doesn’t play when it comes to his office. It’s go big or go home for this guy and we definitely can’t help but admire his passion for his craft.
Snoop’s music studio complex — The Compound — was custom-made to look like a spaceship
The rapper linked up with Westlake Pro design to create a music studio complex modeled after a spaceship.
The futuristic space dubbed “The Compound” is located in Inglewood, California, and features state-of-the-art technology, recording consoles, and custom furniture.
It has three main rooms named Starship, Battleship, and Mothership — and each area is designed with significant decors, memorabilia, and music equipment.
On the hallways of his music studio, Snoop paid tribute to the greats who have inspired his career.
A mural of N.W.A, which he called “the backbone of West Coast hip-hop”, is displayed proudly alongside Star Wars artwork, as well as framed posters of Snoop’s albums and other prized possessions.
His wife of 26 years, Shante Broadus, also has a special spot in The Compound — a dance studio that pays tribute to performers like Janet Jackson, Beyonce, and Michael Jackson.
The property also houses some of the rapper’s impressive car collection, which includes a Ferrari, a Rolls-Royce Phantom VII, and several classic lowriders.
Currently, the rapper has been busy growing his empire. His career has now come full circle, as he acquired Death Row records in 2022.
“I am thrilled and appreciative of the opportunity to acquire the iconic and culturally significant Death Row Records brand, which has immense untapped future value,” the hip-hop icon said.
“It feels good to have ownership of the label I was part of at the beginning of my career and as one of the founding members. This is an extremely meaningful moment for me… I’m looking forward to building the next chapter of Death Row Records.”
And we’re looking forward to seeing what comes next!
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Making a financial plan can be intimidating, especially if you don’t know all of the essential budget categories you should include. Budgeting isn’t a one-size-fits-all process either, as the importance of each category will largely depend on your specific financial situation.
This article will review the top 12 budget categories that can bolster your financial plan. Credit.com also has multiple personal finance resources that can enhance your financial literacy.
Several important budget categories account for housing, transportation, health care, entertainment expenses, and more.
Key Takeaways:
The prioritization of budget categories will be unique to your needs.
Some expenses have fixed prices, while others have variable costs. You’ll need to account for both from one month to the next.
Tools like money apps and budget spreadsheets can help you visualize your spending habits.
Table of Contents:
Why Do I Need a Budget?
A budget can ensure that you aren’t caught off-guard by bills throughout the month—especially near the month’s end or right before you get paid. Keeping a budget can also provide long-term data based on your spending habits and serve as a snapshot of your priorities.
Effective budgets can help you plan for longer-term goals, like retirement, and inform you of what expenditures truly make you happy—and which ones aren’t necessary.
Fixed Expenses vs. Variable Expenses
Fixed expenses refer to items that essentially cost the same each month, with very little fluctuation in terms of pricing. Mortgage and rent payments, auto loan payments, and internet service bills will likely fall into this category.
Variable, or flexible, expenses can drastically differ from one month to the next. The amount you spend on groceries, clothes, entertainment, and even medical appointments can all vary over time.
Top 12 Budget Categories to Add to Your Plan
The following budget categories can help you map out your monthly expenses. Depending on your unique circumstances, these categories may need to be adjusted in terms of their priority.
1. Housing Expenses
Housing often takes top priority as your living space is directly tied to your long-term health and safety. You also need a stable housing situation to perform well at work and ensure that you have the funds to make your mortgage or rent each month.
While there’s no strict maximum for the housing category, you can expect to spend anywhere from 25% to 35% of your income on your mortgage or rent payments. If your housing budget exceeds more than 35% of your monthly income, refinancing your mortgage or looking for another living space might be more expense-friendly in the long run.
Items that fall in housing expenses:
Rent
Mortgage Payment
Appliances
Household Repairs
2. Utilities
The ability to live comfortably in your home is just as crucial for your health as actually having one, which is why utilities are usually another high-priority item. Many residential buildings in some urban areas have ordinances that require certain utilities, like water and electricity, to be considered safe living.
Utilities rarely come close to the top of the list of expenses in terms of cost, and you can reduce their cost with proper management. Depending on their usage, you can expect to spend around 5% to 10% on monthly utilities.
Items that fall in the utilities category:
Electricity
Water
Telephone
Natural gas
Sewer
Trash
Heating
Air conditioning
3. Transportation Costs
Owning or leasing a vehicle, along with repairing it, can be another high-priority expense. Some areas may complement alternative means of transportation, such as public transit or biking—which would result in much less money going toward this category.
The cost of owning a car includes the tags, licenses, and maintenance on top of the monthly car payments. Depending on your method, transportation or travel expenses will likely cost you anywhere from 10% to 15% per month.
Items that fall in transportation costs:
Gasoline
Car payment
Registration fees
Vehicle repairs and maintenance costs
New tires
4. Groceries
Groceries (not food from restaurants) and water encompass our basic needs. Store-bought groceries and water may require a large chunk of your income, though this category offers a lot of flexibility in terms of total spending.
Cooking dinner at home with groceries can help you save money, as many home-cooked meals can last multiple days. You should probably expect to spend between 10% and 15% of your monthly income on food expenses.
Items that fall in the food category:
Grocery budget
School lunch
5. Insurance
This broader category covers numerous subcategories that apply to different people. For example, if you live in a large, urban area with well-run public transportation, you may not have to worry about auto insurance.
Insurance may be classified under different categories depending on who you ask. Some pundits include health care in this category, for example. Depending on what type of insurance you need and your insurance premiums, you can look to spend anywhere between 10% to 25% of your income on this category.
Items that fall in the insurance category:
Life insurance
Auto insurance
Renters insurance
Homeowners insurance
Health insurance
Vision insurance
Disability insurance
Dental insurance
Vision insurance
Pet insurance
6. Health care
This category may have higher or lower priority depending on your specific health needs. Health and dental insurance in America is also quite costly—making them one of the primary reasons Americans go bankrupt.
Health care costs include annual checkups, clinic visits, prescription medications, and general medicines, like pain relievers. Health care is a variable expense because some months can be costly while others don’t have any expenses. Even when you don’t have any expenses, it’s a good idea to put away a little cash for a rainy day.
Items that fall in the health care category:
Anticipated copays
Prescription medications
Orthodontic work (braces)
Prescription eyeglasses
Primary care visits
Dental care visits
7. Savings
Everyone needs some kind of emergency fund to cover those unforeseen expenses. Regularly dedicating a small portion of your monthly income can help you save for major life events down the road.
There’s no hard line about what amount you should save, but a safe bet is between 5% and 10% of your monthly income. Saving this amount can help you handle emergency expenses and create a nest egg for a future big purchase.
Items that fall in the savings category:
Emergency fund
Health savings accounts
Fun money
Three to six months’ worth of expenses
Saving for a specific purchase (vehicle, college savings, vacation, etc.)
8. Retirement
While you could argue that retirement or a 401(k) is a type of savings, we refer to savings as money that can be used for any expense without penalty. Retirement accounts like IRAs help you save money that’s intended for use in the future. If you take money out of your retirement account before the preset time (unless you have a 457(b) account), you will incur a 10% tax penalty.
Much like savings, this is another category without a hard-line amount that you should contribute but should see at least 5% to 15% of your income. Ideally, you can primarily rely on this money once you’ve retired.
Items that fall in retirement:
Employer-sponsored retirement plan
401(k)
403(b)
Roth IRA
457(b)
9. Debt
This category applies to a significant portion of the U.S. population—especially those who have a student loan, credit card debt, or personal loans. Debt is a consideration that often has a lower priority level because we can pay it off over time. That said, it’s important to make sure you don’t fall behind on your payments as the penalties and fees can compound if left unchecked.
Because everyone’s situation is different, there’s no given amount of your monthly income you should dedicate to debt payments. We do, however, recommend that you pay more than the monthly minimum.
Items that fall in the debt category:
High-interest credit cards
Vehicle loan
Student loans
Personal loans
Medical bills
10. Personal Care and Hygiene Items
This category encompasses both wants and needs. Toilet paper and toothpaste should be considered “needs,” while designer clothes or expensive watches are examples of “wants.”
Because most personal expenses are lower priority, there’s no expected amount you should budget for this category, but it should remain relatively low on your list of priorities. Ensure that everything else above on this list is covered first, then look to see what you can spare on these purchases.
Items that fall in the personal care and hygiene category:
Shampoo
Deodorant
Toothbrush/toothpaste
Gym memberships
Shoes
Dry cleaning
Toiletries
Laundry detergent
Cleaning supplies
Diapers
Hair care
11. Entertainment
This category sits at the bottom of our list for a good reason, but it’s still essential to include. If you find yourself in a budget crunch, this is easily one of the first categories you should reduce until finances stabilize.
Sporting events, vacations, or streaming services like Netflix fall into this category. Given its otherwise low priority, there is no set amount you should spend on entertainment, and extra money can shift from month to month.
Items that fall in the entertainment category:
Books
Electronics
Restaurant dining
Concert tickets
Events
Vacations
Movies
Coffee
12. Other
This low-priority category covers pretty much anything else not already discussed. That can include property taxes that are a high priority in most circumstances, but you can often work with the IRS to get a debt repayment plan.
