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A tax refund can be an opportunity to advance financial goals, whether you need a shovel to dig your way out of debt or a launching pad to generate more income.
The average tax refund in the 2023 tax season was $2,753, according to filing season statistics reported by the IRS. It’s a potentially robust amount that can make a difference if it’s prioritized in a way that makes sense for your situation. And you can set aside a sliver for fun or self care, as some experts suggest.
“Take a little bit of it — no more than 10% — and do something for yourself like treat yourself to a nice dinner, maybe a new outfit or something like that,” says Jessica Allen, an accredited financial counselor based in Tennessee.
Taking a small portion to spend however you want can encourage discipline and focus over decades to keep on track with your financial plan, according to Yusuf Abugideiri, chief investment officer at Yeske Buie, a Virginia-based financial planning firm. As for that 90% or more, allow your goals to dictate where it goes.
Here are some ways to use your tax refund to get ahead financially.
1. Build credit
If you need to build credit or get a second chance at it, consider using the tax refund to put down a deposit on a secured credit card. It’s not uncommon for some of these cards to require an upfront deposit of several hundred dollars.
When you’re researching secured credit cards, look for ones that have no annual fee; that offer a potential upgrade path to a traditional unsecured credit card; and that will report your payments to all three major credit bureaus (Equifax, Experian and TransUnion). With a good payment history, you can eventually get the deposit back after closing the card or graduating to a better card with the same issuer.
2. Pay off debt
If you’re carrying a high-interest balance on a credit card, a tax refund can help you ditch that debt more quickly. In addition, if you’re able to lower your credit card’s interest rate, you can make an even larger dent.
If you have multiple debts, consider one of two approaches: Tackle the one with the highest interest rate, through the debt avalanche method, or attack the smallest balance first, with the snowball method. Whichever debt you prioritize, remember that it’s still important to keep up with payments on all other debts.
Allen is a fan of the snowball method because it incentivizes people and builds confidence as they make more progress toward their goal.
“I don’t know about you, but when I accomplish a whole bunch of small goals I feel super-good and it makes me get to that bigger goal,” she says.
3. Save for an emergency
You could also put your tax refund toward an emergency fund — with a goal of getting that fund to at least $1,000 — to prevent you from accruing debt when the unexpected happens. Make the most of a tax refund by putting it in a high-yield savings account at an online bank, ideally one that offers an annual percentage yield of 4% or more.
If you’re debt-free, work toward saving the recommended three to six months’ worth of living expenses.
4. Invest in your ability to generate more income
If you’re looking to advance professionally, build a business or bring in additional income, a tax refund can propel those goals forward. Make yourself more marketable in a profession by earning certifications or training that will allow for more job opportunities or a salary increase. Or use a tax refund toward buying the training or equipment needed to start a business or side hustle.
5. Invest for retirement
When debt isn’t the focus, you can think about putting a tax refund to work in retirement accounts. If your company offers one, snag the match on a 401(k) by increasing your contributions, or fund a traditional or Roth IRA. In 2024, you can save up to $7,000 in an IRA ($8,000 if you’re 50 or older), and up to $23,000 in a 401(k) ($30,500 if you’re 50 or older). If you’re already on track with these goals, consider investing elsewhere.
“If IRAs and 401(k)s are already being addressed in a savings plan, you can look at just putting it in a brokerage account,” Abugideiri says.
A brokerage account is an investment account through which you can purchase stocks, bonds and mutual funds.
6. Save for your child’s education
With your financial ducks in a row, you can explore whether investing your refund in a tax-advantaged account like a 529 plan makes financial sense to save up for your child’s college education. However, don’t prioritize this option over other financial goals like retirement, and think carefully about the potential drawbacks.
For instance, your child may decide not to go to college, and penalties could apply if earnings are withdrawn for nonqualified expenses. Providing financial security for children may be a top priority, but a good way to do that is by taking care of yourself financially — to help them avoid having to do that for you down the line, Abugideiri says.
“You can take out a loan for college, but you can’t take a loan out to cover [all] your retirement expenses,” he says.
I grew up east of Rochester, in Upstate New York’s apple country. New York produces ~30 million bushels of apples per year, second among the 50 states (behind Washington).
But apples start to rot 5-7 days after they’re picked. So how does New York harvest 30 million bushels of apples in September and October without eating 30 million bushels over the following week?
The answer is cold storage.
Apples can be stored near 35°F for 6-12 months without decay. We gain an entire year of “freshness!” But first, we must put forth an effort of time, resources, and money to build that cold storage infrastructure.
Today’s effort allows us to keep more of our harvest in the long run. We get to choose our consumption schedule, not Mother Nature.
Roth Conversions
It might seem like an odd transition, but the same concept applies to Roth conversions. Today’s planning can allow us to keep more of our “harvest” in the long run. We gain control over our tax schedule rather than leaving it entirely up to the IRS.
Roth conversions are among many tools in a good “tax planning toolbelt.” Done correctly, Roth conversions allow an investor to turn high tax rates in the future into lower tax rates today. This article was inspired by Catherine (a listener of The Best Interest Podcast), who wrote me the following email:
Can you please explain the connection between RMDs and Roth conversions? Is this something I should look into? I’m 57, single, and have ~$2.3M in my 401k right now.
An Example: Required Minimum Distributions
Most retirees have heard of required minimum distributions, or RMDs, which are mandatory withdrawals that individuals with tax-deferred retirement accounts, like Traditional IRAs and 401(k)s, must make once they reach a specific age.
RMDs are forced. You must withdraw money from your 401k. Thus, the income tax associated with RMDs is forced. That’s not ideal.
Let’s use Catherine as an example. She’ll start taking RMDs at age 73 (although Congress might change that minimum age, as they’ve done before). That’s 16 years from her current age 57.
