There are literally thousands of legitimate checking accounts to choose from, and more spring into being all the time as online banks emerge and grow. There’s no way you can evaluate them all.
If you’re under age 25 and don’t care about loading up on potentially generous features, you can safely narrow your search by limiting your choices to basic checking accounts built for young, unfussy people. One account that should still be among those choices is the BMO Harris Smart Money™ Account.
The BMO Harris Smart Money Account has no monthly maintenance fee for users under 25 and relatively few other account fees. It comes with a Mastercard debit card accepted by millions of merchants worldwide. And it could be right for you — but be sure you understand its capabilities and limitations before opening an account.
What Is the BMO Harris Smart Money Account?
The BMO Harris Smart Money Account is a basic checking account designed for younger people and those seeking the peace of mind that comes with fee-free overdraft protection.
Smart Money has no monthly maintenance fee for anyone under 25 and no overdraft fees for anyone. Otherwise, it has the same basic features as BMO Harris’s two other consumer checking accounts — Advantage and Premier — including a vast fee-free ATM network, a robust mobile app, and no ongoing minimum balance requirement.
What Sets the BMO Harris Smart Money Account Apart?
The BMO Harris Smart Money Account stands out from competing checking accounts in a few key ways:
No overdraft fees. Smart Money has no overdraft fees. This is less generous than it sounds because BMO declines most Smart Money transactions that would result in an overdraft. Still, BMO may allow some transactions to go through even if they result in a negative balance. If and when it does, there’s no charge.
No maintenance fee for younger users. Smart Money has no monthly maintenance fee for users under 25. It qualifies as a free checking account for younger folks.
No way for older users to waive the maintenance fee. Smart Money does have a maintenance fee ($5 per month) for users 25 and older. This is low as checking account maintenance fees go. But it’s also unusual (in a bad way) because there’s no way to waive it. Most checking accounts waive maintenance fees if you maintain a minimum balance or incoming direct deposit.
Key Features of the BMO Harris Smart Money Account
The BMO Harris Smart Money Account is a straightforward checking account for people who don’t need many bells and whistles.
Age Restrictions
Smart Money has no official age restrictions. Kids under age 18 can open an account with a parent as a joint owner, and anyone 18 or older can open an account as the sole owner.
However, Smart Money does make an important distinction between account holders under age 25 and those 25 and older. While there’s no monthly maintenance fee for users under age 25, users 25 and over must pay a $5 monthly maintenance fee. There’s no way to waive this fee, either.
Minimum Deposit & Balance
The minimum deposit to open this account is $25. Once opened, there’s no ongoing minimum balance.
ATM Network
BMO Harris belongs to the Allpoint ATM network, which has more than 40,000 fee-free ATMs across the United States. These ATMs are relatively evenly distributed across the country, including in many locations where BMO Harris has no physical branches.
Smart Money doesn’t reimburse out-of-network ATM fees, however. Be sure to use Allpoint ATMs to the extent possible.
Possible Account Fees
Smart Money has no maintenance fee for users under 25 and an unwaivable $5 maintenance fee for users 25 and older. It has no overdraft fee for any users, though BMO Harris declines most transactions that would result in a negative balance.
Other possible fees include:
A $2 paper statement fee per month
A $3 fee for each out-of-network ATM transaction
A $3 fee for each check image if you’re not opted into paperless statements
Mobile Features
Smart Money users get access to BMO Harris’s user-friendly mobile app. Notable capabilities include:
No BMO user fees for person-to-person Zelle transfers (though other fees may apply)
Free mobile check deposit
Free budgeting and expense-tracking tools
A single view of all your BMO accounts, including bank accounts and credit cards
Advantages
Like the account itself, Smart Money’s advantages are straightforward: no maintenance fees for younger users, no ATM fees if you stay in-network, and excellent mobile features, to name a few.
No monthly maintenance fee for younger users. BMO waives the $5 monthly fee for account holders under age 25. That makes Smart Money an appealing choice for college students and recent college graduates.
No overdraft fees. Though it declines most transactions that would result in negative balances, BMO waives overdraft fees and insufficient funds fees for such transactions anyway. If it allows negative-balance transactions to go through at its discretion, it still doesn’t charge an overdraft fee.
Big fee-free ATM network. As part of the Allpoint ATM network, BMO Harris has more than 40,000 fee-free ATMs in the United States. You can find these machines in every corner of the country, including places far from any physical BMO Harris branches.
Excellent mobile features. BMO Harris has a comprehensive, user-friendly mobile app with useful, time-saving features like mobile check deposit and Zelle transfers.
Disadvantages
Smart Money’s biggest downsides include an unavoidable monthly fee after age 25, unavoidable ATM fees outside the Allpoint network, and no sign-up bonus for new account holders.
No sign-up bonus. Unlike the BMO Harris Premier Account and the BMO Harris Smart Advantage Checking Account, the BMO Harris Smart Money Account has no sign-up bonus for new account holders. If you’re looking to pad your balance early on, consider one of those instead.
Can’t waive the monthly fee after age 25. Most checking accounts offer a way around their monthly maintenance fees, and sometimes several. Often, maintaining a minimum balance of a few thousand dollars or receiving a recurring direct deposit does the trick. Smart Money is different — in a bad way. There’s no way to waive the $5 monthly fee after you turn $25.
No out-of-network ATM fee reimbursement. Smart Money doesn’t reimburse out-of-network ATM transaction fees. These can really add up, so if you expect to use non-Allpoint ATMs often, consider an account with a more generous reimbursement allowance.
How the BMO Harris Smart Money Account Stacks Up
The BMO Harris Smart Money Account is one of three BMO checking accounts. Before you open yours, see how it compares to the highest-end account in the BMO family: BMO Harris Premier.
BMO Harris Smart Money
BMO Harris Premier
Monthly Maintenance Fee
$5, limited waiver only
$25, but can be waived
Waiver Requirements
Only waived if you’re under 25
Yes, required $10,000+ balance
Overdraft Fee
$0
$0
ATM Fee Reimbursement
None
Up to $25 per month
Credit Card Benefits
None
Up to $75 in quarterly spending bonuses
Mortgage Benefits
None
Closing cost and interest rate discounts
Interest on Balances
None
0.01% APY
Final Word
If you’re a college student or recent college graduate looking for a basic checking account that lets you spend as you please, wherever you please, the BMO Harris Smart Money™ Account makes sense for you.
Just don’t expect Smart Money to be anything more than it claims. With no sign-up bonus or perks beyond fee-free in-network ATM withdrawals, it’s not a lifelong checking account. Better to use it as you work to build your net worth, then trade up to a more generous product — whether with BMO or another bank of your choice.
The Verdict
Our rating
BMO Harris Smart Money™ Account
The BMO Harris Smart Money Account is a no-frills bank account with few fees and an above-average mobile experience. It’s ideal for people under age 25, who pay no monthly maintenance fee no matter what.
Editorial Note:
The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author’s alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he’s not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.
A discussion about personal finances can be a polite, congenial affair. Few people come to blows over insurance or budgeting. But some topics inflame financial passions, and one of them is investing. Fellow GRS e-scribe William Cowie encountered this a couple weeks ago when he advocated for investing in individual stocks in certain situations. I thought I would pass along a few thoughts of my own, given that 1) William cited the success he’s had with a newsletter from The Motley Fool (my employer for the past 15-plus years), and 2) my own portfolio has big holdings in index funds but also some actively managed funds and individual stocks.
This is a huge topic, with enough books written about the subject to create an entire wall of books. But for today’s post, I’ll question one of the main arguments against individual stocks, then conclude with a few parting thoughts. And as my posts have traditionally been sprinkled with cat pictures, I’m including this cool “peace” cat as inspiration.
People Aren’t Actively Managed Funds
The evidence is clear: Most actively managed funds underperform similarly invested index funds. The Standard & Poor’s Index vs. Active (SPIVA) mid-2014 report says that more than 70 percent of actively managed funds lost to their respective benchmarks over the previous five years. The cheerleaders of index funds have plenty of hard evidence to power their pom-poms.