Various “other expenses” might also include donations, parking fees, child support, gifts, and school supplies, depending on your circumstances.
Some of these other expenses are significantly more important than others, but things like home improvement can be considered a kind of investment.
Items that fall in the other budget category:
Miscellaneous expenses
Child care
Holiday decor
Special occasions
Alimony
Anniversary presents
Tutoring
Private school
How Do I Make a Budget?
Considering the budget categories we presented in this article, one budgeting method that could work for you is a monthly budget spreadsheet. Or, you can use a budgeting app like Mint or another high-end competitor.
There are plenty of resources to use, so you should do lots of research on any budgeting apps that you consider downloading. Since not all of the apps work the same, search through different apps to find what best serves your budgetary needs.
What Is a 50/30/20 Budget?
Numerous financial pundits advocate for a 50/30/20 budget scheme, in which 50% of your income goes to necessary expenses, 30% goes to savings accounts, and 20% goes to wants and miscellaneous expenses. It’s also not uncommon to see people devote 30% of their funds to wants and 20% to savings.
This strategy often faces scrutiny during periods of economic strife, such as high inflation rates. Nevertheless, many budgeting apps may recommend this plan if your current income can support it.
Refine Your Budgeting Plans With Credit.com
The categories we’ve discussed today, along with their corresponding priority levels, can all vary from person to person. Building the best budget for your specific needs calls for a bit of craftiness and professional assistance.
Credit.com offers a wealth of tools and resources to help build credit, such as a free monthly budget template and services that allow you to report your utility and rent to the credit bureaus.
Inside: Learn the roadmap to financial freedom with no money. Surpass debt, embrace millionaire habits, invest wisely & start a victorious journey to become financially independent!
Navigating the road to wealth can feel daunting, especially without a financial head start. But the journey to becoming a millionaire isn’t reserved for the lucky few with an inheritance at their heel.
It’s about strategy, perseverance, and making informed decisions.
Reaching the status of a millionaire is possible. I have done it and many other Money Bliss readers as well.
You have to change your mindset to make this happen. Becoming financially stable is of utmost importance.
Now, if you are serious about making seven figures in your net worth, then keep reading on how to do it.
Foundations of a Millionaire Strategy with No Money
Building a wealthy future from the ground up demands a strong and comprehensive financial plan. This isn’t something super fancy and you don’t need crazy knowledge.
You just have to start and be determined.
Step 1: The Essential First Steps Toward Financial Growth
Before plotting any course, assess your current circumstances candidly. Are you battling debts? Barely managing expenses? Or perhaps saving inconsistently? Acknowledging your starting point is critical.
A financial plan acts as your roadmap. It outlines not only your current standing but also sets the destination: your millionaire goal. This is not a figure plucked from thin air but rather a calculated estimate determined by your aspirations and timeframe.
Structure your plan to encompass these elements:
Income Assessment: Calculate your total annual income, be it from your primary job or any side gigs you maintain.
Expense Analysis: Track every expense. From the daily coffee to the monthly rent, understand where your money is going.
Debt Strategy: High-interest debts can cripple financial growth. Prioritize paying off these debts to alleviate financial pressure.
Savings Plan: Start with achievable goals. Perhaps saving $100 a month initially, then incrementally increasing as your earnings grow.
Investment Consideration: Every dollar saved should be working for you.
Ultimately, keep your plan documented and visible. Regular interaction with your strategy keeps the vision of financial growth at the forefront of your daily choices.
Step 2: Harness a Mindset Crafted for Success
Maintaining a positive mindset can significantly amplify your success with money, empowering you to manifest your financial ambitions with clarity and confidence.
This positivity helps to reframe financial obstacles as opportunities for growth. To cultivate this prosperous mindset:
Practice gratitude by acknowledging and appreciating what you already possess, which can create a sense of wealth beyond the monetary value.
Counteract negative thoughts about money by consciously redirecting them into positive money affirmations, reinforcing your belief in your financial acumen and capabilities.
Focus on your ultimate goals and align your behaviors accordingly.
Step 3: Starting Small: Saving with Limited Means
When funds are scarce, saving can seem impossible. However, even the most modest savings habits can blossom into significant wealth over time. The key is to start – no matter how small, and to remain consistent.
Implement these techniques to save effectively on a tight budget:
Automate Savings: Set up a direct deposit from your paycheck to a savings account.
Savings Challenges: Engage in one of my popular money saving challenges.
Save Raises and Bonuses: Save at least half of any raises, bonuses, or tax refunds you receive rather than increasing your spending.
Micro-Saving Apps: Consider using apps that round up your purchases to the nearest dollar and save the difference.
Saving is habitual. Even with a limited budget, adapting ways to make saving a consistent part of your financial behavior is crucial.
Start with a small percentage that won’t strain your daily living but will quietly accumulate in the background. These mini saving challenges are perfect!
Step 4: Handling Debt: Strategies for Minimizing Financial Burdens
Tackling debt is a pivotal stage on the road to financial freedom and accumulating wealth. Personally, this is exactly what happened to me. Once we paid off our debt, we were able to increase our net worth substantially.
Simply put… When debt is left unchecked, it can blossom into an insurmountable challenge, thwarting efforts to acquire wealth. The cash flow killer.
Consider these tactics to manage and minimize your debt:
Debt Audit: Begin by evaluating all your debts. Take note of balances, interest rates, and minimum payments. Understanding the total sum of your debts is essential for forming a repayment strategy.
Prioritize High-Interest Debts: High-interest debts such as credit cards can quickly grow beyond control. Prioritizing these debts for repayment can save you a significant amount in interest over time.
Debt Snowball vs. Avalanche: Choose the method that will keep you motivated and align with your financial goals.
Negotiate with Creditors: If you’re in financial hardship, reach out to your creditors to negotiate for lower interest rates or modified payment plans. Many creditors prefer to work out a payment plan rather than risk not being paid at all.
Avoid Accumulating New Debt: As you pay off existing debts, it’s crucial not to accrue new ones. Stick to your budget and avoid temptations that could lead to further debt.
Remember, every debt you free yourself from is one step closer to letting your money work for you, not against you.
Step 5: Identifying Skills That Pay: Turning Talents into Revenue
In the evolving economy, capitalizing on your skills can be a powerful way to generate additional revenue streams. The beauty of skill-based earning is that it can fit around a traditional job and can be scaled up or down as your situation changes.
Here are possible avenues to pursue:
Demand for Your Skills: Look at the market and find out if you can outsource your skills
Start Freelancing: Platforms like Upwork, Fiverr, and Freelancer can connect you with clients looking for your specific skillset. Begin with competitive pricing and build up your portfolio and rates as your experience grows.
Teach Others: If you’re knowledgeable in a particular area, consider creating an online course or conducting workshops. With platforms like Teachable or Udemy, you can reach a global audience.
Networking: Leverage social media, professional networking sites like LinkedIn, and community forums. This builds your professional presence and can lead to job opportunities.
Lastly, do not be afraid to ask for a pay raise. Thus, will help you fast-track your path to six figures.
Step 6: Side Hustles and Entrepreneurship: Growing Your Earnings
To build real wealth, especially with no initial capital, earning income from multiple streams can be a game-changer. Side hustles and entrepreneurship are about leveraging your time, talents, and sometimes minimal financial investments to grow your income outside of your primary job.
Almost every millionaire I know has a side hustle or business that helped them to get to that point.
Here’s how you can expand your earnings with side hustles and entrepreneurship:
Make money online: The fastest growing area is knowing how to make money online. Even seemingly mundane skills can be lucrative.
Choose the Right Side Hustle: You can choose to make money or chill and watch TV. Pick on the popular side hustles to get started today.
Start Small Business Ventures: Consider creating a small business. It could start as simple as lawn care services, homemade goods, or consulting. Validate your business idea with minimal investment before scaling up.
As financial expert and entrepreneur Ramit Sethi states, “There’s a limit to how much you can save, but there’s no limit to how much you can earn.”
By actively growing your earnings and establishing additional income streams, you accelerate your trajectory toward millionaire status.
Step 7: Investment 101: Basics for the Beginner Investor
Investing is the escalator to wealth, turning your savings into passive income generators.
For beginners, the world of investing can seem labyrinthine, but with foundational knowledge and strategic baby steps, you can begin to navigate it confidently.
Don’t be afraid of the stock market as you are giving up way too much money! This was the stupid mistake I made in my 30s. Now, my investment portfolio is the primary way I am growing my wealth today.
Here’s what you need to know to get started with investing:
Start with a Retirement Account: If your employer offers a retirement plan, like a 401(k), especially with matching contributions, take full advantage of it. This is often a beginner’s first, and potentially most profitable, investment.
Low-Cost Index Funds: As a beginner, it’s wise to invest in low-cost index funds, which are designed to mimic the performance of a particular market index. They are diversified and typically have lower fees.
Automatic Investing: Set up automatic transfers to your investment account to facilitate regular contributions without having to actively think about it. Don’t forget to select which fund to invest in.