We don’t know the rest of Catherine’s scenario. Her Roth assets, taxable assets, Social Security, etc. are a mystery to us. So is her monthly spending need. All that info is essential to proper planning!
But I want to be extreme, so we’ll say Catherine’s lifestyle is wholly supported by her Social Security, taxable assets, and Roth assets. She doesn’t withdraw a single dollar from her 401k. Thus, it will grow from $2.3M today to $6M by the time she’s 73 (the assumption: 16 years at 6% per year).
Now in 2040, it’s time for her first RMD.
To calculate that RMD, we’ll look at Catherine’s year-end account value from the prior year ($6.0M) and divide it by her age-based Life Expectancy Factor. For age 73, that factor is presently 26.5. Here’s the full table of Life Expectancy Factors.
Catherine’s RMD is $6M / 26.5 = $226,415
That entire RMD is taxable as income, so her marginal Federal tax bracket is 32% based on the current tax code.
I’d bet Catherine’s account continues to grow past 2040, despite the RMD withdrawals. Her first 10 RMDs are all in the 4-5% range, and we’d expect her investment growth to outpace that. Her RMDs will grow in size. And that means she’ll be paying higher and higher marginal taxes in the 32% bracket, the 35% bracket, and potentially even the 37% bracket.
How Can Roth Conversions Help?
Paying high tax rates on RMDs is like letting your apples rot during the glut of harvest season. We need a “cold storage” to gain control over our tax rates and spread those taxes over time.
So let’s return to 2024, while Catherine is still 57 and her 401(k) is still at $2.3M. How do Roth conversions work?
First, we need to ensure Catherine’s 401(k) – which is still active – allows “in-service Roth conversions.” If it doesn’t, Catherine will have to wait until she retires and rolls over the 401(k) into an IRA.
Some simple paperwork with Catherine’s custodian will allow her to convert a number (of her choosing) of Traditional dollars into Roth dollars. Since the Traditional dollars have never been taxed, this conversion is taxable, triggering income tax.
Those converted Roth dollars will never be taxed again! That’s fantastic. But did Catherine save money? Was this a smart move?
We’d want to know all of Catherine’s personal financial details to run an accurate analysis, but we certainly need to understand what Catherine’s tax rate is today.
Her 2024 regular taxable income is $100,000, so she’s paying Federal taxes in the marginal 24% bracket. And she has another $90,000 available in that 24% bracket this year.
We can fill that ~$90,000 space in her 24% bracket with Roth conversions. Catherine would pay 24% Federal tax on those dollars today to prevent 32% (or higher) marginal tax rates once her RMDs hit. That’s the essence of Roth conversions.
Not Too Much Roth Conversion
Catherine needs to be careful not to overdo it. And so should you.
If you’re in your high-earning years and paying high marginal taxes, the odds are Roth conversions don’t make sense for you right now. There’s no reason to move extra income into your current high tax years.
But! You might have a few low-income years as soon as you retire. Your W2 income will disappear. Your financial plan might dictate you delay Social Security for a while.
Your only income might be dividends and income from your Taxable accounts and small withdrawals from your Traditional accounts. If so, fill up those low tax brackets with Roth conversions! This is a very common strategy for new retirees.
What If…?
But even as I write this article, “What if…” questions are bombarding my head.
Retirement planning withdrawal strategies are far from one-dimensional, and what I’m describing today is a one-dimensional view. I’m only focusing on a few details to provide an example of Roth conversions. Other nuanced planning questions include:
Roth conversions and (more generally) tax planning are essential aspects of retirement planning. But just two of many aspects.
A cold-stored apple a day keeps the IRS away.
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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Sales of annuities, a financial product that can provide a lifetime income stream in retirement, are smashing records as Americans look to lock in high interest rates.
Sales of one type of annuity in particular, fixed-rate deferred annuities, have more than tripled in the last two years, rising to $164.9 billion in 2023 up from just over $50 billion in both 2020 and 2021, according to trade association LIMRA.
With annuities, you pay a lump sum to an insurance company to receive monthly payments for life that begin on an agreed upon date, which Americans commonly align with their retirement. Annuities with deferment periods are popular for people in their 50s or 60s who want a product that will grow tax-deferred before they convert it to a steady income stream.
Fixed-rate deferred annuities are the “most basic product” out of the many different types of annuities because they grow at a guaranteed annual rate, says Chris Blunt, CEO of F&G, an annuity provider that is a subsidiary of Fidelity. His company has seen 46% growth in the space in the past year, thanks in part to more attractive rates.
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In 2022, rates were in the arena of 2.5%, Blunt says. But last year, they soared and now sit around 4% to 5%.
Fixed-rate deferred annuities are behaving similarly to certificates of deposit (CDs), which also provide guaranteed returns at rates that typically move in tandem with the Federal Reserve’s rate decisions.
With inflation cooling and the Fed possibly gearing up for rate cuts in 2024, people are seizing on what could be the last chance to get a rate in the ballpark of 5%.
Unlike CDs, however, annuities are not insured by the Federal Deposit Insurance Corp. (FDIC), and there are typically higher fees as well as a 10% early withdrawal penalty for distributions before age 59 ½. These are clear tradeoffs, but in exchange, you can usually get a better rate with an annuity than a CD.
Annuity sales broke records in 2023
Bryan Hodgens, head of research at LIMRA, says the first jump in annuity sales occurred in late 2022 and early 2023 as interest rates were rising amid high inflation.
“When you had these pretty dramatic increases in interest rates, consumers could now get much higher rates on these fixed annuities,” he says.
Rates have increased in large part because annuity companies invest your dollars in bonds and other securities, which are generating higher returns. Annuity companies were faster to react to the changes in market conditions and adjust their rates compared to banks offering similar products, according to Eric Henderson, president of Nationwide Annuity.