This leads some to argue that if fancy-pants Wall Street fund managers can’t beat an index fund, then the average Josephine doesn’t have a chance. However, fund managers have to overcome hurdles that individual investors don’t.
First off, fund companies take money from your account to pay for running the business and buying fancy pants. The fees charged by index funds are much lower than those charged by actively managed funds, which gives the former group a head start, so to speak. According to the SPIVA report, the S&P 1500 index (a more comprehensive measure of the U.S. stock market than the S&P 500) earned an annualized 19.18 percent over the five years ending June 30, 2014; the average actively managed fund made 17.95 percent — a difference of 1.23 percent. Not coincidentally, that is just about the average fund’s expense ratio — i.e., the percentage of your account value a fund company extracts. In other words, higher costs are one of the reasons active funds lag index funds.
Investors in individual stocks, on the other hand, just pay commissions, which generally are $10 a trade or less. If those shareholders are true buy-and-hold investors — which is the right way to do it — that is the only expense they will pay to own a stock for years to come. To be fair, investors who subscribe to research services should also factor in those costs. But annual expenses for investors in individual stocks shouldn’t be anywhere near 1 percent.
Also, fund managers must deal with the flow of money in and out of the fund, which might force them to invest in ways they would rather not. For example, when the market tanks, fund investors collectively take out more money than they put in. This can force managers to sell stocks after prices have already plummeted, even though they would prefer to be buying when stocks are down. On the flip side, when the market or a particular fund does well, money pours in, and the manager is compelled to invest the cash after prices have already gone up. As a fund gets bigger, its menu of potential purchases shrinks; it can no longer invest in smaller companies because buying a meaningful stake could drive up the price.
Individual investors don’t have these concerns. They can invest in small and big companies alike as well as buy, sell, or hold based on their own circumstances and choices. They are not forced into selling because others are panicking.
Do these advantages that individuals have over fund managers lead to market-beating returns? The research is not as extensive as the “index vs. active funds” literature — and much of it is outdated, involves only a few years’ worth of investing, and/or is based on data from foreign exchanges. But I know of enough people who have pulled off benchmark-beating returns to know that it is possible.
Indexing and Picking Stocks, Living in Harmony
There is so much more to say on this; but for now, let me pass along these three thoughts.
1. Index funds are the right choice for most investors’ money. Even Warren Buffett, one of the greatest investors of all time, agrees. In the 2013 annual letter to Berkshire Hathaway shareholders, he revealed the instructions in his will for the money his wife will inherit. “My advice to the trustee,” he wrote, “could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”
2. This isn’t an either/or decision. Even some of the most ardent supporters of index investing are OK with people having 5 percent to 10 percent of their portfolios in individual stocks. One of those people is Bill Schultheis, author of “The Coffeehouse Investor” (one of my all-time favorites). He wrote: “Somewhere among the millions and millions of stock pickers you might be the next Warren Buffett. But I am not sure it is worth risking your entire portfolio to find out you aren’t.”
Many people who are known for their indexing advocacy own some individual stocks on the side. Heck, even Vanguard — the company most known for advancing the cause of index funds — has been offering actively managed funds for decades. Last year they published “The Case for Vanguard Active Management” and launched their non-indexy Global Minimum Volatility Fund. If Vanguard can be cool with an investor having both active and indexing strategies in a portfolio, then it’s probably fine.
3. Keep score. However you invest, evaluate your choices annually. Are your actively managed funds keeping up? Do you have the best index funds? If you have a financial adviser, how is she doing? If you are picking stocks, how are you doing? If you’re not sure how to do all that, have no fear. It will be the topic of one of my first posts of 2015. But beating an index fund is not an easy thing to do, so it is important to know sooner rather than later if your forays into active management are paying off.
Four years ago, my beloved kitty Zito developed kidney problems. She was only five years old, and her littermate, Mikey, was fine and healthy. But Zito had stopped eating and wasn’t drinking much water. I took her to the vet.
An x-ray by the veterinarian showed that one of her kidneys was tiny and the other was not the normal size it should have been. The vet said most likely the little kidney wasn’t functioning at all and the other was working overtime.
I took Zito to a veterinary specialty hospital to get her checked out, and they said they might be able to repair her kidney with surgery. I could afford it — even though it was a LOT of money, about $3k) — and I didn’t want to lose my kitty. I chose to have the surgery. And no, I didn’t have pet insurance.
The surgery went well and I visited her at the hospital for the next week as she was recuperating. Then she was ready to come home. She had a feeding tube in, and I learned how to feed her through that with the special liquid food she needed.
When I brought her home, Mikey began hissing and growling at her. I wound up having to lock Zito in my bedroom to take care of her and keep Mikey away. It was very stressful, but I managed to take care of Zito for four days. And then she refused to let me feed her. She bit me. She wouldn’t use the litter box. She pulled out her feeding tube.
As I drove her back to the specialty vets, I knew I couldn’t take care of her any longer and that the whole situation was making her more miserable than helping her. The vet surgeon sat with me for a long while as I cried and tried to get up my courage to put her down.
(Aside: The surgeons and the vet techs at Palm Beach Veterinary Specialists were phenomenal. The surgeon called me every morning before I left for work to tell me how Zito had done through the night. After Zito died, I got personal cards and letters from all of the vets and vet techs, even my regular vet. I’ve said often since then, if I ever need surgery, I’m going to PBVS for my care!)
Looking back, I shouldn’t have put Zito through this. I should have accepted that her kidneys were failing, and let her be home, play with Mikey, eat whatever food she wanted until she passed away on her own.
This was a situation where having the money to do something proved to be the wrong thing to do, and probably clouded my judgment. If I hadn’t been able to afford the surgery, I wouldn’t have done it. I do have enough sense not to go into debt for something I can’t afford. And Mikey is still with me.
So, readers, what lengths and expense would you go to in order to save a pet?
That’s a reasonable question. Why would anyone want to invest in a volatile market and in the midst of economic uncertainty?
But recessions create opportunities. Yes, it’s terrible that millions have lost jobs and suffered huge portfolio losses, but the unfortunate reality is recessions happen. Like it or not, this is our current situation. By looking at the market and asking “what opportunities can I find?,” we contribute to the recovery.
We contribute to the recovery in all types of investments: stocks, real estate, side hustles.
When we buy stocks, we infuse capital into companies that we believe in and/or into the market as a whole.
When we buy, renovate and rent properties, we create jobs for contractors, agents and property managers and we offer our tenants a safe, comfortable and well-maintained home.
When we start a side hustle, we build products or services that thrill our clients and create jobs for our team.
When we invest, we participate in the recovery. Recessions are an unfortunate fact of life, but they carry a silver lining. And for newbie investors in particular, recessions can open the door.
Unfortunately, during times of uncertainty, many people surrender to their fear of investing. They sit in cash until it’s too late.
To be clear, I’m not talking about people who don’t have the capital to invest. If someone is financially unstable — if they lack an adequate emergency fund, for example, or if they’re buried in high-interest credit card debt — then they should be applauded for focusing on the fundamentals first. Build the foundation; everything else rests on that.
But many financially stable people will sit on excess piles of cash.
I get it. Investing is scary during a recession.
It’s normal to feel scared of buying index funds, only to watch them drop the next day. It’s natural to feel scared to start a side hustle, when you know this is a tough time for small businesses. It’s normal to feel scared about buying a rental property; what if your tenants lose their jobs?
But by sitting on too much cash, you miss the opportunity to pick up undervalued deals.
You also miss the chance to start building momentum, so that when the economy starts rebounding, you’re already established. You’ve started the side hustle. You own the rental property. You’re not scrambling to get started after the recovery is underway; your projects are in place.
You might not have enough cash to buy cheap assets at this moment. That’s okay. Focus on the fundamentals (like building an emergency fund) and don’t worry.
If you’re fortunate enough to be able to invest, though, don’t sit out this opportunity due to fear.
We discussed stocks at length in this podcast episode, and we talked broadly about how to finish 2020 financially stronger than you started in this episode.
In this article, we’ll focus on real estate.
Should you invest in rentals during a pandemic? Might we see another housing crash, 2008-style? Is this a good time to buy? To sell? Let’s explore.