Educate Yourself: Take advantage of online resources, books, and courses to understand the basics of stocks, bonds, and other investment vehicles. This is what I did – invest in my stock market knowledge and it has paid off big time!
Understand the Rule of 72: A simple formula to estimate the doubling time of an investment. For example, at a 7% average annual return, your money could potentially double every roughly 10 years.
Understand Risk vs. Reward: All investments carry some level of risk. Typically, higher risk could mean higher potential returns, but also greater potential losses. Assess your risk tolerance before investing and use those stop losses!
Investing isn’t a sprint; it’s a marathon with compound interest serving as the tailwind to push you forward over time. Learn how to invest in stocks for beginners.
Step 8: Retirement Accounts: Why Maxing Out Early Matters
By maximizing contributions to retirement accounts, you not only safeguard your golden years but also capitalize on tax-advantaged growth, which can be substantial over time.
Just because you are in your 20s or 30s, don’t say I’ll invest later. You are missing the boat.
Here’s why it’s beneficial to start maxing out your retirement accounts as soon as possible:
Compounding Interest: The earlier you start, the more you benefit from compounding interest.
Tax Benefits: Contributions to retirement accounts like 401(k)s and traditional IRAs are made each year, but they come with limits and potential tax-deferred (IRA) or tax-free (Roth IRA) accounts.
Employer Match: Many employers offer a match on 401(k) contributions up to a certain percentage. Failing to contribute at least enough to get the full match is akin to leaving free money on the table.
Higher Contribution Limits: The earlier you start maxing out, the less you have to play catch-up later. The IRS sets annual contribution limits, and consistently hitting those maximums can mean a considerable difference in your retirement savings over time.
By comprehensively engaging with your retirement accounts from an early age, you start an assured path towards the millionaire echelon.
Yes, it is possible to have multiple Roth IRA accounts.
Step 9: Adopting the Growth Attitude: Learning from Millionaire Mentors
The difference between those who accumulate wealth and those who don’t can often be traced back to mindset and mentorship. Adopting a growth attitude and learning from successful individuals can accelerate your path to prosperity.
Millionaires, with their experience and results-driven approaches, often provide valuable insights into effective wealth-building strategies.
Here’s how tapping into the wisdom of millionaire mentors can benefit your financial growth:
Learning from Their Experiences: Millionaires can share their triumphs and tribulations, offering you a roadmap that highlights what to do and what pitfalls to avoid. Cultivate these millionaire habits in your life.
Networking Opportunities: Millionaire mentors often have expansive networks. By building a relationship with a mentor, you may be introduced to key connections that can lead to lucrative opportunities.
Mindset Shift: Interacting with successful individuals can shift your perspective from a fixed mindset to one that embraces challenges, persists in the face of setbacks, sees the effort as the path to mastery, and learns from criticism.
Innovative Thinking: Mentors can inspire innovative approaches to income generation, investment, and savings. They can encourage out-of-the-box thinking that may lead to financial breakthroughs.
Emulating Success: By observing the habits and tactics of millionaires, you can emulate strategies that have proven successful while avoiding practices that may lead to failure. Start these billionaire morning routines to help you.
By adopting a growth attitude and learning from the insights and experiences of millionaire mentors, you sharpen your financial acumen and enhance your ability to create and capitalize on wealth-building opportunities.
Step 10: Community Counts: Surround Yourself with Success
The people you surround yourself with can significantly influence your thoughts, actions, and ultimately, your success. By intentionally building a community of hard-working, success-oriented individuals, you can foster an environment that promotes wealth accumulation.
Here is why it’s crucial to immerse yourself in communities that align with your aspirations:
Shared Success Mindset: In a like-minded success-oriented community, you’ll find individuals who have goals similar to yours and an attitude that is conducive to financial growth. This collective mindset can reinforce your own ambitions.
Peer Learning: Being a part of a community allows for collaborative learning. Exchange insights, experiences, and tactics with peers who are also on a path of financial growth. I love my masterminds!
Accountability: Just as with individual mentors, a community can keep you accountable. Regular interactions with people who take financial success seriously can encourage you to do the same.
Cross-Pollination of Ideas: Varied perspectives in a group can lead to a cross-pollination of ideas, sparking creativity and innovation in your own wealth-building strategies.
Increased Confidence: As you witness others achieving success, it instills a belief that you can do the same. This confidence can push you to take calculated risks that lead to greater rewards.
This adage stresses the importance of being selective with the company you keep, as their attributes frequently rub off on you, influencing your path to becoming a self-made millionaire. Likely you want friends who are millionaires or striving to be, too.
Step 11: Steer Clear of Debt: Remaining Unshackled as You Ascent
The gravitational pull of debt can be a formidable force, impeding one’s ascent toward the zenith of financial independence. But, you can overcome this by using these debt free living habits.
Here are strategies to remain unshackled by debt:
Budget Religiously: A budget constrains overspending and reduces the temptation to rely on credit.
Build an Emergency Fund: A substantial emergency fund can cover unforeseen expenses, diminishing the need to fall back on credit cards or loans that could exacerbate your financial situation.
Spend Less Than You Make: This may sound simple, but this helps you to live within your means and avoid going into debt.
Discern Needs from Wants: Be meticulous in distinguishing true needs from mere wants.
Ultimately, your ability to evade debt not only safeguards your financial stability but also amplifies your capability to invest and save, propelling you firmly on the trajectory toward millionaire status.
Step 12: The Lifestyle Inflation Trap: Keeping Expenses in Check
Success and salary hikes can often lead to lifestyle inflation, a phenomenon where spending increases as income rises, negating the potential for savings and investments. Keeping lifestyle inflation at bay is pivotal to ensuring that growing income translates into growing wealth.
Here’s how you can avoid the lifestyle inflation trap and keep expenses in check:
Stick to Your Budget: Even as your income grows, maintain the budget that facilitates your savings habits.
Identify Trigger Points: Be aware of what prompts you to spend more. Sometimes, seeing others upgrade their lifestyle can trigger the same desire. Stay focused on your financial goals rather than external influences.
Automate Savings Increases: When you receive a raise or bonus, immediately update your automatic transfers to increase the amount going into your savings or investment accounts.
Value Experiences Over Possessions: Studies have shown that experiences bring more lasting happiness than material goods. Opt for a modest increase in experiences rather than expensive goods as your income grows.
Embrace Minimalism: Adhering to minimalist principles can reduce the urge to accumulate non-essential items, keeping spending down and savings rates up.
Avoiding lifestyle inflation doesn’t mean living as frugally as possible regardless of how much you earn. It’s about finding a balance that allows for a comfortable yet modest lifestyle, wherein you can enjoy the fruits of your labor without compromising your long-term wealth goals.
Billionaire investor Warren Buffett exemplifies this principle by still living in the house he bought in 1958 for $31,500 and driving a reasonably priced car. Buffett’s lifestyle choices display an astute awareness of the perils of unnecessary spending and emphasize the importance of consistency in financial discipline.
Step 13: Compounding: The Wonder that Builds Big Balances Over Time
Compounding interest is a powerful tool that has the potential to turn modest savings into vast sums over time.
The principle behind compounding is straightforward: the returns you earn on your investments generate their own returns in the next cycle, leading to exponential growth given enough time.
Here’s how the wonder of compounding works to build big balances:
Start Early: The magic of compounding is maximized by time. The sooner you start investing, the more cycles of compounding your money can go through, and the larger your balance can grow.
Reinvest Your Returns: To truly harness the power of compounding, reinvest the interest, dividends, and any capital gains you receive, rather than spending them. This increases your investment balance, which in turn means more significant potential returns in the next cycle.
Regular Contributions: Make regular contributions to your savings and investments. Consistent additional deposits can significantly amplify the effects of compounding over the long term.
Step 14: Procrastination and Perils: Why Immediate Action is Crucial
Procrastination is often the thief of time and opportunity, especially when it comes to financial decisions. Postponing essential actions like saving, investing, or paying down debt can have compounding negative effects, making it harder to achieve financial goals.
Understand the perils of procrastination and the importance of immediate action:
The Cost of Waiting: In the realm of investment, the longer you wait to begin, the more you miss out on the potential compounding returns. Delayed action can mean the difference between a comfortable retirement and a financially insecure one.
Opportunity Loss: Procrastination can lead you to miss out on time-bound opportunities, such as market dips that are ideal for purchasing investments at lower prices or missing the deadline for a tax-advantaged account contribution.
Paying More on Debt: By putting off debt repayment, you accrue more interest, which only increases the total amount you’ll eventually have to pay. Acting quickly to pay off high-interest debt saves money in the long run.
Increased Stress: Delaying important financial actions can lead to an accumulation of stress and anxiety, which can, in turn, impair your ability to make sound financial decisions.
Potential for Rash Decisions: When you constantly procrastinate, you might eventually rush into decisions without adequate research or consideration, leading to poor financial outcomes.
Recognize this type of behavior and set weekly money meetings with yourself to help you move forward – one task at a time. Grab an accountability partner too!
Step 15: Long-Term Vision: Setting Up For Sizeable End Gains
The journey to becoming a millionaire is often a marathon, not a sprint.