“As the Fed raised rates, banks tended to be slow to raise their CD rates where the insurance industry, the annuity industry moved more quickly, so I think that’s what really caused the surge at first,” Henderson says.
He adds that this was around the time when recession fears were peaking, which meant there was high demand for safe places to stash money that offered returns without the risk of the stock market. Of course, a recession hasn’t materialized and “you would have been better off actually investing in the market, but you didn’t know that at the time,” Henderson says.
Hodgens says the fourth quarter of 2023 marked a second big spike in annuity sales. Sales have boomed again more recently because the Fed is indicating that rate cuts are on the horizon, which is spurring people to buy while current annuity rates are still available.
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Higher rates create opportunities for retirement savers
It’s not just fixed-rate deferred annuities that are hot, Hodgens says, noting that fixed indexed annuities and registered index-linked annuities (RILAs) are also selling at record levels. Like fixed-rate deferred annuities, these products are common tools for retirement planning and they’re more attractive in a high-interest rate environment.
With fixed indexed annuities, you don’t have a constant rate of return like with the fixed-rate variety. Instead, they’re tied to indexes like the S&P 500, but your principal investment is guaranteed, meaning you can’t lose any money. In exchange, the upside — or how much you can earn — is capped.
RILAs are almost exactly the same except instead of not being able to lose money, the insurance company commits to absorbing the first 5% or 10% of loss in the event the index declines in a year, Butler says. There’s still a cap on the upside, but it’s not as large.
Annuities aren’t the right retirement planning tool for everyone: Some have high fees, and alternative retirement savings options may offer greater flexibility or the potential for higher returns. But they can be appealing to people who want a lifetime income stream. One strategy is to combine annuities with Social Security so you can ensure a level of comfort — or at least income — in retirement.
While there’s been plenty of talk around the pain for consumers that comes with high interest rates, annuities are a good example of how there’s also been the emergence of some unique opportunities in fixed income to set yourself up for the future, Hodgens says.
“Most Americans loved their pension plan, it’s just most of us don’t have a pension plan anymore,” Blunt says. Annuities, though, can provide a similar peace of mind that you won’t outlive your savings.
“That can be game-changing in an overall financial plan,” he says. “It gives people more courage to be a little more aggressive on the rest of their savings.”
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Less than a year after coming to the rescue of Signature Bankduring the market turmoil of March 2023, New York Community Bancorp (NYCB) faces a confidence crisis due to its exposure to commercial real estate loans.
The stress is leading to the bank to seek the sale of some of its assets to improve its capital position, executives said during a conference call on Wednesday morning. According to a Bloomberg report, the bank has already started to offer its mortgage assets to investors in order to transfer the portfolio risks.
“While we are already in a strong liquidity position, (…) we are committed to building liquidity further,” NYCB executive chairman Alessandro DiNello told analysts during the call.
Bloomberg, citing anonymous sources, reported that NYCB has contacted investors to finance a large portfolio of residential mortgages held by Flagstar Bank. The offering includes a synthetic risk transfer-backed portfolio of about $5 billion in home loans originated when mortgage rates were lower.
According to Inside Mortgage Finance (IMF) estimates, Flagstar originated $15.7 billion in mortgages in 2023. It also had $84.3 billion in owned servicing rights at year’s end. When including the portfolio of other companies, Flagstar serviced $379 billion in mortgages, IMF data shows.
Questions regarding NYCB financials began at the end of January when it reported earnings for fourth-quarter 2023. The data included a $193 million net loss available to common stockholders during the three-month period, compared to a net income of $266 million in the previous quarter.
The performance was impacted “by reserve building repricing risk in multifamily loans and deterioration in office in our ACL [allowance for credit losses] coverage,” the bank said. NYCB’s provisions for loan losses surged to $552 million in Q4 2023, up from $62 million in the previous quarter.
After the earnings report, NYCB stock shrunk 60%, from $10.38 on Jan. 30 to $4.20 on Feb. 6.
Credit rating agency Moody’s put even more pressure on Tuesday when it announced the downgrade to “junk” status of all long-term rates and assessments, as well as some short-term ones, for NYCB and its lead bank, Flagstar.
Moody’s actions reflected, among other things, an unanticipated loss on the bank’s New York office and multifamily property portfolio that “could create potential confidence sensitivity.” It also mentioned the bank’s concentration in rent-regulated multifamily properties amid an inflationary environment, as well as NYCB’s low fixed-rate multifamily loans, which could face refinancing risk.
According to Moody’s, there are also governance risks, including the leadership transition “of second and third lines of defense, the risk and audit functions of the bank, at a pivotal time.”
In response to Moody’s, NYCB president and CEO Thomas R. Cangemi said in a statement that the bank’s deposit ratings remain “investment grade” at other credit rating agencies.
Cangemi also said the bank has an orderly process of bringing in a chief risk officer and a chief audit executive with large bank experience and has “qualified personnel filling those positions on an interim basis.”
NYBC had $83 billion in total deposits as of Tuesday, with 72% of the total insured and collateralized. Total liquidity was $37.3 billion, with a coverage ratio of 163%.
The bank’s capitalization, as measured by its common equity tier 1 (CET1) ratio, fell to 9.1% as of Dec. 31, 2023, down from 9.59% in the third quarter. Targeting a 10% CET1 ratio, the bank announced that it cut its quarterly dividend from $0.17 to $0.05 to assist with capital generation.
“We will build a financial plan to gradually build capital, no ifs, ands or buts,” DiNello told investors. “We have already reduced the dividend to preserve capital, so that’s a step in the right direction. If we must shrink, then we will shrink. If we must sell non-strategic assets, then we’ll do that. We’ll do whatever it takes.”
DiNello said the bank will sell assets, including loans, and will reduce its commercial real estate concentration as soon as it can.