“Is the real estate market going to crash again?”
Have you heard of the availability heuristic?
It’s defined as “the tendency to overestimate the likelihood of events with greater ‘availability’ in memory.”
We overvalue examples that can easily come to mind, while we undervalue examples that are harder to imagine or recall.
If something happened recently or if something is emotionally charged, then it’ll easily come to mind. And if it easily comes to mind, we overestimate the likelihood that it’ll happen again.
Prior to the pandemic, the 2008 housing crash was the most recent recession. It comes to mind quickly: it was recent and suuuuper emotionally charged.
And so it’s natural — it’s logically flawed, but natural — to assume that this current recession will resemble the last one, to overestimate the likelihood of another housing crash.
But the factors that led to the 2008 recession (subprime lending, speculative building, shady credit-default swaps) are nothing like the factors that led to the 2020 economic collapse (a deadly virus).
The Great Recession was created by weakness in the housing market. The chain of events in 2008 wasn’t: “a recession struck, therefore home prices collapsed.” It was the opposite: “home prices collapsed, therefore recession struck.”
If you started investing before the 2002 dot-com burst, or if you were already an adult during the 1987 market crash, you’ve experienced bear markets that didn’t coincide with a housing crash. But if you’re under 40, the Great Recession was the first major recession in your adult life.
If that’s your situation, then it’s especially tempting to associate recessions with real estate crashes. After all, as a millennial, 100 percent of the recessions of your adult life — 1 out of 1!! — have been tied to a massive real estate crash.
But that was a dozen years ago. The underlying economic factors are different today.
There may or may not be a temporary slight dip in housing prices. (I doubt it, but it’s possible.) If that happens, clickbait headlines will refer to this minor dip as a “crash,” because that’s eminently more clickable. Don’t be fooled by the phrasing.
Study the housing market. Read the price-per-square-foot declines. Look at the average days-on-market of homes for sale. Scan for the number of new mortgage loan originations. This data will tell you far more than any screaming headline.
“What if my tenants can’t pay rent?”
Let’s look at statistics:
In a normal market, around 20 percent of tenants are late in paying their rent, according to data from the National Multifamily Housing Council, which tracks 11.5 million apartment units nationwide.
In April 2020, that number increased from 20 percent to 31 percent. That’s not as bad as many landlords feared.
In normal conditions, 80 percent of tenants pay rent on time, and 20 percent are late.
In pandemic conditions, 69 percent of tenants pay rent on time, and 31 percent are late.
But wait! It gets better.
The NMHC surveyed apartment managers again one week later. They found a huge improvement: 84 percent of apartment households paid rent by April 12th.
Tenants might not be able to pay rent on the 1st of the month. But the overwhelming majority — 84 percent — were able to pay after a delay of less than two weeks.
As far as the data shows so far, worries that tenants won’t be able to pay rent have largely not come to pass. Most tenants are still able to pay rent; they just need extra time.
(The NMHC noted that a huge number of apartment managers volunteered to waive late fees or offer flexible payment plans.)
That said, millions of people have been helped by a combination of stimulus checks, enhanced unemployment benefits (which currently provides an extra $600 per week in addition to normal state unemployment benefits), or payroll protection if either they or their employer qualifies for Paycheck Protection Program funds. Will these programs get renewed or extended? What will happen if they don’t? There are many lingering questions, and the future remains to be seen.
The simple truth is that nobody can accurately predict the future. We can look at data about our current situation, and as of now, we know that 84 percent of tenants (out of 11.5 million household units) paid rent within two weeks of its due date. But we do not know if or how that number will change in the future. Variables that cannot be predicted — such as the speed of recovery, the level of government intervention — will play a major role in shaping these answers. We don’t know how those variables will take shape.
The greatest risk is assuming that we know the future. Beware of certainty. Those who pretend to know the future are clinging to security at the expense of honesty and accuracy. Don’t listen to any economic or market projections that are expressed with too much confidence. We don’t have a crystal ball. Nobody knows what the future holds. The wise ones recognize this and accept it.
We cannot state what will happen. We can only state what IS happening. And from that, we make preparations for what is and what might be.
“What risks should I be wary of?”
Of course, there are serious risks ahead. We do not know:
… how long the pandemic and global shutdown will continue.
… how long such a large portion of the population will remain unemployed.
… how many employees have had their hours reduced or accepted a temporary paycut, and how this will reverberate throughout the economy.
… how long the recovery will take.
… whether or not there will be a tragic second wave, or third wave, which triggers an unavoidable second or third shutdown.
How can you approach smart real estate investing in this context?
Here are a few Do’s and Don’ts:
Don’t avoid investing. The people who made that mistake during the Great Recession — those who avoided making new investments from 2009-2012 — missed out on massive, opportunity-of-a-lifetime recovery gains.
Do thoroughly analyze any new rental investment that you’re eyeing. Run a variety of “what if” scenarios on a spreadsheet, crunching the numbers with different assumptions.
What if occupancy rates fell by an additional 10 percent? What if you reduced the rent by 20 percent for the next six months? How would this affect your returns?
In our course, Your First Rental Property, we provide robust, detailed spreadsheets for heavy number-crunching.
We teach our students that the cliché thrown around by other investors — who tell you to “calculate the return” — is too simplistic.
You’re not calculating “the” return; you’re calculating a range of possible returns.
You’re not stubbornly insisting that a given rental property will have an 8 percent cap rate. You’re calculating a range of cap rates in best-case, worst-case and middle-case scenarios.
Unfortunately, there are sellers who will advertise properties as having an “X” cap rate, and there are investors who take that information as a fixed number. That’s baloney.
Properties don’t have a single fixed cap rate; they have a range of cap rates, and we teach our students how to assess this range before they commit to a six-figure investment.
Don’t over-leverage. You don’t need to borrow every penny you qualify to receive.
Ignore the real estate investors who are fixated on cash-on-cash return, a popular formula that inherently rewards overleveraging.
Instead, focus on an investing strategy that prioritizes the property’s cap rate (essentially its dividend stream). This is the investment philosophy and strategy that we teach in our course.
Do maintain strong cash reserves. We teach our students to keep a minimum of three months’ gross rent, which translates to six months of operating expenses.
Don’t jump in without a specific, carefully-thought-out written plan. Before you start investing in rental properties, write your personal investor statement.
Your written investment statement should articulate how many properties you want to purchase, the speed or rate of acquisition, the type of financing you want to use, your ideal debt-to-equity ratio or leverage maximum, the type of neighborhood you want to target, the age and condition of properties you want to purchase, and more.
We provide a fill-in-the-blank template to guide you through this exercise in our course.
Do prepare a variety of ways that you can accommodate tenants who are financially struggling. Here are some examples:
Offer an incentive: Offer your tenants one month of free rent — which they can use immediately — if they extend their lease by an additional year.
This is a win-win scenario. You’re spared from the costs of a turnover and vacancy. You pass these savings directly to your tenant.
Waive late fees: If your tenant is waiting on unemployment benefits, they may not be able to pay rent on the 1st of the month. That’s fine; they’ll have the money once their benefits arrive.
Offer to waive late fees, under the condition that they stay communicative.
You want to avoid a tenant ‘ghosting’ you, screening and dodging calls from you or your property manager.
You can avert this situation by (1) letting them know you’re flexible and accommodating, and (2) telling them you’ll waive late fees as long as they send you frequent updates about their situation, like a quick text message or email, every two to three days.
Set specific and measurable communication criteria, such as: “Please text me with an update at least once every three days, even if your text is as simple as ‘hey I’m still waiting on my benefits to start’.”
Spread the payments: Another option? If your tenant is waiting for their unemployment benefits to arrive, offer to spread next months’ payment across the rest of their lease.
Let’s say their rent is $800 per month, and they have 9 more months remaining on their lease. In this example, they would pay $0 next month, and their rent would rise by $100 per month for the remaining 8 months.
The Bottom Line: Recessions are tragic, but they also carry the hope and promise of a recovery. If you have money to invest, don’t let fear hold you back. Invest in the market, start a side hustle, or invest in rental properties. Don’t let another year or two slip by, and then scramble to get a foothold after the recovery is well underway.