Nurturing a long-term vision for your financial future is essential in guiding your daily decisions and motivating you to stay the course.
To ensure sizeable end gains, you need to establish and maintain a future-oriented mindset:
Set Long-Term Financial Goals: Establish clear, achievable long-term financial goals that align with your desired = future. Whether it’s attaining a specific net worth, owning property outright, or securing a comfortable retirement, these goals should inspire your action plan.
Strategic Planning: Develop a comprehensive financial plan that includes savings, investments, retirement accounts, and estate planning. This plan should act as a living document that you can adjust as your circumstances and goals evolve.
Patience is a Virtue: Recognize that wealth typically accrues over time, and not without fluctuation. Stay patient and avoid knee-jerk reactions to short-term market swings or temporary setbacks.
Regular Investments: Commit to making regular investments, even in small amounts. Over time, consistent contributions can result in substantial wealth through compounding interest.
It’s about creating financial disciplines that compound over time, ensuring that with each day, month, and year, you’re progressively building towards a considerable nest egg.
FAQ: Climbing the Financial Ladder Without a Silver Spoon
Getting rich with no money might seem like a paradox, but it’s a trajectory that many self-made millionaires have pursued successfully. The blueprint involves a combination of mindset shifts, disciplined financial habits, and strategic action.
You have to take proactive steps to increase wealth even when starting from zero.
Starting from nothing and achieving millionaire status requires a multifaceted strategy, encompassing personal development, financial planning, and an entrepreneurial approach to income generation.
Wealth creation is a journey, and starting from zero means that progress may be slow initially.
However, by adopting these steps and maintaining a disciplined and proactive approach, you incrementally increase your chances of accumulating significant wealth.
Ready to Become a Millionaire with Nothing?
Are you ready to become a millionaire with nothing but your ambition, intellect, and unwavering resolve? If your answer is a resounding yes, then it’s time to take the first step.
With every small victory and learned lesson, you inch closer to your ultimate goal.
Your journey starts with dedication, a commitment to yourself that from this day forward, you will work relentlessly toward the life you envision.
Wealth is not just about the money you accumulate but also the knowledge, experience, and relationships you develop along the way. Wealth creation is often not a straight line but a series of strategic moves and consistent behaviors that, collectively, lead to financial success.
Remember, your current financial position is just a starting point – with the right mindset and actions, significant financial growth is within the realm of possibility.
Your next step is working towards becoming financially independent.
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Inside: Escape the cycle of being broke with insightful tactics. Learn to invest, save smartly, spot financial traps, and build secure money habits today.
You are desperate right now. You want to know why I am broke.
I get it. This is a situation I have been in before and just recently when I lost my main source of income.
The feelings of you can’t afford anything may send you down a steep spiral of depression.
So, how do we escape?
Here are the tips I used before and plan to use again.
Top Reasons for Why I am Broke
#1 – The Mindset Traps That Keep You Broke
A mindset that cultivates a sense of scarcity rather than abundance can be a massive roadblock to financial prosperity. When you’re shackled by thoughts like “I am always broke,” you unwittingly set the stage for a self-fulfilling prophecy.
The mental narrative that convinces you wealth is unattainable can keep you trapped in a loop of missed opportunities and poor financial decisions.
You may inadvertently sabotage your potential to earn more, save, or invest wisely by clinging to a defeatist paradigm.
Fixing a broken mindset is about shifting from a state of helplessness to one of deliberate, empowering action.
It starts with self-awareness and is further built through intentional positive affirmations and financial education.
Overcome By: Remember, the mind is powerful—it can be your greatest ally or your most formidable adversary. Change your money mindset.
#2 – Living Beyond Your Means: A Fast Track to Empty Pockets
Living beyond your means is akin to constantly filling a sieve with water, hoping it will someday retain more than it loses—a surefire way to financial drought. It’s a lifestyle where your outflow far exceeds your inflow, and every paycheck evaporates into the ether of consumerism.
With the advent of credit cards and buy-now-pay-later schemes, the temptation to spend money we don’t have has never been greater.
The façade of affluence conceals the grim reality of financial instability.
Acknowledging this trap is step one. Living within one’s means doesn’t imply sacrificing joy or reverting to asceticism; it’s about striking a harmonious balance between the lifestyle you desire and the one you can sensibly afford.
Overcome By: Making choices aligned with your financial reality, finding contentment in simplicity, and prioritizing financial health over transient pleasures.
#3 – Chronic Debt: Borrowing from Tomorrow for Today
Chronic debt is a pervasive issue, ensnaring individuals in a vicious cycle of borrowing today and worrying about repayment tomorrow. This pattern often stems from an urgency to fulfill immediate desires or needs without adequate financial resources.
Alarmingly, the trend of increasing consumer debt signals a culture obsessed with instant gratification as consumer debt is $16.84 trillion in Q2 2023, according to Experian. 1
Being in debt should not be normal.
The onus of breaking free from chronic debt lies in reevaluating your relationship with money. It means slowing down the urge to splurge, meticulously planning for future financial obligations, and carving a path towards debt repayment.
Overcome By: Find the discipline to not only stop accumulating debt but also to aggressively tackle existing debts through methods like debt snowball or debt avalanche strategies.
#4 – You Haven’t Learned to Plan and Budget for a Brighter Tomorrow
The lack of a strategic financial plan and a detailed budget is tantamount to navigating unknown terrain without a map. Without these critical tools, your finances are left to chance rather than choice, leaving you vulnerable to the whims of circumstance.
Budgeting is perhaps the most fundamental step toward taking ownership of your financial future. It gives you a clear snapshot of where your money is going, which is essential for making informed spending decisions.
However, many avoid the budgeting process, perceiving it as restrictive or complex. The truth is that budgeting liberates you from the anxiety that comes with uncertainty. It empowers you to align your spending with your financial goals and to find a balance between today’s necessities and tomorrow’s aspirations.
Overcome By: Choose a budgeting method whether it be the zero-based budget, the 50/30/20 rule, or the envelope system, the key is to find a method that resonates with your lifestyle and stick to it.
#5 – No Emergency Fund to Weather Financial Storms
An emergency fund is an essential bulwark against the financial tempests life invariably hurls your way. Without it, a single unforeseen event—a job loss, a medical emergency, or an urgent car repair—can capsize an already precarious financial ship. The lack of an emergency cushion extends an open invitation to debt and financial strain.
The data tells a stark tale:
A statement from the Consumer Financial Protection Bureau highlights that nearly a quarter of consumers (24%) don’t have an emergency savings account. 2
Additionally, 39% have less than a month’s worth of income saved for emergencies, setting the stage for potential financial disaster. 2
This precarious situation has become more pronounced with the increasing cost of living and high inflation rates witnessed in 2021-2023.
Overcome By: Structured, automatic savings transfers to facilitate the gradual growth of your emergency fund without it feeling like a financial blow. The goal is to build a reservoir robust enough to cover several months of living expenses, providing a comfortable buffer that can help you bounce back from setbacks without the need to borrow money at high-interest rates or liquidate precious assets at inopportune times.
#6 – Lack of Understanding of The Power of Investing
Understanding the power of investing is key to grasping the potential of a seed. A seed, given the right conditions, can grow into a flourishing tree. Similarly, investing allows your finances to grow beyond the confines of stagnant savings.
Yet, many people fail to harness this power due to a lack of understanding or fear of the unknown. This was me for many years until I decided to learn to trade stocks.
A common misconception surrounding investing is that it’s solely the playground for the rich or financially savvy. This myth steers many away from multiplying their wealth via investments, leaving them to rely solely on their primary source of income. Moreover, a lack of understanding often leads to panic during market volatility, resulting in ill-timed decisions to buy high and sell low—contrary to sound investment strategies.
Overcome By: Invest money consistently into a low-cost mutual fund or ETF that tracks the overall S&P. Then, continue your investing education on how to invest in stocks.
#7 – Wasteful Spending Habits
Wasteful spending habits are the quiet thieves of financial security. They nibble away at your earnings, leaving you wondering where your money has gone at the end of each month. This pattern often goes unnoticed, as it’s usually composed of small, seemingly insignificant purchases that accumulate over time.
The danger of wasteful spending is its subtlety.
It’s the daily coffee on the way to work, the meal out because cooking feels like too much of an effort, or the impulse buys during the sale season.
Individually, these do not seem like considerable expenses, but together, they can consume a substantial portion of your budget.
To curtail this financial leak begins with recognizing and acknowledging these habits. Tracking every penny spent can be an eye-opening experience, illustrating just how quickly the ‘little things’ can add up. With this awareness, one can then consciously decide where to cut back.
Overcome By: Adopting a minimalist approach, where value and purpose become the benchmarks for every expense, can help combat wasteful spending. Questions like, “Do I really need this?” or “Will this purchase add value to my life?” can serve as useful filters. Take up a no spend challenge to see your mindless consumption.
#8 – Fail to Recognize the Patterns That Lead to a Near-Empty Wallet
Failing to recognize the patterns that deplete your wallet is akin to ignoring the signs of a leaking roof until it caves in—it’s a disaster in the making. Often, it isn’t one significant financial blunder, but rather a series of small, recurring missteps that lead to the near-empty wallet syndrome.