Only one-third of men correctly estimated how long a 60-year-old man in the U.S. could expect to live, according to a 2022 TIAA Institute survey. And fewer than half of women got it right for a 60-year-old woman.
Advisers call this — understanding how long you’ll live in your retirement years — longevity literacy. It’s a crucial part of your retirement strategy, and it’s important that you and your financial professional are on the same page. You should be talking about things like what your planner is using as your life expectancy, how you’ll cover future health care costs and whether you need to account for any spending related to aging parents.
Getting this right means your money will last for as long as you do. Here are the questions to ask your adviser.
1. What are you using as my life expectancy?
No one can know when they’re going to die, but your health and family history can help your planner make a good guess. How long did your parents live, or your grandparents? Do you have any health conditions?
“I’ve started, a few years ago, asking a lot of health questions of my clients,” says Mitchell Kraus, a certified financial planner in Santa Monica, California. “They should let their adviser know of any health concerns that might cause their life expectancy to be shorter.”
Planners often work with software that can model what will happen to your finances if you die at different ages, based on the assumptions you’re making. You can explore various scenarios together and decide what makes the most sense.
“If you’ve got longevity in your family, let’s boost it up to [age] 97 or even 100,” says Timothy Knotts, a CFP in Red Bank, New Jersey. “We want to make sure we don’t have this thing that keeps you up at night, which is, ‘Am I going to run out of money?’”
2. What should I be doing about long-term care?
The big wild card in your financial plan is whether (and how long) you’ll need long-term care. There’s a reasonable chance you’ll need some kind of support, so talk to your planner about the best way to prepare.
You may want to plan to purchase long-term care insurance at some point, or a hybrid policy that combines permanent life insurance with a long-term care rider. Or it may be better to self-insure and plan to use savings for long-term care needs if insurance is too expensive.
“It’s something that unfortunately many of us aren’t good at — the risk and uncertainty thing,” says Paul Yakoboski, a senior economist with the TIAA Institute. “This is where an adviser could be extremely valuable — to help us understand likelihoods and scenarios and the costs attached to them.”
3. How should I prepare to pay for health care needs?
You may have seen Fidelity’s statistic that a 65-year-old couple today may need $315,000 to pay for health care expenses in retirement. It’s a daunting figure. But making the right health care decisions once you’re eligible for Medicare can help.
“I think if people have Medicare and a Medicare Supplement, I’ve actually found they have a pretty good chunk of their health care paid for,” says Clark Randall, a CFP in Dallas.
This is because Medicare Supplement Insurance, otherwise known as Medigap, can pay for most out-of-pocket costs associated with your Medicare plan. As long as you can pay the premiums, many of your costs may be covered if you have a big health event.
“We also build in some percentage for out-of-pocket expenses,” Knotts says.
4. Should we include any planning for my parents?
If there are older adults in your life who may need your support later, make sure your adviser knows this and builds it into your retirement plan to the extent that’s possible. Do you anticipate bringing them to live with you or potentially moving in with them? Do you expect an inheritance, or do you expect to have to help pay their bills?
“I will ask, ‘Do your parents have enough money to support themselves in retirement?’” says Catherine Valega, a CFP in Winchester, Massachusetts. Clients may be doing everything right, she says, but it doesn’t mean their parents have done everything right.
Considering these questions may facilitate a conversation with your loved ones about the future, which can be helpful for everyone. If they’re young enough, you can also encourage your parents to look into long-term care insurance for themselves.
This article was written by NerdWallet and was originally published by The Associated Press.
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Making a financial plan can be intimidating, especially if you don’t know all of the essential budget categories you should include. Budgeting isn’t a one-size-fits-all process either, as the importance of each category will largely depend on your specific financial situation.
This article will review the top 12 budget categories that can bolster your financial plan. Credit.com also has multiple personal finance resources that can enhance your financial literacy.
Several important budget categories account for housing, transportation, health care, entertainment expenses, and more.
Key Takeaways:
The prioritization of budget categories will be unique to your needs.
Some expenses have fixed prices, while others have variable costs. You’ll need to account for both from one month to the next.
Tools like money apps and budget spreadsheets can help you visualize your spending habits.
Table of Contents:
Why Do I Need a Budget?
A budget can ensure that you aren’t caught off-guard by bills throughout the month—especially near the month’s end or right before you get paid. Keeping a budget can also provide long-term data based on your spending habits and serve as a snapshot of your priorities.
Effective budgets can help you plan for longer-term goals, like retirement, and inform you of what expenditures truly make you happy—and which ones aren’t necessary.
Fixed Expenses vs. Variable Expenses
Fixed expenses refer to items that essentially cost the same each month, with very little fluctuation in terms of pricing. Mortgage and rent payments, auto loan payments, and internet service bills will likely fall into this category.
Variable, or flexible, expenses can drastically differ from one month to the next. The amount you spend on groceries, clothes, entertainment, and even medical appointments can all vary over time.
Top 12 Budget Categories to Add to Your Plan
The following budget categories can help you map out your monthly expenses. Depending on your unique circumstances, these categories may need to be adjusted in terms of their priority.
1. Housing Expenses
Housing often takes top priority as your living space is directly tied to your long-term health and safety. You also need a stable housing situation to perform well at work and ensure that you have the funds to make your mortgage or rent each month.
While there’s no strict maximum for the housing category, you can expect to spend anywhere from 25% to 35% of your income on your mortgage or rent payments. If your housing budget exceeds more than 35% of your monthly income, refinancing your mortgage or looking for another living space might be more expense-friendly in the long run.
Items that fall in housing expenses:
Rent
Mortgage Payment
Appliances
Household Repairs
2. Utilities
The ability to live comfortably in your home is just as crucial for your health as actually having one, which is why utilities are usually another high-priority item. Many residential buildings in some urban areas have ordinances that require certain utilities, like water and electricity, to be considered safe living.