Our flagship course, Your First Rental Property, opens for enrollment again on Monday, November 30th.
Learn about the course in this video below, or check out this page for FAQs, testimonials, and your chance to join our VIP waitlist. When you join, you get a free 7-day crash course on the fundamentals of residential real estate investing.
If you’re interested in investing in rental properties and want an A-to-Z guide of everything you need to know, learn all the details here.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
When you are trying to tighten down the hatches on your spending, you are doing everything possible to stick to your budget.
You are determined to stick to your budget this time around. But, you always hear that budgeting can be hard.
Well, here are some quick budgeting tips that will make sure to stick to your budget.
As most new budgeters learn, they struggle to stick to a budget for their monthly expenses. It is a natural process everyone goes through.
Budget, if you are looking for an easy button, then learn which payment type is best if you are trying to stick to a budget.
Especially if you spend a lot of time on social media, studies have shown you are more likely to overspend. So, you must learn which payment type will have you stick to a budget.
Then, you may be wondering and wanting help deciding which payment type is best for you.
The Optimal Solution Payment Type Solution
The most efficient payment type is something that is instantaneous and there are no fees associated with the transaction.
Cash is the most efficient payment type: Cash payments are usually the most efficient and convenient way to pay for goods or services.
Credit cards can be a less favorable option: Credit cards tend to have high-interest rates and can lead to financial disaster if used irresponsibly.
Debit cards are a great way to keep your spending within your budget: Debit cards should be considered a top priority for budgeting because they keep you within your spending limits.
Developing a budget will help you avoid financial disaster: A budget helps you stay organized and make informed decisions about which payment method works best for you.
Today, there are so many options on which payment type to use in today’s online world.
1. Cash
Cash is a payment type that can be used to reduce debt spending. It is versatile and can be used for a variety of expenses, such as groceries, medical bills, and gym memberships.
Cash is an excellent choice for people just starting to budget and save.
It is more restrained than credit or debit cards. The envelope method of cash budgeting can be used to train your brain to reduce spending. Cash is the most traditional payment method and has the fewest drawbacks. However, you need a safe place to store your cash, and some stores may not accept it.
Benefits of Cash:
Cash is an excellent payment type when your financial goals are to reduce debt spending.
Cash is a finite payment method that prevents you from overspending.
You have a set amount of money to spend each month, so there’s no chance of overspending.
Easy to track with the envelope method: Utilizing the envelope method ensures that you are tracking your spending (i.e groceries, gas, medical bills) and making sure that you aren’t overspending.
Cash is a quick and easy way to pay for goods and services.
No Fees. No maintenance fees or interest rates as credit cards. Cash is just plain cash – printed paper of currency.
You can avoid high fees associated with card transactions: There are no associated fees when paying with cash, making it the cheapest option overall.
Cash discounts may be available. Since you are paying with cash many small businesses offer a cash discount of 2-5%.
You can use cash at any store: No need to carry around extra cards or checks.
It’s easy to get cash: You can easily get cash and make extra cash.
There’s no need for bank account details: No need for bank account details means you’re free from identity theft risks and other inconveniences that come with having a bank account.
Cash allows you to skirt some financial regulations: Because cash payments don’t fall under the purview of many financial regulations, businesses can take advantage of loopholes in the law that allow them to charge higher interest rates on loans or engage in shady business practices. (highly recommended to stay above book)
Cons of Cash:
Possibility of losing or stolen cash: Keep your cash in a safe place!
You need a safe place to store your money: Another disadvantage of using cash is that you may need a safe place in which to keep it – some stores don’t accept it as a payment method.
Why Choose Cash?
Total control over your money, so there’s little chance of unexpectedly running out of funds.
Cash is a great way to stay on budget, as you can easily track your spending and see where you need to cut back.
Unpleasant to spend money with cash, which can help train your brain to reduce spending.
Cash is a quick and easy way to pay: Using cash eliminates the need for banks, credit cards, or other forms of payment.
Verdict: Paying with cash is the best method for budgeting and saving.
Overall, cash is a great payment type when it comes to budgeting. You can immediately see how much money you’ve spent and what needs to be cut back.
You can’t make impulsive buying decisions with debit cards or credit cards.
With a finite amount you can spend, cash is an excellent choice to prevent overspending. According to research, paying with cash can feel unpleasant, which can train your brain to reduce spending as much as possible.
2. Credit cards
Credit cards offer a number of benefits, including convenience, cash back, and the ability to make large purchases or pay bills in case of emergency. However, credit cards also come with credit card debt and can lead to overspending and financial problems if not used carefully.
For many, credit cards are the easiest way to blow your budget because you don’t have control over how much money you spend.
It is possible to overspend with credit cards if you are not mindful of what you charge.
On the flip side, this is a preferred method as many credit cards also offer rewards programs that give you cash back or points for purchases. If you make the conscious decision to use credit cards, you must make payments on time to avoid penalties.
Benefits of Credit Cards
Credit cards are convenient: Convenient to use and don’t have to worry about losing cash.
Use a credit card if you are disciplined and have strict spending habits: If you are disciplined and have strict spending habits, then using a credit card can work well for budgeting purposes.
Flexibility on larger purchases: Some benefits that come with having a credit card include more cash flow as well as being able to make larger purchases.
Credit cards provide support in times of crisis: Many credit cards offer extended services that can help like 24-hour fraud protection, lost wallet services, traveler’s insurance, and many other benefits – check each issuer for details.
$0 Liability on Unauthorized charges: Your credit card company will not be held responsible for any charges that were not authorized by you. This means that if you did not authorize a charge in person, online, or otherwise, you will not be responsible for it.
Fraud protection: Check your credit card issuer, but many offer fraud protection.
New card introductory APR is helpful to pay down debt: The introductory APR for the new card may not last long.
Payments on balance transfer should be manageable: Make sure that the payments on your balance transfer are manageable.
Points: You can accrue points along with your spending which can be a great perk.
Credit card interest rates are significantly lower than payday loans: Interest rates on credit cards are usually much lower than payday loans.
Due Date is After your statement closes. Since your bill cycle is at least another 21 days between the closing date for your statement and the due date, it gives you flexibility. Personally, I still account for the credit card bill in the same month that it was accrued.
Cons of Credit Cards
Potential for credit card debt: When using a credit card, be aware of your credit limit and the interest rate that you will have to pay on your debt. Also one of the categories of debt.
Credit limit often leads people to spend money: The credit limit often leads people to spend money by giving them a false sense of security, when they should stick to a budget and pay attention to their credit card statement and the billing cycle.
Credit card overspending can lead to debt: Consider the purchase if it is essential or delay it if possible.
Ability to easily purchase something you cannot afford. Buying something that you don’t have the money saved up for will cost you interest fees associated and maybe even with a credit card balance transfer.
There are a number of fees associated with a balance transfer: Transfer fee, interest on new purchases charged to the card.
Your introductory APR may not be valid if you make too many payments late: If you fall more than 60 days behind on payments your introductory APR might be canceled and you may face higher interest rates.
Credit score can suffer from debt: When you carry a credit card balance or don’t pay your monthly bills on time, you will lower your credit score.
Avoid carrying a balance: Pay your statement in full each month to avoid paying interest and maximize your grace period.
Key Takeaways on Credit Cards
Make sure to pay attention to the dates: Don’t spend more than you can afford, and make sure you’re making your minimum monthly payments on time so that your debt doesn’t increase over time.
A credit card can be used for budgeting only if you’re very disciplined: If you know that overspending is NOT an issue and you pay the credit card’s monthly balance in full, then using a credit card is fine.
Credit card transactions usually take several days to register in the feedback system: Something to look out for!
You can step back into debit cards or cash if needed: If credit cards are not for you, there are other options available such as debit cards or cash
3. Debit cards
Debit cards are a good option if you want to stick to a budget because the predetermined amount of funds can help you stay within your means. Additionally, debit cards are more convenient than cash and just as accepted as credit cards in most places.
A debit card works more similarly to cash than to credit cards.
They provide an easier way to track your spending and avoid having to carry a lot of cash.