For instance, routinely underestimating monthly expenses can lead to a perpetual state of surprise when the bills pile up.
Similarly, neglecting to keep tabs on bank account balances may result in overdraft fees that, over time, take a sizable bite out of your funds.
Disregarding the accumulative effects of late payment charges or routinely paying only the minimum on credit card balances can exacerbate financial distress.
Overcome By: To reverse this trend, one must become a detective in their own financial mystery. Start by scrutinizing bank statements and tracking expenses. Look for patterns, like repeated late-night online shopping sprees or habitual dining out, which contribute to the thinning of your wallet. Use budgeting apps or spreadsheets to flag these patterns visually, making it easier to identify and amend them.
#9 – How Fear and Denial Contribute to Ongoing Money Issues
Fear comes in several forms: fear of failure, fear of taking risks, and even fear of facing the truth about one’s financial situation. It can immobilize individuals, preventing them from making necessary financial changes or taking action that could otherwise mitigate or reverse money woes.
For instance, the fear of losing money might dissuade one from investing in potentially lucrative opportunities, leaving them stuck in the low-yield safety of a savings account.
Further, there’s the psychological phenomenon of denial—a defense mechanism that numbs the pain of reality. When faced with mounting debt or budgetary failure, denial kicks in, allowing individuals to live as if the problem doesn’t exist. Unfortunately, ignoring overdue notices or dodging calls from creditors doesn’t make debts disappear.
Denial only deepens the financial hole, often leading to larger, more complex problems.
Overcome By: To confront these challenges, it’s crucial to adopt a stance of brutal honesty with oneself. This means acknowledging fears and confronting financial shortcomings head-on. Professional help, such as financial counselors or advisors, can provide support and guidance to navigate these tricky emotional waters.
#10 – No Clear Financial Goals and Plans
The absence of clear financial goals and plans is like embarking on a voyage without a destination. It not only leads to aimless wandering but also ensures that you miss out on the focus and motivation that well-defined objectives provide.
When you lack clarity on what you’re saving for or what you wish to achieve, there is little impetus to resist the temptations of immediate gratification or to weather the short-term sacrifices that long-term gains often require.
Setting clear and measurable financial goals lays the groundwork for creating effective plans to reach them.
Overcome By: To break this cycle, begin by reflecting on what you value most and where you would like to be financially in the future. Whether it’s achieving debt freedom, owning a home, funding education, or planning for retirement, having specific goals in mind will define the purpose of your financial activities. Craft a plan that outlines the steps needed to accomplish them.
#11 – Laziness is your Game
When you approach your finances with a laissez-faire attitude, it’s akin to ignoring the health of a garden; without regular attention and effort, it’s bound to wither. Financial laziness can manifest in various ways, from failing to review bank statements and ignoring budgeting to neglecting opportunities to cut costs or boost income.
Each act of omission is a step closer to the financial doldrums.
Procrastination or avoidance might seem less painful at the moment, but they ultimately compound the problem. Contrary to what some might think, simple acts of financial diligence, such as cash management or regularly doing household chores, do not require Herculean effort.
Moreover, they set a foundation for sound financial habits that thwart needless spending.
Overcome By: Schedule time for financial management much like an important meeting.
#12 – Keeping up with Others is Breaking Your Bank
The urge to keep up with others—often termed the ‘Keeping up with the Joneses’ or ‘Keeping up with the Kardashians’ phenomenon—is a profound pressure that exerts an invisible, yet powerful, force on financial habits. This social comparison can lead to an insidious form of competition, one that disregards personal financial realities in favor of an illusory social standing.
It’s an impulse driven by comparison, where the benchmark of success is set not by personal satisfaction, but by the possessions and lifestyles of others.
The decision to upgrade to a luxury car, splurge on designer clothes, or redo a perfectly functional kitchen stems not from need, but from a desire to project an image that matches or surpasses those in your social sphere.
Financial guru Dave Ramsey encapsulates this philosophy with his common saying, “Live like no one else will now, so in the future, you can live like no one else can.” This means making money moves that are right for you, not those dictated by social pressures, which can sometimes involve humbler living now for a wealthier future.
Overcome By: Breaking free from the shackles of this social competition requires introspection and a bold reaffirmation of personal values. Adjusting focus towards personal financial goals and aspirations, rather than mirroring others’ spending decisions, is key.
#13 – Need Help Differentiating Needs from Wants
The blurring line between needs and wants is a common financial pitfall that can lead individuals deeper into the morass of money woes.
Needs are essentials, the non-negotiable items necessary for survival—food, shelter, healthcare, and basic utilities.
Wants, on the other hand, include anything that is not vital for basic survival but enhances comfort and enjoyment of life.
The difficulty in distinguishing between the two often stems from habituation. What starts as a luxury, like eating out at restaurants, getting a high-end smartphone, or subscribing to multiple streaming services, can quickly become perceived as essential. This is particularly difficult in a consumer-driven society, where advertising and social media constantly inflate our perception of what we ‘need’ to lead a fulfilling life.
The result? A budget that’s stretched thin on non-essentials, leaving little room for savings or investment.
Overcome By: Regularly reassess expenses and ask the hard questions about whether a purchase is genuinely essential or merely a desire dressed up as a need.
#14 – You Don’t Make Enough Money to Cover Your Expenses
When your income doesn’t cover expenses, the strain can be relentless. This financial imbalance is often the stark root of the “I am broke” refrain. In such cases, every dollar becomes precious, and the financial breathing room feels nonexistent.
The reason is straightforward: if what comes in is less than what goes out, deficits and debt are the inevitable outcomes.
Addressing this challenge requires a two-pronged approach—increasing income and/or reducing expenses. For many, reducing expenses is the immediate reflex, and while it’s an essential strategy, there’s only so much you can save, but no limit to how much you can earn.
Overcome By: Focus on making more money. This could mean asking for a raise, seeking better-paying job opportunities, pursuing a side hustle, making money online, or acquiring new skills that offer higher income potential.
Long-Term Solutions to Build a Secure Financial Future
Building a secure financial future is an aspirational goal for many, but achieving it requires a strategic approach characterized by foresight, discipline, and an understanding of personal finance.
Becoming financially independent doesn’t happen by magic chance; it’s the result of deliberate actions taken with consistency over time.
Here are the foundational blocks for constructing a sturdy financial edifice:
Invest in Financial Literacy: Knowledge is power, and this is especially true in the realm of finance. Educate yourself about budgeting, investing, insurance, taxes, and retirement planning. Reliable resources include books, online courses, podcasts, and workshops.
Set Clear Financial Goals: Define what financial success looks like for you, whether it’s being debt-free, owning a home, or achieving financial independence. Detailed goals provide direction and motivation for your financial plan.
Create a Robust Budget: A flexible budget isn’t a one-time exercise but a living document that should evolve with your financial situation. It should reflect your income, fixed and variable expenses, and financial goals.
Establish an Emergency Fund: This is the bedrock of financial security. Aim to save three to six months’ worth of living expenses to protect yourself from unforeseen circumstances without falling into debt.
Pay Off Debt: High-interest debt is a major impediment to financial growth. Utilize strategies like the debt snowball or avalanche methods to tackle debts efficiently. Once you’re debt-free, avoid accumulating new debt.
Diversify Income Streams: Relying on a single source of income is a risk. Look for opportunities to create additional streams of income, such as side businesses, freelance work, or passive income from investments.
Invest Wisely: Make your money work for you through smart investments. Consider diversified portfolios, retirement accounts, and tax-efficient investment strategies to grow your wealth over time.
Plan for Retirement: The future is closer than you think. Contribute regularly to retirement accounts like 401(k)s or IRAs. Take advantage of employer match programs if available, as they’re essentially free money.
Protect Yourself with Insurance: Ensure you have adequate insurance coverage for health, life, property, and potential liabilities. This helps to guard against catastrophic financial losses.
Breaking the Cycle of Being Broke
Just like becoming broke is often a gradual process—a few uncalculated loans, hasty investments, and numerous credit card swipes. Suddenly, financial stability seems like a far-off dream.
The same goes for breaking the cycle of being broke. It is about moving from living paycheck to paycheck with no savings, drowning in debt, and making questionable spending decisions to become financially stable.
Even though our society may see being broke as normal, it is possible to embrace financial prudence to defy such norms. It’s time to delve into the reasons behind the perpetuation of brokeness and unveil practical steps toward lasting financial freedom.
What do I do if I’m broke?
Finding yourself in a financial predicament where the end of your money arrives before your next paycheck is a stress-inducing scenario.
When faced with the stark reality of being broke, here’s a step-by-step guide to help you navigate through and set the stage for a more stable financial future:
Assess Your Situation: Take stock of all your available assets and resources. This includes checking account balances, any savings, and items you could potentially sell for quick cash. Understanding what you have can help you gauge your immediate next steps.
Prioritize Your Expenses: Sort your expenses by urgency and necessity. Essentials like rent, utilities, and groceries come first. Non-essentials or discretionary spending should be paused or significantly reduced until your financial situation improves.