Utilities rarely come close to the top of the list of expenses in terms of cost, and you can reduce their cost with proper management. Depending on their usage, you can expect to spend around 5% to 10% on monthly utilities.
Items that fall in the utilities category:
Electricity
Water
Telephone
Natural gas
Sewer
Trash
Heating
Air conditioning
3. Transportation Costs
Owning or leasing a vehicle, along with repairing it, can be another high-priority expense. Some areas may complement alternative means of transportation, such as public transit or biking—which would result in much less money going toward this category.
The cost of owning a car includes the tags, licenses, and maintenance on top of the monthly car payments. Depending on your method, transportation or travel expenses will likely cost you anywhere from 10% to 15% per month.
Items that fall in transportation costs:
Gasoline
Car payment
Registration fees
Vehicle repairs and maintenance costs
New tires
4. Groceries
Groceries (not food from restaurants) and water encompass our basic needs. Store-bought groceries and water may require a large chunk of your income, though this category offers a lot of flexibility in terms of total spending.
Cooking dinner at home with groceries can help you save money, as many home-cooked meals can last multiple days. You should probably expect to spend between 10% and 15% of your monthly income on food expenses.
Items that fall in the food category:
Grocery budget
School lunch
5. Insurance
This broader category covers numerous subcategories that apply to different people. For example, if you live in a large, urban area with well-run public transportation, you may not have to worry about auto insurance.
Insurance may be classified under different categories depending on who you ask. Some pundits include health care in this category, for example. Depending on what type of insurance you need and your insurance premiums, you can look to spend anywhere between 10% to 25% of your income on this category.
Items that fall in the insurance category:
Life insurance
Auto insurance
Renters insurance
Homeowners insurance
Health insurance
Vision insurance
Disability insurance
Dental insurance
Vision insurance
Pet insurance
6. Health care
This category may have higher or lower priority depending on your specific health needs. Health and dental insurance in America is also quite costly—making them one of the primary reasons Americans go bankrupt.
Health care costs include annual checkups, clinic visits, prescription medications, and general medicines, like pain relievers. Health care is a variable expense because some months can be costly while others don’t have any expenses. Even when you don’t have any expenses, it’s a good idea to put away a little cash for a rainy day.
Items that fall in the health care category:
Anticipated copays
Prescription medications
Orthodontic work (braces)
Prescription eyeglasses
Primary care visits
Dental care visits
7. Savings
Everyone needs some kind of emergency fund to cover those unforeseen expenses. Regularly dedicating a small portion of your monthly income can help you save for major life events down the road.
There’s no hard line about what amount you should save, but a safe bet is between 5% and 10% of your monthly income. Saving this amount can help you handle emergency expenses and create a nest egg for a future big purchase.
Items that fall in the savings category:
Emergency fund
Health savings accounts
Fun money
Three to six months’ worth of expenses
Saving for a specific purchase (vehicle, college savings, vacation, etc.)
8. Retirement
While you could argue that retirement or a 401(k) is a type of savings, we refer to savings as money that can be used for any expense without penalty. Retirement accounts like IRAs help you save money that’s intended for use in the future. If you take money out of your retirement account before the preset time (unless you have a 457(b) account), you will incur a 10% tax penalty.
Much like savings, this is another category without a hard-line amount that you should contribute but should see at least 5% to 15% of your income. Ideally, you can primarily rely on this money once you’ve retired.
Items that fall in retirement:
Employer-sponsored retirement plan
401(k)
403(b)
Roth IRA
457(b)
9. Debt
This category applies to a significant portion of the U.S. population—especially those who have a student loan, credit card debt, or personal loans. Debt is a consideration that often has a lower priority level because we can pay it off over time. That said, it’s important to make sure you don’t fall behind on your payments as the penalties and fees can compound if left unchecked.
Because everyone’s situation is different, there’s no given amount of your monthly income you should dedicate to debt payments. We do, however, recommend that you pay more than the monthly minimum.
Items that fall in the debt category:
High-interest credit cards
Vehicle loan
Student loans
Personal loans
Medical bills
10. Personal Care and Hygiene Items
This category encompasses both wants and needs. Toilet paper and toothpaste should be considered “needs,” while designer clothes or expensive watches are examples of “wants.”
Because most personal expenses are lower priority, there’s no expected amount you should budget for this category, but it should remain relatively low on your list of priorities. Ensure that everything else above on this list is covered first, then look to see what you can spare on these purchases.
Items that fall in the personal care and hygiene category:
Shampoo
Deodorant
Toothbrush/toothpaste
Gym memberships
Shoes
Dry cleaning
Toiletries
Laundry detergent
Cleaning supplies
Diapers
Hair care
11. Entertainment
This category sits at the bottom of our list for a good reason, but it’s still essential to include. If you find yourself in a budget crunch, this is easily one of the first categories you should reduce until finances stabilize.
Sporting events, vacations, or streaming services like Netflix fall into this category. Given its otherwise low priority, there is no set amount you should spend on entertainment, and extra money can shift from month to month.
Items that fall in the entertainment category:
Books
Electronics
Restaurant dining
Concert tickets
Events
Vacations
Movies
Coffee
12. Other
This low-priority category covers pretty much anything else not already discussed. That can include property taxes that are a high priority in most circumstances, but you can often work with the IRS to get a debt repayment plan.
Various “other expenses” might also include donations, parking fees, child support, gifts, and school supplies, depending on your circumstances.
Some of these other expenses are significantly more important than others, but things like home improvement can be considered a kind of investment.
Items that fall in the other budget category:
Miscellaneous expenses
Child care
Holiday decor
Special occasions
Alimony
Anniversary presents
Tutoring
Private school
How Do I Make a Budget?