Pros of Debit Cards:
No Need to Carry Cash: A debit card is better than cash because you don’t have to carry a lot of paper money and change around, and they’re also safer.
Debit cards are faster and easier to use: Debit cards work just like credit cards – withdrawing cash, making purchases, and paying bills – but they are linked directly to your bank account, so there is no need to carry around a separate cash envelope wallet or purse for them.
A debit card is a good option if you want to stick to a budget: Debit cards come with a predetermined amount of funds that you can spend from your bank account just like cash.
Tracking payments is easy with debit cards: Your debit payments will appear on your issuer’s dashboard, which you can monitor anytime from any location.
Convenience: Debit cards are more convenient to use and faster than needing to write a check or carry around cash. Plus they don’t add to your debt.
Shopping online is easy. You can use your debit card to make online purchases with your bank account, and digital banking tools make tracking your spending easy.
Points: Some debit cardholders can earn points for spending on their cards, which can be redeemable for rewards such as cash back or gift cards. This is new to compete with credit cards.
Fraud protection is typically offered for free with most debit cards—meaning if your card is stolen or used without your permission, you can get your money back.
No impact on your credit report. When you use a debit card, the funds are actually withdrawn from checking or savings accounts so there is no credit reporting occurring.
Cons of Debit Cards:
An overdraft on a debit card can happen when a purchase exceeds the amount of money in the checking account, leading to overdraft fees.
Funds on hold with fraudulent charges. If your account gets hacked, your losses will be limited since most banks protect their users against fraudulent charges and online purchases with their accounts. However, those funds will be held while they investigate and you may be liable for $50.
No chance to improve your credit score. Since you are not borrowing money, you are unable to improve your credit score.
Debit cards are a great way to keep your spending within your budget and avoid overspending which can lead to many detrimental issues.
Regardless of the overdraft fee, debit cards are still better than cash because they’re safer and easier to carry around.
4. Checks
Checks… do people still write checks? Why yes they do!
Checks offer a few benefits as a payment method, even though they are slowly being replaced by more modern options.
This can help you keep track of your spending and make sure you do not overspend. Additionally, if you ever need to dispute a charge, having a check can be helpful in proving what you paid for.
What is a check?
A check is a written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer from the check writer’s account. The date is usually written in month/day/year format. The signature of the check writer is usually on the line below “Pay to the order of.”
There are three main types of checks:
A cashier’s check is a check guaranteed by a bank, drawn on the bank’s own funds, and signed by a cashier.
A certified check is a personal check for which the bank has verified that there are sufficient funds to cover the payment.
A personal check is one that you write yourself and that is not guaranteed by the bank.
Pros of Checks
Checks are still a payment option: Checks are one of the traditional payment methods, but it is slowly dying out because of modernization.
Physical written record. It can be helpful to have physical copies of checks in addition to digital records through the bank.
You need to make both digital and physical copies of the check: Save check stubs but also transfer the information to a budgeting system.
Cons of Checks
Saving check stubs is helpful, but you still need to transfer the information to a budgeting system: Useful for tracking spending, but you’ll likely want more detailed records than just check stubs.
Not as convenient as credit or debit cards.
5. Apple Pay or Apple Cash
Apple Pay is easy to use and convenient since you only need to connect your smartphone to your cards and bank accounts via the app.
It is easy to use since you just hold your phone up to the reader and wait for the payment screen to appear.
You can even get cash back with apple pay.
Pros of Apple Pay:
Apple Pay is easy to use and convenient: You only need to connect your iPhone to your cards and bank accounts via the app.
You don’t need to carry any extra cards or cash: No need for additional cards or cash when you’re out and about
You can use Apple Pay on different devices: You can use Apple Pay on your iPhone, iPad, and Mac.
Transactions are secure: Your transactions are secured with Touch ID or a passcode.
Set up Spending Limits for each user. This way you can make sure you (or others with authorized access) are not spending more than you intended. Learn how.
Protection of Data during transactions. Your actual credit card number is changed to a different digital number, which allows limits your card number’s exposure.
Cons of Apple Pay:
Not widely accepted (yet). This method of payment is 100 percent guaranteed. While many stores offer apple pay, not all do quite yet.
The same rules apply if you load apple pay with a debit or credit card drawbacks include late fees, interest rates, and overspending: Keep that in mind when choosing Apple Pay as your payment method.
6. Mobile wallets like Google Pay, Samsung Pay, Venmo, or Zelle
Mobile wallets are digital payment systems that allow you to pay for items with your smartphone. Many people find mobile wallets are very convenient and becoming a traditional method of payment (such as credit cards).
With mobile wallets, you are making digital payments without having to carry around cash or cards using just your smartphone.
Mobile wallets are easy to use and provide instant payment convenience, making them perfect for shopping online.
Pros of Mobile Wallets:
Mobile wallets use credit cards and debit cards: Connect your smartphone to your bank accounts and use it for digital payments.
Mobile wallets are easy to use and convenient: Instant payment convenience makes them perfect for shopping online as well.
No need for cash or cards: No need for cash or cards.
Strong secuirity features provide privacy and security features that ensure your personal information is safe from data breaches and unwanted charges.
You can make purchases without having to show your identification: You can make purchases without having to show your identification.
Additional Layer of Security. Additionally, mobile wallet data is protected with verification, such as fingerprints.
Cons of Mobile Wallets:
With Zelle and Venmo, it is easy to send money to the wrong person or add an extra zero and send more money from planned. More often than not, it is difficult to recover your money.
You need to be disciplined when using a mobile wallet: Pay attention to late fees and interest rates, as well as the amount you spend in a month.
7. Prepaid Cards or Gift Cards
A prepaid card or a gift card could be right for you. The advantage of these is the mere fact that you reached the limit is enough to deter overspending.
It can make you think twice about whether you need to purchase an item or not.
Pros of Prepaid Cards and Gift Cards
Easy to use: Prepaid and gift cards are easy to use and manage your finances with.
The mere fact that you reached the limit is enough to deter overspending: It can make you think twice about whether you need to purchase an item or not.
No strings attached: No need to worry about any fees associated with the prepaid card once activated.
Privacy: The prepaid card does not track your spending or use any personally identifiable information.
Credit Score Doesn’t Matter: Your credit score does not matter when obtaining a prepaid card.
Cons of Prepaid Cards or Gift Cards
Losing a prepaid card is not a fun experience. Contact the prepaid card issuer right away to protect the funds on the prepaid card.
Fraud protection: Consider whether your prepaid card issuer offers any theft or fraud protection, as not all providers offer this feature.
Prepaid cards have limits on how much money you can load onto them, which can be frustrating if you need to make a large purchase.
8. PayPal
PayPal is a very convenient way to pay for items online or in person. It is widely accepted and used by many people.
PayPal is a digital payment service that offers convenience and ease of use. You can use them to send money to people or pay for online purchases.
However, because these services can only be used online, they should not be relied on as your sole method of budgeting and tracking expenses. Instead, consider Paypal in combination with another budgeting tool, like a spreadsheet or app, to get a fuller picture of your spending.
Pros of PayPal:
PayPal is one of the most popular online payment methods: Widely accepted and used by many people.
You can use them to send money to people or pay for online purchases: Help you review your spending prior to purchase.
Cons of Paypal:
EasyTarget for phishing scams. A phishing scam is when someone tries to trick you into giving them your personal information, like your password or credit card number. They might do this by sending you an email that looks like it’s from PayPal, but it’s not. Or they might create a fake website that looks like PayPal. If you enter your information on these sites, the scammers can then use your account to make purchases or send money to themselves.
Reputation for poor customer service. This is evident in their customer service ratings, which are some of the lowest in the industry. The majority of complaints against PayPal revolve around poor service received when asking for assistance with fund freezes and account holds.
9. Cryptocurrency (ie: Bitcoin)
Cryptocurrencies offer a new and innovative way of handling payments. They’re not yet widely accepted, so there’s potential for businesses to get in on the ground floor with this new technology.
However, because cryptocurrencies are so new, it’s uncertain if they will be regulated or not. This could pose a challenge for businesses down the road.