Reduce Costs Immediately: Eliminate any non-essential expenses. Cancel or suspend subscriptions, memberships, or services that are not vital. Consider cheaper alternatives for necessary expenses, and utilize community resources, such as food pantries, if needed.
Negotiate with Creditors: If you’re struggling to pay your bills, proactively reach out to creditors to discuss payment options. Many are willing to work with you on a revised payment plan to avoid defaults.
Seek Additional Income Sources: Consider taking on a side job, selling unused items, freelancing, or offering your skills for short-term gigs. Even small amounts of additional income can make a significant difference when you’re broke.
Consider Assistance Programs: Look into local, state, and federal assistance programs. You may be eligible for temporary aid to help with food, housing, or utility bills.
Borrow with Caution: If borrowing is unavoidable, be cautious and choose the most cost-effective options such as loans from family or friends, a personal loan with a low-interest rate, or a hardship withdrawal from your retirement account (as a last resort).
Remember, being broke can happen to anyone, so there’s no shame in it.
The key is to take swift, decisive action to mitigate the immediate crisis while also planning longer-term strategies to prevent recurrence. By addressing the issue head-on and adjusting your financial habits, you can initiate the journey from being broke to becoming financially buoyant.
FAQ: Navigating Away from Being Broke
Finding yourself consistently broke at the end of each month is an indicator that there’s a disconnect between your income and your spending habits.
It’s often the result of several factors or behaviors that, when combined, result in a cycle of financial scarcity. Here are common reasons why this might be happening:
No Budget or Poor Budgeting
Overspending
Impulse Purchases
Lack of Emergency Savings
Failure to Track Expenses
Living paycheck to paycheck
High Debt Payments
Remember, understanding why you’re broke at the end of the month is the first step towards financial stability.
Saving money when funds seem stretched to their limit is a challenge that requires creative strategy and discipline. Even with a tight budget, there are ways to eke out savings without significantly impacting your day-to-day life.
If saving a significant amount seems daunting, start by saving your change. Physically save coins or use apps that round up your purchases to the nearest dollar and save the difference. Check out my mini savings challenges.
Saving money when it seems there’s barely enough to cover the bills begins with a commitment to take whatever steps are necessary, however small they may initially seem. Every dollar saved is a step towards financial resilience and a buffer against future financial challenges.
Investing can be a powerful tool for building wealth over the long term, and it’s often considered a key component of achieving financial stability. However, for those who are currently struggling to make ends meet, the decision to invest should be approached with caution.
Investing typically involves committing money with the expectation of achieving a future financial return. It has the potential to outpace inflation and increase your wealth due to the power of compound interest. Nevertheless, it often carries the risk of losing the invested capital, a risk that those in financial distress may not be in the position to take.
Feeling Broke without Money – Time to Make A Change
Feeling broke is a stressful and demoralizing experience, but it’s also a clarion call for change. It signals that your financial health needs attention and that your money management strategies may require a significant overhaul.
However, the situation is not without hope; with determination and the right approach, it’s possible to transform your financial landscape.
The journey away from the precipice of being broke begins with honesty, introspection, and a willingness to adapt. It’s about confronting uncomfortable truths, devising a clear plan, and taking decisive action. From crafting and adhering to a precise budget, cutting unnecessary expenses, to seeking additional income streams—all these steps are essential in the path to financial stability.
Remember, feeling broke isn’t a permanent state. Mindset is everything.
It’s a challenge to be met, an opportunity for growth, and a chance to steer the course of your financial ship towards calmer and more abundant waters. Your future self will thank you for the changes you implement today, so take that first step now.
>>>It’s time to make a change—because you deserve the peace of mind that comes with financial security.
Source
Experian. “Experian Study: U.S. Consumer Debt Reaches $16.84 Trillion in Q2 2023.” https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/. Accessed January 25, 2024.
Consumer Financial Protection Bureau. “Emergency Savings and Financial Security.” https://files.consumerfinance.gov/f/documents/cfpb_mem_emergency-savings-financial-security_report_2022-3.pdf. Accessed January 25, 2024.
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A college degree can be a major rite of passage and career stepping stone for millions of Americans. Putting one’s education to work can unlock professional rewards and a solid financial future.
However, there’s no denying that the cost of tuition can be daunting. The student loan debt balance has surged 66% over the past decade and, according to the Federal Reserve, currently totals more than $1.77 trillion (that’s trillion, not billion).
Having those payments unfurling before you can be stressful and frustrating, and the effects of student loan debt can be far-reaching. It can seem as if some of your personal, professional, and financial goals will have to wait until you can pay off what you owe. But there are ways to manage those loans and navigate this situation. After all, student debt is what you are going through, not who you are.
Here, you’ll learn more about student loan debt, how it can impact borrowers’ life decisions, and ways to minimize those effects and manage debt more effectively.
Student Loan Debt Statistics
To understand how impactful student loan debt can be, here’s some perspective. Consumer debt in the United States is measured by the Federal Reserve in five distinct categories — home, auto, credit card, student, and other debt.
Using the Federal Reserve Bank of New York data from 2023, here’s how household debt stacks up in the U.S.:
• Mortgage debt (excluding HELOCs, or home equity lines of credit): $12.14 trillion
• Student loan debt: $1.599 trillion
• Auto loan debt: $1.595 trillion
• Credit card debt: $1.079 trillion
Here’s how educational debt stacks up more specifically: In 2023, the average student loan borrower carried $37,338 in federal debt and $54,921 in private debt. 💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.
Impact of Student Loan Debt on Life Plans
Given the cost of student loan debt, some borrowers may delay big life decisions, such as buying a home or starting a family until they are further along in their loan repayment or have their debt totally paid off. Here are some specifics about the potential negative effects of student loan debt. Then, more happily, you’ll find tips on managing what you owe.
Homebuying
One landmark study in the Journal of Labor Economics found that a $1,000 increase in student loan debt lowered the rate of homeownership by approximately 1.8% for people in their mid-twenties who went to a public college for four years. This is equivalent to a delay of about four months in achieving homeownership per $1,000 in debt.
Indeed, as student debt has increased, homeownership among younger Americans has decreased. Experts, however, caution that this is a complex situation and not a matter of student debt meaning you can’t buy a house.
It’s true that student loans can raise a person’s debt-to-income ratio (DTI), a critical measure of creditworthiness. And it can slow an individual’s ability to save for a down payment.
That said, there are ways to get a mortgage with a student loan. By managing debt responsibly and building your credit score, you can achieve this goal. It’s also wise to look into the various mortgages available with as little as 3% down or even 0% for qualifying candidates.
Pursuing Graduate School
If you have undergraduate student loan debt, you may decide to delay or forgo enrolling in a graduate or professional degree program. Graduate school can often mean even more debt. According to the Education Data Initiative, the average graduate student loan debt is $76,620 among federal borrowers, with only 14.3% of that coming from the borrower’s undergraduate studies.
That said, an advanced degree can mean increased job opportunities. For example, the starting salary for those who majored in computer and information sciences of a recent graduating class was $86,964 with a bachelor’s degree and $105,894 with a master’s degree. And if you want to go to medical school, law school, or business school (which can lead to fulfilling and lucrative careers), you will need significant additional training. So it’s important to determine if taking out the debt is worthwhile vs. your anticipated earning potential.
Employment and Career Choices
What you’ve just read indicates some of the ways that student loan debt can impact your career plans. There are a couple of other ways that your loan balance might impact your career:
• If you have significant debt and are faced with the choice between your dream job at a lower salary and a basic job at a higher pay grade, you might opt for the one that fattens your bank account even though it doesn’t thrill you.
• Also, some companies (particularly those in the financial industry) may check your credit score as part of your job application. Student loans could build your score if you pay on time, and they could broaden your credit mix. But loans also create the opportunity to make a late payment or miss one entirely. Those are aspects of your payment history, the single largest contributor to your score. If you don’t stick to your schedule and pay what you owe every month, you could wind up with a lower score.
Marriage and Divorce
Student loans can also impact one’s personal relationships. According to a 2023 Student Loan Planner® survey, one in four borrowers said they delayed their marriage plans due to student debt. In addition, more than half of respondents (57%) said their student loans were a source of considerable stress in their marriage or relationship.
Marriage can impact your student loan payments, depending on the types of loans you have and the repayment plan you are on. If you are on an income-based repayment plan, your monthly bill might change based on how much you and your spouse earn and how you file your taxes.
Marriages and money can create complex situations that are hard to fully decode. When looking at the impact of student loan debt on divorce, it can be tricky to unravel the interplay of factors. One survey conducted a few years ago found that 13% of respondents attribute student loan debt as a cause of their divorce. Yet some couples with student loan debt were more likely to delay divorce due to their student loans and how it might impact their ability to repay their debt. So in matters of the heart and the wallet, there isn’t a clear consensus.
Recommended: How Marriage Can Affect Your Student Loan Payments
Starting a Family
According to the USDA and other government statistics, it can cost more than $330,000 to raise a child to age 18. That’s no small amount, and it’s a daunting figure for many. Those carrying a hefty amount of student debt may delay parenthood as they pay off their loans.