Considering the budget categories we presented in this article, one budgeting method that could work for you is a monthly budget spreadsheet. Or, you can use a budgeting app like Mint or another high-end competitor.
There are plenty of resources to use, so you should do lots of research on any budgeting apps that you consider downloading. Since not all of the apps work the same, search through different apps to find what best serves your budgetary needs.
What Is a 50/30/20 Budget?
Numerous financial pundits advocate for a 50/30/20 budget scheme, in which 50% of your income goes to necessary expenses, 30% goes to savings accounts, and 20% goes to wants and miscellaneous expenses. It’s also not uncommon to see people devote 30% of their funds to wants and 20% to savings.
This strategy often faces scrutiny during periods of economic strife, such as high inflation rates. Nevertheless, many budgeting apps may recommend this plan if your current income can support it.
Refine Your Budgeting Plans With Credit.com
The categories we’ve discussed today, along with their corresponding priority levels, can all vary from person to person. Building the best budget for your specific needs calls for a bit of craftiness and professional assistance.
Credit.com offers a wealth of tools and resources to help build credit, such as a free monthly budget template and services that allow you to report your utility and rent to the credit bureaus.
Inside: Learn the roadmap to financial freedom with no money. Surpass debt, embrace millionaire habits, invest wisely & start a victorious journey to become financially independent!
Navigating the road to wealth can feel daunting, especially without a financial head start. But the journey to becoming a millionaire isn’t reserved for the lucky few with an inheritance at their heel.
It’s about strategy, perseverance, and making informed decisions.
Reaching the status of a millionaire is possible. I have done it and many other Money Bliss readers as well.
You have to change your mindset to make this happen. Becoming financially stable is of utmost importance.
Now, if you are serious about making seven figures in your net worth, then keep reading on how to do it.
Foundations of a Millionaire Strategy with No Money
Building a wealthy future from the ground up demands a strong and comprehensive financial plan. This isn’t something super fancy and you don’t need crazy knowledge.
You just have to start and be determined.
Step 1: The Essential First Steps Toward Financial Growth
Before plotting any course, assess your current circumstances candidly. Are you battling debts? Barely managing expenses? Or perhaps saving inconsistently? Acknowledging your starting point is critical.
A financial plan acts as your roadmap. It outlines not only your current standing but also sets the destination: your millionaire goal. This is not a figure plucked from thin air but rather a calculated estimate determined by your aspirations and timeframe.
Structure your plan to encompass these elements:
Income Assessment: Calculate your total annual income, be it from your primary job or any side gigs you maintain.
Expense Analysis: Track every expense. From the daily coffee to the monthly rent, understand where your money is going.
Debt Strategy: High-interest debts can cripple financial growth. Prioritize paying off these debts to alleviate financial pressure.
Savings Plan: Start with achievable goals. Perhaps saving $100 a month initially, then incrementally increasing as your earnings grow.
Investment Consideration: Every dollar saved should be working for you.
Ultimately, keep your plan documented and visible. Regular interaction with your strategy keeps the vision of financial growth at the forefront of your daily choices.
Step 2: Harness a Mindset Crafted for Success
Maintaining a positive mindset can significantly amplify your success with money, empowering you to manifest your financial ambitions with clarity and confidence.
This positivity helps to reframe financial obstacles as opportunities for growth. To cultivate this prosperous mindset:
Practice gratitude by acknowledging and appreciating what you already possess, which can create a sense of wealth beyond the monetary value.
Counteract negative thoughts about money by consciously redirecting them into positive money affirmations, reinforcing your belief in your financial acumen and capabilities.
Focus on your ultimate goals and align your behaviors accordingly.
Step 3: Starting Small: Saving with Limited Means
When funds are scarce, saving can seem impossible. However, even the most modest savings habits can blossom into significant wealth over time. The key is to start – no matter how small, and to remain consistent.
Implement these techniques to save effectively on a tight budget:
Automate Savings: Set up a direct deposit from your paycheck to a savings account.
Savings Challenges: Engage in one of my popular money saving challenges.
Save Raises and Bonuses: Save at least half of any raises, bonuses, or tax refunds you receive rather than increasing your spending.
Micro-Saving Apps: Consider using apps that round up your purchases to the nearest dollar and save the difference.
Saving is habitual. Even with a limited budget, adapting ways to make saving a consistent part of your financial behavior is crucial.
Start with a small percentage that won’t strain your daily living but will quietly accumulate in the background. These mini saving challenges are perfect!
Step 4: Handling Debt: Strategies for Minimizing Financial Burdens
Tackling debt is a pivotal stage on the road to financial freedom and accumulating wealth. Personally, this is exactly what happened to me. Once we paid off our debt, we were able to increase our net worth substantially.
Simply put… When debt is left unchecked, it can blossom into an insurmountable challenge, thwarting efforts to acquire wealth. The cash flow killer.
Consider these tactics to manage and minimize your debt:
Debt Audit: Begin by evaluating all your debts. Take note of balances, interest rates, and minimum payments. Understanding the total sum of your debts is essential for forming a repayment strategy.
Prioritize High-Interest Debts: High-interest debts such as credit cards can quickly grow beyond control. Prioritizing these debts for repayment can save you a significant amount in interest over time.
Debt Snowball vs. Avalanche: Choose the method that will keep you motivated and align with your financial goals.
Negotiate with Creditors: If you’re in financial hardship, reach out to your creditors to negotiate for lower interest rates or modified payment plans. Many creditors prefer to work out a payment plan rather than risk not being paid at all.
Avoid Accumulating New Debt: As you pay off existing debts, it’s crucial not to accrue new ones. Stick to your budget and avoid temptations that could lead to further debt.
Remember, every debt you free yourself from is one step closer to letting your money work for you, not against you.