Pros of Crypto
Not subject to the same regulations as traditional currency, which makes them appealing to those who want to avoid government intervention.
The valuation of Crypto changes rapidly. If you are smart with crtyple this is a great way to spend your crypto coins.
Cons of Crypto
Cryptocurrencies are not accepted everywhere: Cryptocurrencies are not accepted by most organizations yet, which it makes it difficult to use them in day-to-day life.
It’s unclear if cryptocurrencies will be regulated: It’s uncertain if cryptocurrencies will be strictly regulated or not. This poses a challenge for those who want to use them as a payment method.
Bitcoin and other cryptocurrencies are still in their infancy: Bitcoin and other cryptocurrencies have only been around for a few years, so they may still face challenges in the future.
Here are the most popular budget apps today:
Other Payment Methods:
ACH payments
ACH Payments is an excellent way to pay bills and other financial obligations: You can easily set up a billing cycle for recurring payments, making it safe and convenient.
Fewer people are aware of your transactions when using ACH payments, reducing the chances of fraud or theft.
Key Facts:
Fewer people know about your transactions when using ACH payments, reducing the chances of fraud or theft.
Your checking account information is not shared or accessed by the system in any way.
You can quickly pay bills and other expenses with ACH payment: Financial institutions offer this as part of their deals.
When setting up recurring bills with ACH payment, you are aying your bills on time is important for maintaining a good credit score.
Pay attention to your check account balances: Make sure you have enough funds in your check account to avoid paying overdraft fees.
Money orders
A money order is a document that orders the payment of a specified amount of money. Money orders are convenient because they can be bought at many locations, including post offices, banks, and convenience stores.
To get a money order, you will need to fill out a form with the payee’s name, the amount of the payment, and your contact information. You will then need to purchase the money order with cash or a debit card.
To cash a money order, you will need to take it to a bank or post office. You will need to show identification and sign the back of the money order. The teller will then give you the cash for the payment.
More secure than cash: Money orders are more secure than cash because they don’t require a bank to make the transaction.
Less convenient: money orders are less convenient because you must purchase them in person.
Able to trace. They are also more secure than cash because they can be traced if lost or stolen.
Wire Transfers
Wire transfers are a more secure way to transfer money than traditional methods like checks and cash. These are sent through the banking system and are usually processed within two business days.
Typically, wire transfers are used when sending and receiving large sums of money (over $10000).
More secure than cash: Wire transfers are more secure than cash as the bank verifies there is enough money to make the wire transfer.
Fees involved with using a wire transfer. Most institutions charge for handling a wire transfer.
What method of payment is best?
Cash is the most widely accepted form of payment, but debit and credit cards are very popular.
The payment method that is best for you depends on which one helps you to stick to your budget and spend less money. The goal is to be financially stable.
What method is best for sticking to a budget?
There are several different types of budgeting methods that people use in order to manage their finances. Many people focus on using the 50/30/20 method, in which each percent corresponds to a different category of expenses.
There are plenty of budgeting tools available today to make sure you stick to your budget.
You need to find what works best for you. At the end of the month, you want to spend less than you make. That is the winning combo!
1. Budgeting App
There are many budgeting tools available online, which can be helpful as it can be easier to track your progress and budget over time.
You can use various popular budgeting apps like Quicken, Qube Money, or Simplifi.
These apps can help you track your spending, set goals, and stay on track with your budget.
2. Paper and Pen or Simple Spreadsheet
Some people find that they prefer using a simple spreadsheet or paper budget. This may be due to personal preference or because they find it easier to understand and use.
Additionally, using a paper budget may help you stay more organized as you can physically see where your money is going.
Options to get you started include our own budgeting spreadsheets or using an automated system like Tiller.
3. Envelope budgeting method
The cash envelope system is a good way to stick to a budget because it is rigid and based on envelopes and cash. You can’t get more money until your cash payday. So, this system helps you track your spending and budget better.
However, using only cash can have drawbacks as having large amounts of cash on hand can be risky.
The envelope method gives you a sense of control over your spending and makes it more tedious to write down your transactions. If you find writing down your transactions tedious, the envelope method may be too much for you.
4. Know Your Budget Categories and Track expenses
Tracking expenses is essential to move ahead financially: Knowing what you have spent in each category will help you make better financial decisions.
Be specific with your budgeting categories. Don’t make it too complicated. Always remember to include household items, clothing, and groceries when tracking expenses.
5. Prioritize your Budget Plan
A budget can provide a realistic picture of your finances, help reduce stress related to money matters, and guide you toward achieving your goals.
Creating a budget can help ensure that you are able to meet your financial obligations and still have money left over for savings and other goals. A budget can also help you track your spending so that you can make adjustments if necessary.
Make a budget plan: This will help you stay on track and make sure that you are spending your money wisely.
You decide where to spend money: A budget helps you set future goals and achieve your financial goals.
Creating a budget can help reduce stress: If you tend to get stressed about money matters, creating a budget can give you peace of mind.
A budget has other benefits beyond financial ones: If you want to achieve something in life, creating a budget can help guide you in the right direction.
See where to cut back spending. You can also look at your past spending habits to see where you can cut back. Sometimes it may be necessary to save more in order to achieve long-term goals, like buying a house or having a wedding. Always be mindful of your budget when making payments and spending money.
It’s a three-step process that involves basic math: Making a budget is simple and requires only basic math skills.
Stay on track: Making a budget plan will help you stay organized and keep track of your expenses.
A budget plan will help you stay on track and make sure that you are using the best payment type for your budget.
Making a budget is an easy way to save money. By following a few simple steps, you can keep track of your expenses and make sure that you are spending your money wisely.
Which type of payment is best for sticking to a budget?
One of the main pros of using cash as a method of payment is that it is the most efficient way to keep track of your finances. This is because it is very easy to budget when you are only dealing with cash.
However, many people prefer debit or credit cards are the best type of payment. They are more convenient than cash and can help you keep track of your spending. However, if you have a bad credit history or a low credit score, credit cards may not be the best option for you.
Cash payments are the most efficient: Most convenient and easiest to keep track with cash envelopes.
Credit cards allow you to accrue points along with your spending: These are a great benefit and one that can be a perk if handled well as part of your budgeting process. As long as pay them off in full each month to avoid credit card debt, high-interest rates, and other negative consequences.
Debit cards are also a good option for sticking to a budget. They can be used like credit cards but with less risk of debt.
Cash-based payments are a newer option and are more reliable: May not have as many negative consequences as other payment methods such as credit cards or loans.
What Not to Use when you are Trying to Stick to a Budget
You need to steer clear of these types of payments if you want to be financially stable person.
Personal loans
Personal loans are a risky way to budget. However, if you need the money for an emergency or unexpected expense, a personal loan can be a lifesaver.
There are many risks to consider and other ways to lower your spending before resorting to a personal loan.
Loans can cause budgeting problems: Loans can mess up your budget and make it difficult to stick to spending plans.
Taking out a personal loan just for the sake of having money can disrupt your budgeting: Consumers often borrow money in order to pretend they’re doing better financially than they really are.
Borrowing money is usually not a good idea: When you borrow money, you may find that you cannot handle seeing low checking account balance, which can lead to deeper debt problems.
Payday Loans
Payday loans are a bad option for someone looking for a long-term solution. They are expensive, and there is a high chance that the person will not be able to pay back the loan.
The interest that is charged is also high, and it can add up quickly.
Write bullet points about what happens with a payday loan
Payday loans can trap people in a cycle of debt, as they are often unable to pay back the loan in full on the due date.
When someone takes out a payday loan, they are borrowing money from a lender in a short amount of time, usually two or three days.
Payday loans are often expensive, with interest rates that can be above 300%.
Debt Consolidation Loans
Debt consolidation can be a good way to manage your debt because it can result in a lower monthly payment and extended payments may impact your financial plan. You can use a debt consolidation calculator to estimate how much debt you can afford before taking out a consolidation loan.
Debt consolidation loans also provide convenience because they have lower interest rates than payday loans. However, be careful when consolidating your debt because it is possible to overspend and lose your introductory APR.