One landmark New York Times survey in 2018 found that among people who didn’t plan to have children at all, 13% said it was as a result of student debt. In a more recent study of those with high student debt, 35% said they were waiting to have kids due to the impact of their loans on their finances. Still others may respond to this scenario by adopting strategies to pay off student loans faster.
Saving for Retirement
One of the negative effects of debt on young adults is that their retirement savings can be impacted. A recent study conducted by Fidelity found that 84% of borrowers felt that their loans impacted their ability to save for their retirement.
A study from a few years ago bore this out: Research by the Center for Retirement Research at Boston College found that Millennials who had never borrowed student loans saved twice as much for retirement by age 30 as college graduates who have student debt.
Here’s another bit of intel that supports the fact that student debt can make it harder to save for your future. Fidelity also found that the percentage of student loan borrowers who put at least 5% of their salary into their retirement plan rose from 63% to 72% during the Covid-19 loan payment pause.
Delaying retirement savings can mean playing catch up in your later years. Typically, the earlier you start saving for retirement, the more time your money will have to benefit from compound interest.
It can seem overwhelming to start saving for retirement while you’re still paying off student loan debt, but doing both at the same time can help you meet your financial goals in the future. 💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
How to Manage Your Student Loans
As you’ve just read, student loans can impact many areas of your life. But you are not alone in this situation, and your loans will not be with you forever. Focus on smart solutions to help you manage your debt repayment. Consider the following strategies.
Keep Paying
Even when money is tight, it’s wise to pay on time, as much as possible. Timely payments are the single biggest contributing factor to your credit score, an important financial metric. So do your best to keep current on those monthly installments.
Make a Budget
It’s hard to effectively manage your student debt and your finances in general if you don’t know how much money you have coming in and going out. If you don’t yet have a budget or yours isn’t working well for you, commit to reviewing different budgeting methods and finding one that works.
This process of tracking your money and possibly trimming your spending could reveal ways to free up more funds to pay off your debt.
Repayment Plans
There are federal student loan repayment plans that base your monthly payment on your income or ones that give you a fixed monthly payment. Those that are based on your income may help you lower your monthly payment.
It can be worthwhile to consider your options. For fixed payments, you may have a choice between standard, graduated, and extended plans. If you focus on income-driven repayment (IDR) plans, you will likely review the SAVE Plan (which replaces REPAYE), PAYE, IBR (income-based repayment), and ICR (income-contingent repayment) plans. With IDR plans, once you satisfy a certain number of months of qualifying payments, you can be eligible for forgiveness on the remaining balance of your loan(s).
Deferment and Forbearance
If you are finding it challenging to pay your federal student loans, you may be able to take advantage of deferment or forbearance, which are both ways of pausing or lowering your payments for a specific period of time. Perhaps you haven’t yet found a job after graduation or have another situation that is impacting your ability to pay; these programs can help qualifying borrowers out.
The main difference between is that during deferment, borrowers are not required to pay the interest that accrues if they have a qualifying loan. With forbearance, however, borrowers are always responsible for paying the interest that accrues, no matter what kind of federal loans they have.
Forgiveness
Here’s another path to lessening the impact of student loans on your life: forgiveness, which means you may not have to pay back some or all of your federal student loans. For these programs, there are a variety of qualifying factors, such as whether you’re a teacher, government employee, or worker at a nonprofit. Other factors could be that you have a disability, your school closed, or you declared bankruptcy, among others. It’s worthwhile to research your eligibility because the upside could be significant.
Recommended: A Look at the Public Service Loan Forgiveness Program
Refinancing
Another possible way to reduce the impact of student debt on your life is student loan refinancing.
When you refinance your loans you take out a new loan with a private lender. Depending on your credit history and financial profile, you can qualify for a lower interest rate, which could substantially lower the amount of money you pay in interest over the life of the loan (depending on the term you select, of course). Two important notes about this:
• When you refinance federal loans with a private loan, you forfeit federal protections and benefits (such as the forbearance and forgiveness options mentioned above).
• If you refinance for an extended term, even though your monthly payment may be lower, you may pay more in interest over the life of the loan.
To see how refinancing could help you manage your student loans, take a look at an online student loan refinance calculator.
The Takeaway
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
When you think about retirement planning, you may feel like you’re doing alright, especially if you’re contributing part of your monthly paycheck to your employer-sponsored 401(k) plan. You may even have visions of growing old by the ocean or tapping into your Bohemian side with some global travel.
But to truly live the retired life you dream of, rather than scraping the bottom of your savings accounts, you need to be well-prepared. While a 401(k) is a great start, there are other tools you can take advantage of to diversify and maximize your retirement savings.
That’s where a Roth IRA comes in.
This tax-friendly retirement account can not only bolster your retirement money but can also help relieve your future tax burden. An IRA does come with a few rules attached to it, plus some eligibility requirements. However, when used wisely, it can really work to your advantage when it comes time to retire.
We’ll take you step-by-step through everything you need to know to make sure you qualify and how to use a Roth IRA to its fullest.
What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that allows you to save and invest money for retirement on a tax-advantaged basis.
Contributions to a Roth IRA are made with after-tax dollars, meaning you cannot claim a tax deduction for the money you contribute. However, once the money is in the account, it can grow tax-free, and you can withdraw it tax-free in retirement.
This can be extremely beneficial because the money you contribute to a Roth IRA should grow (ideally substantially) between when you put cash in and when you start to take it out. But since you pay income taxes on it the first time around, you don’t have to do it again, even though the amount is larger.
You get to pick the investments in which to place your Roth IRA funds, such as:
How does a Roth IRA work?
A Roth IRA comes with many tax benefits, which is why it’s so popular these days. Even if you have a 401(k), it’s a great tax-advantaged addition to your retirement plan. And if you’re self-employed or don’t have a 401(k) at work, it’s a good start to investing for your retirement goals.
Here’s how a Roth IRA works:
Eligibility: To be eligible to contribute to a Roth IRA, you must have earned income and your income must fall below certain thresholds.
Contributions: You can contribute up to a certain amount each year to a Roth IRA, depending on your age and income. Contributions are made with after-tax dollars and are not tax-deductible.
Investment options: You can invest the money in your Roth IRA in a variety of ways, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Tax benefits: Earnings on your investments grow tax-free, and you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain conditions.
Withdrawals: You can withdraw your contributions to a Roth IRA at any time without penalty. However, you may owe taxes and a penalty if you withdraw your earnings before you reach age 59 1/2 and have not held the account for at least five years.
Roth IRAs can be a valuable tool for saving for retirement, especially for people who expect to be in a higher tax bracket in retirement than they are now.
How much can you contribute to a Roth IRA?
As long as you meet certain income requirements (which we’ll discuss shortly), you can contribute up to $6,000 a year to your Roth IRA. That number jumps to $7,000 if you’re at least 50 years old, helping you catch up financially and get ready faster as you approach retirement.
Plus, there are no minimum Roth IRA contribution limits when you turn 70 ½. So, you can use your Roth IRA as a way to provide your family with an inheritance.
Ready to retire early? A Roth IRA can help.
You can start making tax-free and penalty-free IRA withdrawals before you reach the traditional retirement age because you’ve already paid taxes. However, you have to pay taxes and potentially penalty fees on your earnings if you withdraw those early.
Plus, Roth IRAs aren’t just for retirement.
You can also use your funds for qualified education expenses without having to pay penalties or taxes. So, you can help pay for your own or your child’s college tuition, just as you would with a 529 plan (or in addition to it).
Although there are contribution limits, you get a lot of flexibility when you choose a Roth IRA. And when you have financial goals at any stage of life, flexibility is key.
What’s the difference between a traditional IRA and a Roth IRA?
If you’re at all familiar with retirement terminology, you may have heard of an IRA before. But there are a few key differences between a Roth IRA and a traditional IRA.
The most significant difference is when you pay your taxes. Unlike Roth IRAs, a traditional IRA allows you to take a tax deduction the year you actually contribute. So if you’re attempting to drop into a lower tax bracket or lower your overall tax payment, your traditional IRA contribution can help you do that.
Of course, there’s a catch.
When you start to take withdrawals when you retire, you’ll have to pay taxes on the full amount — including your earnings. But that’s not necessarily a bad thing.
If you’re established in your career and already earn a lot of money, you may expect your annual income to drop when you retire. You’re probably not going to withdraw your entire balance at once, so your tax rate might not be that high compared to where you are now.
Minimum Distributions
Speaking of making withdrawals from your account, you have to start taking the required minimum distributions once you hit the age of 70 ½. The minimum amount is based on a formula from the IRS comparing your age to your life expectancy.
If you want to take out funds from traditional IRAs before you reach the age of 59½, you’ll have to pay a 10% penalty on top of your income tax.
Still, like most investments, it’s good to have a diverse mix of products to help you now and in the future. You may want to consider having both a traditional IRA and a Roth IRA, particularly if you want to start lowering your annual federal tax burden.
Tax-Free Distributions
You must have a Roth IRA account opened for 5 tax years to be able to take any distributions, including earnings, that are tax-free. Furthermore, you are only eligible to take tax-free distributions for death or disability, after age 59-1/2, or for a first-time home purchase.