Step 5: Identifying Skills That Pay: Turning Talents into Revenue
In the evolving economy, capitalizing on your skills can be a powerful way to generate additional revenue streams. The beauty of skill-based earning is that it can fit around a traditional job and can be scaled up or down as your situation changes.
Here are possible avenues to pursue:
Demand for Your Skills: Look at the market and find out if you can outsource your skills
Start Freelancing: Platforms like Upwork, Fiverr, and Freelancer can connect you with clients looking for your specific skillset. Begin with competitive pricing and build up your portfolio and rates as your experience grows.
Teach Others: If you’re knowledgeable in a particular area, consider creating an online course or conducting workshops. With platforms like Teachable or Udemy, you can reach a global audience.
Networking: Leverage social media, professional networking sites like LinkedIn, and community forums. This builds your professional presence and can lead to job opportunities.
Lastly, do not be afraid to ask for a pay raise. Thus, will help you fast-track your path to six figures.
Step 6: Side Hustles and Entrepreneurship: Growing Your Earnings
To build real wealth, especially with no initial capital, earning income from multiple streams can be a game-changer. Side hustles and entrepreneurship are about leveraging your time, talents, and sometimes minimal financial investments to grow your income outside of your primary job.
Almost every millionaire I know has a side hustle or business that helped them to get to that point.
Here’s how you can expand your earnings with side hustles and entrepreneurship:
Make money online: The fastest growing area is knowing how to make money online. Even seemingly mundane skills can be lucrative.
Choose the Right Side Hustle: You can choose to make money or chill and watch TV. Pick on the popular side hustles to get started today.
Start Small Business Ventures: Consider creating a small business. It could start as simple as lawn care services, homemade goods, or consulting. Validate your business idea with minimal investment before scaling up.
As financial expert and entrepreneur Ramit Sethi states, “There’s a limit to how much you can save, but there’s no limit to how much you can earn.”
By actively growing your earnings and establishing additional income streams, you accelerate your trajectory toward millionaire status.
Step 7: Investment 101: Basics for the Beginner Investor
Investing is the escalator to wealth, turning your savings into passive income generators.
For beginners, the world of investing can seem labyrinthine, but with foundational knowledge and strategic baby steps, you can begin to navigate it confidently.
Don’t be afraid of the stock market as you are giving up way too much money! This was the stupid mistake I made in my 30s. Now, my investment portfolio is the primary way I am growing my wealth today.
Here’s what you need to know to get started with investing:
Start with a Retirement Account: If your employer offers a retirement plan, like a 401(k), especially with matching contributions, take full advantage of it. This is often a beginner’s first, and potentially most profitable, investment.
Low-Cost Index Funds: As a beginner, it’s wise to invest in low-cost index funds, which are designed to mimic the performance of a particular market index. They are diversified and typically have lower fees.
Automatic Investing: Set up automatic transfers to your investment account to facilitate regular contributions without having to actively think about it. Don’t forget to select which fund to invest in.
Educate Yourself: Take advantage of online resources, books, and courses to understand the basics of stocks, bonds, and other investment vehicles. This is what I did – invest in my stock market knowledge and it has paid off big time!
Understand the Rule of 72: A simple formula to estimate the doubling time of an investment. For example, at a 7% average annual return, your money could potentially double every roughly 10 years.
Understand Risk vs. Reward: All investments carry some level of risk. Typically, higher risk could mean higher potential returns, but also greater potential losses. Assess your risk tolerance before investing and use those stop losses!
Investing isn’t a sprint; it’s a marathon with compound interest serving as the tailwind to push you forward over time. Learn how to invest in stocks for beginners.
Step 8: Retirement Accounts: Why Maxing Out Early Matters
By maximizing contributions to retirement accounts, you not only safeguard your golden years but also capitalize on tax-advantaged growth, which can be substantial over time.
Just because you are in your 20s or 30s, don’t say I’ll invest later. You are missing the boat.
Here’s why it’s beneficial to start maxing out your retirement accounts as soon as possible:
Compounding Interest: The earlier you start, the more you benefit from compounding interest.
Tax Benefits: Contributions to retirement accounts like 401(k)s and traditional IRAs are made each year, but they come with limits and potential tax-deferred (IRA) or tax-free (Roth IRA) accounts.
Employer Match: Many employers offer a match on 401(k) contributions up to a certain percentage. Failing to contribute at least enough to get the full match is akin to leaving free money on the table.
Higher Contribution Limits: The earlier you start maxing out, the less you have to play catch-up later. The IRS sets annual contribution limits, and consistently hitting those maximums can mean a considerable difference in your retirement savings over time.
By comprehensively engaging with your retirement accounts from an early age, you start an assured path towards the millionaire echelon.
Yes, it is possible to have multiple Roth IRA accounts.
Step 9: Adopting the Growth Attitude: Learning from Millionaire Mentors
The difference between those who accumulate wealth and those who don’t can often be traced back to mindset and mentorship. Adopting a growth attitude and learning from successful individuals can accelerate your path to prosperity.
Millionaires, with their experience and results-driven approaches, often provide valuable insights into effective wealth-building strategies.
Here’s how tapping into the wisdom of millionaire mentors can benefit your financial growth:
Learning from Their Experiences: Millionaires can share their triumphs and tribulations, offering you a roadmap that highlights what to do and what pitfalls to avoid. Cultivate these millionaire habits in your life.
Networking Opportunities: Millionaire mentors often have expansive networks. By building a relationship with a mentor, you may be introduced to key connections that can lead to lucrative opportunities.
Mindset Shift: Interacting with successful individuals can shift your perspective from a fixed mindset to one that embraces challenges, persists in the face of setbacks, sees the effort as the path to mastery, and learns from criticism.