You may be able to pay off your debt with one monthly payment: A consolidation loan often results in a much lower monthly payment than all of your previous monthly payments combined.
Extended payments may impact your financial plan: Take a look at how these extended payments will impact your financial planning.
You can estimate how much debt you can comfortably afford: use this tool – Tally .
It is possible to overspend with debt consolidation: If you spend more money than you planned on your day-to-day expenses, this could increase your debt. Consider if the purchase is necessary or if it can be delayed.
You may lose your introductory APR: If you fall more than 60 days behind on payments, you will likely lose your introductory APR and may even trigger a penalty interest rate.
You need to be careful when transferring a balance: Transferring a balance can also forfeit your grace period and you’ll need to pay interest on new purchases charged to the new card.
What type of payment method is best for sticking to a budget?
There are a variety of payment methods available, and each has its own benefits and drawbacks. It’s important to choose the payment method that’s best suited for your business and budget.
A payment method that allows you to stick to a budget is the best option.
FAQs
There are three main types of payment methods: cash, debit cards, credit cards, and cash-based payments.
The envelope budgeting method is a simple way to create a budget. You will need envelopes and divide your money up into the different categories that you spend money on. You will then put the corresponding amount of money into each envelope. This method can be helpful if you have a hard time sticking to a budget.
The zero-based budgeting method is a more methodical way to create a budget. With this method, you track every penny that you earn and spend. This can help you to see where your money is going and make adjustments accordingly.
A debit card is a plastic card that is linked to a checking account. Customers can spend money by drawing on funds they have already deposited. An overdraft on a debit card can lead to overdraft fees, which have high-interest rates.
A credit card is a plastic card that allows customers to borrow money up to a certain limit in order to purchase items or withdraw cash. Using a credit card can help build credit or improve your credit score.
There are a few different ways to use a credit card. You can use it to check your balance and review your spending history, which can be helpful in staying accountable.
Credit cards also offer online tools which make the analysis of your spending easier which can be helpful in tracking your budget.
Finally, you can use a credit card to rebuild your credit score by using it responsibly and paying off the balance in full each month.
Which payment type can help you stick to a budget?
When it comes to choosing a payment type that will help you stick to a budget, there is no one-size-fits-all solution.
The best payment method for you will depend on your specific needs and preferences.
When you are creating a budget, it is important to consider which payment type will help you stay on budget. Different payment types work better for different people, so it is important to experiment and find the one that works best for you.
As I stated for me, I have learned how to use credit cards to maximize cash back. But, I learned how to budget with cash when first starting.
Please pay attention to your budget and how it changes over time, as different payment types may work better at different stages of your life.
Consequently, I hope that this guide has given you a better understanding of the different payment types available and helped you narrow down your options. There are a variety of payment types that can help you stick to a budget, so it’s important to research each one carefully.
I highly recommend using an app to track your expenses and know where you spend your money. By developing a budget and choosing the right payment type, you can stick to your financial goals.
Know someone else that needs this, too? Then, please share!!
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Today, I’m going to talk about our move to Colorado. It kind of popped up out of nowhere but now we are right in the middle of it all. I can’t believe how quickly everything is moving along and I am extremely excited.
Out of all of the moves we’ve done, this one is definitely the largest. We’ve moved a few times now, but they have all been fairly cheap and short distance moves.
However, after collecting, hoarding, and buying things over the last 5 years, we have many more items to move this time around. Even if we were just moving across town it would be difficult with all of our stuff.
Moving to Colorado will be our longest move as well as our most expensive. I’ve heard of people spending over $10,000 moving, and that is something we didn’t want to come anywhere close to.
Below are some updates for our move to Colorado, including our moving expenses and what’s left on our moving checklist.
Related:
Moving supply costs.
Moving supplies weren’t as expensive as I thought they would be. I highly recommend you shop around, as I found widely varying prices for moving supplies.
For instance, many moving companies charge around $5 per box, whereas places like Home Depot and Lowes charge between $1 to $1.50 per box. There are also moving box sets that usually end up being a better deal, such as with this one.
We also bought bubble wrap and lots and lots of tape. Our total cost for moving supplies was around $100.
We could have completely skipped any costs for moving supplies if we would have looked around though. You can often find free moving supplies on Craigslist, at stores, and so on. We would have gone this route but I will be honest and say I was a little lazy since the move sprung on us very quickly.
The cost of moving to Colorado.
Up until last week, we were set on renting a moving truck and trying to figure out a way for everything to work out. However, things just weren’t going to happen that way.
Our main problem is that we have two cars and a moving truck to bring to the new house, yet there are only two of us. And this is why we didn’t think a company such as UHaul or Budget would work for this specific trip.
Yes, we could tow one of the cars behind a moving truck, but we need a fairly large moving truck for all of our things. Towing a car behind it on such a long move (over 1,000 miles) and through steep mountains just seems like too much for us.
Then, Wes’s dad the other day said the company he works for uses UPack to move their employees, so I decided to look them up.
After debating for some time, we made the decision to use UPack for our moving to Colorado needs.
UPack was the easiest and cheapest option for us. UPack is a company that moves your stuff for you. They drop off a moving trailer at your home, you load it up, they pick it up a few days later, then they drop it off at the location you are moving to. They handle all of the actual moving, which is exactly why we chose them. We can make the whole 15 hour trip with only stopping one night, but I know if we drove a moving truck ourselves then it would require much more planning, more stops, and possibly even paying for car shipping because we would have to find a way to bring our second car to the new house.
Going the UPack route is pretty similar in pricing to renting a moving truck as well, and much cheaper than hiring a full-service moving company. I priced out several rental moving truck companies and once I priced everything out, it was very comparable to the pricing that UPack gave me. This is because once you factor in the extra lodging, the higher gas costs because we would have to drive a moving truck, insurance costs, and more, renting a moving truck quickly added up.
A UHaul moving truck rental would have been around $2,500 including the rental truck, insurance, gas, etc. Then, we would have had to still pay for extra lodging and somehow still transporting our second car to Fruita as well. I’m assuming that would have made our moving cost somewhere between $3,000 to $3,500 for the extras. The UPack expense from St. Louis to Fruita is $3,000, so it was an easy choice for us since it meant much less work on our end and a much safer way to move.
My Moving Checklist.
Moving to Colorado hasn’t been as stressful as I originally thought. While there are many things we have already completed on our moving checklist, everything seems to be going smoothly even with all of the tasks that are left. If you need a thorough moving checklist, UPack has one that I found very helpful.
What’s left on our moving checklist:
Arrange for the drop off of the moving trailer at the new house (and pickup a few days after). This is one of the more important things on our moving checklist because I need my stuff, of course!
Turn the internet off at our Missouri house. We’ve already cut cable.
Confirm with moving truck unloaders about what time they should be at the new house. Since it’s only me and Wes (and I am extremely weak), we need someone to help us bring all of our heavy furniture into the house.
Wait for Charter internet at the new house. Yes, this is getting installed within the first hour of moving into our new house. After spending all of that time actually moving to Colorado, I will need internet quickly set up so that I can continue working. I just can’t go without it!
Notify companies of our move. There are still a few more places we need to inform, such as our car insurance company, our bank, and more.
Run through the house one last time. Before we move, we need to run through the house and make sure nothing is left behind and we also need to make sure it’s perfectly clean too for the home sale.
New driver’s license. We also need to license our cars.
New health insurance. This is the last task on our moving checklist but also very important. Our current health insurance is only good at certain Missouri healthcare providers, so we definitely need this.
How much did your last move cost you? How did you try to save money? Are we crazy for moving to Colorado at the last moment? Is there anything I am missing from my moving checklist?
Today, my friend Jillian, from Mini-Retirements Mastered course and Montana Money Adventures, is sharing a guest post about mini retirements. This subject is something I find to be super interesting and she is definitely the expert at it! Below is her story and advice.
Fifteen years ago, I fell in love with my husband and we started planning our life together. But I had this crazy idea. What if we took mini-retirements? Mini-retirements go by many names: Sabbaticals, Gap Years, Time Off.
Essentially, it’s all the same idea: taking time away from the 9-5 to focus on things that really matter to us. It could be for a year or two, or just a month off.