Roth IRA Eligibility Requirements
Unfortunately, there are restrictions on opening a Roth IRA, particularly for high-income earners. Depending on how much you make, you may be restricted on how much you can contribute, or you may not be able to make any contributions at all. Furthermore, you can only contribute earned income to a Roth IRA.
So, where do cutoffs start?
Single Tax Filer
Let’s look at single tax filers first.
For single tax filers and heads of household, you’re allowed to make the maximum contribution if you earn no more than $146,000. You can contribute a reduced amount if you earn more than $146,000, but less than $161,000. If you earn $161,000 or more, however, you can’t make any Roth IRA contributions.
Joint Tax Filer
Now let’s take a look at those married filing jointly.
You can make the maximum contribution if you earn up to $230,000 and a reduced amount if you earn between $$230,000 and $240,000. Once your annual income reaches $240,000 or more, you’re not eligible to contribute anything. Your modified adjusted gross income (MAGI) is what is used to determine IRA eligibility.
Depending on your anticipated income track over the course of your career, it may be worth opening a Roth IRA as soon as possible. That way, you can ensure that you contribute as much as possible while you still meet the requirements. You also give your investments as much time as possible to grow and compound before you’re ready to make withdrawals.
And since you can use a Roth IRA for a greater range of purposes than other types of retirement accounts, you give yourself greater financial flexibility in the future. It isn’t just about setting up a contribution each year and forgetting about it until you retire. Instead, a Roth IRA can be an active part of your near-term and long-term financial plans, like going back to school or retiring early.
How to Open a Roth IRA
Just about anywhere you conduct your financial business, whether it’s at a bank, credit union, online broker, or even a robo-advisor. Compare your options to make sure you’re getting low fees and good customer service.
Check for mutual funds with no transaction fees and ETFs that are commission-free. Some financial brokers still charge high prices for these fees. So, it’s important to make sure that you’re choosing one who will save you money in the long run. After all, those fees can really start to add up over decades of managing your Roth IRA.
Most brokers also allow you to rollover other accounts into your IRAs (both traditional IRAs and Roth IRAs). If this is a service you may need somewhere down the road, make sure your IRA broker is sophisticated enough to handle it.
Some robo-advisors, for example, may not accept rollovers. And if you leave a job where you’ve had a 401(k), you’ll want to make sure you have somewhere to put it once you’re gone.
With a bit of research and comparison, you can find a convenient, low-cost way to manage your Roth IRA over the years.
Where to Open a Roth IRA
To open up a Roth IRA, you need to select a brokerage firm. You may be able to do this at a financial institution you already work with, or you could explore other options. Both online and brick-and-mortar banks can serve as a broker. It really depends on where you want to house your investment and the type of fee structure you prefer.
Start with a bank you already use, but don’t be afraid to compare their offerings and fees to other financial institutions. It’s important to maximize your earnings so that you can retire comfortably.
How do you manage a Roth IRA?
What exactly do you need to do once you’ve opened a Roth IRA? You want to start by making contributions. You can roll over funds from a traditional 401(k) or traditional IRA, but you’ll be required to pay taxes on that money, so make sure you can handle that extra financial burden.
For 2024, you can still make a contribution to your Roth IRA for the previous year until the tax filing deadline of the following year. For instance, if you haven’t contributed the maximum amount to your Roth IRA by December 31, 2023, you have until the federal tax filing deadline in 2024 to make your contribution for 2023. The specific date of the tax filing deadline can vary each year, so it’s important to check the exact deadline for 2024.
Once you start funding your Roth IRA, it’s time to decide how you want to invest that money, just as you would with any other investment. The type of risk and diversity you select should be based on your own risk tolerance, as well as your age. If you’re in your 20s, you can pick much more aggressive investments than if you’re in your 50s.
For a low-cost approach, experts recommend either index funds or ETFs, which allow you to buy stocks and bonds that track broader markets.
Bottom Line
A Roth IRA can be an effective part of your retirement strategy, particularly considering all the tax advantages that come along with it. For the most effective retirement savings plan, look at all the options available to you. Then, see how each piece fits in the puzzle. As you inch closer and closer to retirement, continually reevaluate how you invest your savings.
For example, if you’re expecting a raise or promotion in the upcoming years that will bump you out of the income range for contributing to a Roth IRA, it may be wise to max out your contributions while you can. If you get a job with an employer that matches your 401(K) contributions, make sure you’re taking full advantage of that perk.
Constant reevaluation is necessary to make sure you’re benefitting from your retirement tools as much as possible. And you want to make sure that you’re taking care of your finances now and in the future. A Roth IRA truly is a favorite because regardless of where you are in life today, you can provide yourself with a lot of room to maneuver around whatever comes in life.
Southern California’s luxury real estate market never sleeps. But this past year, it collectively caught its breath.
Luxury sales slowed down in 2023 — a combination of soaring interest rates, a newly introduced “mansion tax” and an inevitable drop-off from a pandemic market when megamansions flipped like hotcakes.
In 2022, there were 17 home sales above $50 million and 48 over $30 million in L.A. County, according to the Multiple Listing Service. In 2023, there were only five sales over $50 million and 23 over $30 million.
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But even in a down year, there were still plenty of headlines. Jay-Z and Beyoncé set the all-time price record in the state of California, while other celebrities sold homes and left L.A. just in time to avoid paying taxes under Measure ULA.
Here are the top sales of the year.
$200 million
History was made in May when Jay-Z and Beyoncé shattered California’s price record, paying $200 million for a concrete compound in Malibu.
The L-shaped house, which topped the previous record of $177 million, looks more like an airplane hangar or supervillain’s lair than a home. It was built by Tadao Ando, a decorated Japanese architect who also designed a home for Kanye West a few miles down the coast. Ando brought in 7,645 cubic yards of concrete to erect the 40,000-square-foot home.
It never officially hit the market, so photos are scarce. The property is perched above Malibu’s Paradise Cove and features concrete hallways and walls of glass that open to a swimming pool and lawn overlooking the ocean.
$60.85 million
Another power couple — Jennifer Lopez and Ben Affleck — claimed the second-highest home purchase of the year when they shelled out $60.85 million for a five-acre spread in Beverly Crest. High interest rates weren’t a problem; they didn’t need a 30-year-fixed. The pair paid in cash.
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The deal marked the end of a year-long house hunt for Lopez and Affleck, and the house boasts an array of amenities that few other mega-mansions can match. Across 38,000 square feet are 12 bedrooms, 24 bathrooms, 15 fireplaces, a movie theater, wine cellar, nail salon and sauna, as well as a 5,000-square-foot sports facility with a boxing ring and pickleball court.
The $60.85-million sale actually came at a discount; the home originally hit the market with a gargantuan price tag of $135 million.
$55 million
Some scratched their heads when Mark Wahlberg unloaded his Beverly Park mega-mansion for $55 million in February. The movie star spent years designing the French-inspired palace, and he originally asked $87.5 million when he first listed it in 2022.
But Wahlberg was a motivated seller. He moved to Nevada last year, and by selling the home in February, he avoided Measure ULA, a transfer tax that took effect April 1 and would’ve charged a 5.5% tax on the sale. At $55 million, Wahlberg’s tax bill would’ve been more than $3 million.
The European-inspired showplace is truly one of a kind, featuring amenities such as a five-hole golf course, driving range, grotto-style swimming pool and skate park. Wahlberg, a native of Massachusetts, also added a Boston Celtics-themed basketball court during his stay.
$52.056 million
Malibu’s second entry on this list comes via attorney Stuart Liner and his wife, Stephanie Hershey Liner, who sold their beach house on Point Dume for just over $52 million.
The Liners have made a fortune flipping houses over the years, including doubling their money on a house they bought from actor Danny DeVito. They scored a hefty profit here as well; records show they paid $21.758 million for the oceanfront home in 2020 before extensively remodeling the place.
The 6,000-square-foot house comes with a swimming pool and tennis court. It sold to Tom van Loben Sels, a partner at Bay Area tax firm Apercen Partners.
$52 million
For years, Villa Firenze was a cautionary tale, an extravagant reminder that while fortunes can be won in Southern California’s lucrative real estate market, you have to be strategic in how you sell to truly cash in.
Hungarian billionaire Steven Udvar-Hazy was not. The airplane mogul built the Italian-inspired mansion in 1998 and listed it for $165 million in 2017, which at the time was one of the most ambitious asking prices in California history.
Clearly overpriced, the house sat on the market for years until it was auctioned off for $51 million in 2021 to biotech entrepreneur Roy Eddleman, who, for some reason, tried the same thing as Udvar-Hazy.
Eddleman quickly attempted to flip the house for a massive profit, putting it back onto the market for $120 million just a year after he bought it. Unsurprisingly, there were no takers, and he died before it sold.
His estate slashed the price on the luxurious villa, which features 40-foot palm trees, 20-foot ceilings and a two-story library complete with a secret passageway that leads to a bedroom and bar.
After a year of price cuts, it finally sold in February for $52 million, just $1 million more than Eddleman paid for it at auction two years prior.