The problem? We were in NO place to be thinking about mini-retirements! That first year we had over $50,000 in debt and only earned 12k. The next year was a little better, but not by much. Still, I held on to that dream.
I just turned 35, and we are currently in our 5th mini-retirement. We have taken a few short ones (month long), some medium (6 months) and this one is going on two years now. Mini-Retirements might seem almost impossible, until you understand how to plan, prepare and execute them. After that, you’ll be able to sprinkle them in every few years and just maybe grow your net worth in the process!
Related content:
Four common misconceptions about mini retirement
1. You have to be a high-income earner
This just isn’t true! Our combined income averaged between 30k-60k over the last 15 years. Without a high income, you might need to start with shorter one-month mini-retirements. But there is a LOT of really cool things you can do with an extra month off. When I was 24, I took a month off from my job to travel cross country with my best friend. It was an incredible trip! And we did it for under $2,000.
2. You need to be self-employed
All five of our mini-retirements we either negotiated off from a regular employer or walked away from traditional employment. In my free video training, I walk through the exact process to negotiate a month off from an employer, even if your company doesn’t have a sabbatical program. This can be scary if you have never done it, but with a little preparation, it’s totally possible!
3. You can’t take time away if you have debt
It might take you ten years to pay off your student loans, or 30 years to pay off your mortgage. If there is something you are passionate about pursuing, I don’t suggest pushing that off until you turn 65. If you have a lot of credit card debt, it will be really helpful to pay that off first. It will help supercharge your savings rate and lower your monthly expenses once that bill is gone. But there is no reason you can’t have an amazing month-long experience if you still have a mortgage payment.
4. Taking time off will postpone financial independence
Maybe. But it doesn’t have to! During two of our mini-retirements, we also bought and renovated houses. Taking that time away actually greatly increased our net worth and passive income! If you really want to increase your income and net worth, simply add some of those activities to your mini-retirement. There are no rules about what you can or can’t use this time for.
There are so many incredible things you could do if you had a bit of time away from the 9-5. The first step in my full Mini-Retirements Mastered course is to help you narrow down what you really want to focus on in the next mini-retirement! Which things are very time-sensitive and if you don’t tackle it now, the opportunity might pass you by.
Four Mini-Retirement Options
1. Once in a lifetime opportunity
There are a few things in life we just don’t get second chances on. Sometimes because the timing is never right again or life just changes. We had a chance to move overseas when I was in my 20’s for four years. While we were there, we traveled almost every month. I took art classes in Amsterdam and literature classes in Rome. Everything was close by and made it affordable. Because we had made financial sacrifices earlier in our marriage, we had the resources to invest in those experiences.
I have known people who took time off to hike the entire Appalachian Trail or bike along the Croatian coast. In our current mini-retirement, we are traveling in a pop-up camper in the summers with our five kids. They are between two years old to ten. It just wouldn’t be the same if we waited 20 years! Seeing all the US national parks has been an amazing experience and we just didn’t want to miss this time with them.
2. Passion project
People often have that ONE THING they want to do. Maybe it’s volunteer overseas for a year. Design and build a house with minimal help. Start a non-profit. Or adopt a sibling group from foster care. These are the things that, if we do very little else with our life, at least we can look back and say, “But I did that!” And these are the perfect things to fit into a mini-retirement!
By saving an extra 10-15% of your income a year, you would have enough to take a year-long mini-retirement every decade!
3. Build Financial Freedom
When we moved back to the US from Germany, the housing market had crashed and was at an all-time low. We took time off two more times to buy and renovate our primary home and then two rentals. There were other people who might have wanted to do that but didn’t have the free time to make it happen. Taking those two mini-retirements actually helped us build $1,200 in passive rental income and grow our net worth. Instead of derailing our path to financial freedom, it sped it up!
4. Grow a business
This last mini-retirement has been focused around family/travel and growing a creative and entrepreneurial business. We carved out this time, starting with one year as a test. We wanted to lean into our interests. Test some ideas. See if we could find a project that we were passionate about and was a perfect fit for our lifestyle. Something that would leverage our talents and really help people. If there is a business you want to grow and see if you can scale up, a mini-retirement might be exactly what you need!
Of course, there are logistical challenges that scare us. You might be nervous about healthcare. Or scared that you won’t be able to find another job when the time comes. It might simply be the unknown cost! How much would this month-long adventure cost? How much would it cost to start a business, or travel the world for a year?
Once you decide you want to move in this direction, you will find, for every logistical challenge, there are multiple logistical solutions. Then it’s just the matter of finding the courage to live a life that perfectly lines up with everything you value, are passionate about, and meets your goals.
I want to dive into one of the logistical challenges that be top of mind for you. How can I afford this!?! This is the first logistical stumbling block for a lot of people. I want to show you how you can get started with any budget. Even a once-in-a-lifetime experience doesn’t have to break the bank to become one of your most cherished memories in 10 or 20 years.
Let’s start with the idea that you negotiated a month off from your current employer or find yourself between jobs for a month.
How to Budget for a Month Off
Find your Baseline Budget:
If you have been tracking your expenses and budgeting for a while, this might be an easy number to find. Maybe you spend $2,000, $3,000 or $6,000 a month. Now, this won’t include any investing or savings you do. We are going to put that on hold for a month. If you want to take multiple mini-retirements like we have, simply adjust your yearly investing to cover your off times. An extra 1-3% investing a year, could cover your investing during your mini-retirements.
Then subtract any extras from that baseline. Let’s say you normally spend $200 a month on entertainment. If you are going to be traveling for a month, that expense would be put towards your trip entertainment.
Now you have your month off baseline number. Let’s say it’s $2,500. (Even if you earn $4k a month, after taxes, investments and extra expenses, your core expense might only be $2,500.)
Find your Dream Budget:
What is it you want to do with this time? I like to focus on things that could only happen in this season of life. Things that, if I waited another 10 or 20 years, the opportunity might pass me by. I’m 35 now, but the trip I did at 24 isn’t something I could do again. I have five little kids at home. My best friend is now CEO of a large non-profit organization. There is simply no way we could both escape for a month long road trip! Plus, I have given up sleeping on the frozen ground or in the front seat of my Honda Civic. I’m in my thirties, I now require a mattress of some kind!
Once you know what your next month-long adventure will entail, it’s time to figure out the cost.
As I research each cost, I add them to an Excel sheet I name my dream budget.
A dream budget will serve two purposes. First, in the planning, your adventure will get better. You will refine and customize what you really want to do. Second, you will have specific prices for each piece. If you decide to start a side hustle to help save up for your mini-retirement, you will know exactly what your extra $100 earnings will bring you.
Your extra $100 might buy three nights at a youth hostel or national park campground. $20 will pay for food for the day. $80 will pay for a yearly science museum pass for the whole family.
Open up a dream budget checking account, and stash all the extra dollars in there. Each dollar is getting you closer to building that dream experience. Even $1 will buy you a scoop of gelato in Italy.
Let’s say you settle on a US road trip for two people. You plot it all out and come up with a dream budget of $3000 plus baseline expenses of $2500. $5500 is your total cost. If you want to do this in the next 18 months you will need to save about $300 a month between now and then. Maybe that’s in your budget or maybe it’s not.
Then the question becomes how do I hustle for $300 a month to put towards something I really care about? Or maybe you would be willing to give up your eating out budget to make this happen?
Once we narrow down exactly what the challenge is, we can start to problem solve and find solutions for that challenge.
This week I will be hosting a free training on how to take a month off. I’ll be teaching the three essentials to negotiate a month from an employer who doesn’t typically offer that benefit. I’ll also talk about how to pack a mini-retirement go bag for those unexpected opportunities. With all of this leading up to the only time this year my full Mini-Retirement Mastered course will be open.
If you ever want to be able to do something like a mini-retirement, you won’t want to miss it! Now is the perfect time to start laying the foundation!
What do you think of mini-retirements? Do you want to take one?
Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
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Save on Parenthood: Skip These Baby Gear Money Traps
Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
Previous Post
Save on Parenthood: Skip These Baby Gear Money Traps