Innovative Thinking: Mentors can inspire innovative approaches to income generation, investment, and savings. They can encourage out-of-the-box thinking that may lead to financial breakthroughs.
Emulating Success: By observing the habits and tactics of millionaires, you can emulate strategies that have proven successful while avoiding practices that may lead to failure. Start these billionaire morning routines to help you.
By adopting a growth attitude and learning from the insights and experiences of millionaire mentors, you sharpen your financial acumen and enhance your ability to create and capitalize on wealth-building opportunities.
Step 10: Community Counts: Surround Yourself with Success
The people you surround yourself with can significantly influence your thoughts, actions, and ultimately, your success. By intentionally building a community of hard-working, success-oriented individuals, you can foster an environment that promotes wealth accumulation.
Here is why it’s crucial to immerse yourself in communities that align with your aspirations:
Shared Success Mindset: In a like-minded success-oriented community, you’ll find individuals who have goals similar to yours and an attitude that is conducive to financial growth. This collective mindset can reinforce your own ambitions.
Peer Learning: Being a part of a community allows for collaborative learning. Exchange insights, experiences, and tactics with peers who are also on a path of financial growth. I love my masterminds!
Accountability: Just as with individual mentors, a community can keep you accountable. Regular interactions with people who take financial success seriously can encourage you to do the same.
Cross-Pollination of Ideas: Varied perspectives in a group can lead to a cross-pollination of ideas, sparking creativity and innovation in your own wealth-building strategies.
Increased Confidence: As you witness others achieving success, it instills a belief that you can do the same. This confidence can push you to take calculated risks that lead to greater rewards.
This adage stresses the importance of being selective with the company you keep, as their attributes frequently rub off on you, influencing your path to becoming a self-made millionaire. Likely you want friends who are millionaires or striving to be, too.
Step 11: Steer Clear of Debt: Remaining Unshackled as You Ascent
The gravitational pull of debt can be a formidable force, impeding one’s ascent toward the zenith of financial independence. But, you can overcome this by using these debt free living habits.
Here are strategies to remain unshackled by debt:
Budget Religiously: A budget constrains overspending and reduces the temptation to rely on credit.
Build an Emergency Fund: A substantial emergency fund can cover unforeseen expenses, diminishing the need to fall back on credit cards or loans that could exacerbate your financial situation.
Spend Less Than You Make: This may sound simple, but this helps you to live within your means and avoid going into debt.
Discern Needs from Wants: Be meticulous in distinguishing true needs from mere wants.
Ultimately, your ability to evade debt not only safeguards your financial stability but also amplifies your capability to invest and save, propelling you firmly on the trajectory toward millionaire status.
Step 12: The Lifestyle Inflation Trap: Keeping Expenses in Check
Success and salary hikes can often lead to lifestyle inflation, a phenomenon where spending increases as income rises, negating the potential for savings and investments. Keeping lifestyle inflation at bay is pivotal to ensuring that growing income translates into growing wealth.
Here’s how you can avoid the lifestyle inflation trap and keep expenses in check:
Stick to Your Budget: Even as your income grows, maintain the budget that facilitates your savings habits.
Identify Trigger Points: Be aware of what prompts you to spend more. Sometimes, seeing others upgrade their lifestyle can trigger the same desire. Stay focused on your financial goals rather than external influences.
Automate Savings Increases: When you receive a raise or bonus, immediately update your automatic transfers to increase the amount going into your savings or investment accounts.
Value Experiences Over Possessions: Studies have shown that experiences bring more lasting happiness than material goods. Opt for a modest increase in experiences rather than expensive goods as your income grows.
Embrace Minimalism: Adhering to minimalist principles can reduce the urge to accumulate non-essential items, keeping spending down and savings rates up.
Avoiding lifestyle inflation doesn’t mean living as frugally as possible regardless of how much you earn. It’s about finding a balance that allows for a comfortable yet modest lifestyle, wherein you can enjoy the fruits of your labor without compromising your long-term wealth goals.
Billionaire investor Warren Buffett exemplifies this principle by still living in the house he bought in 1958 for $31,500 and driving a reasonably priced car. Buffett’s lifestyle choices display an astute awareness of the perils of unnecessary spending and emphasize the importance of consistency in financial discipline.
Step 13: Compounding: The Wonder that Builds Big Balances Over Time
Compounding interest is a powerful tool that has the potential to turn modest savings into vast sums over time.
The principle behind compounding is straightforward: the returns you earn on your investments generate their own returns in the next cycle, leading to exponential growth given enough time.
Here’s how the wonder of compounding works to build big balances:
Start Early: The magic of compounding is maximized by time. The sooner you start investing, the more cycles of compounding your money can go through, and the larger your balance can grow.
Reinvest Your Returns: To truly harness the power of compounding, reinvest the interest, dividends, and any capital gains you receive, rather than spending them. This increases your investment balance, which in turn means more significant potential returns in the next cycle.
Regular Contributions: Make regular contributions to your savings and investments. Consistent additional deposits can significantly amplify the effects of compounding over the long term.
Step 14: Procrastination and Perils: Why Immediate Action is Crucial
Procrastination is often the thief of time and opportunity, especially when it comes to financial decisions. Postponing essential actions like saving, investing, or paying down debt can have compounding negative effects, making it harder to achieve financial goals.
Understand the perils of procrastination and the importance of immediate action:
The Cost of Waiting: In the realm of investment, the longer you wait to begin, the more you miss out on the potential compounding returns. Delayed action can mean the difference between a comfortable retirement and a financially insecure one.
Opportunity Loss: Procrastination can lead you to miss out on time-bound opportunities, such as market dips that are ideal for purchasing investments at lower prices or missing the deadline for a tax-advantaged account contribution.
Paying More on Debt: By putting off debt repayment, you accrue more interest, which only increases the total amount you’ll eventually have to pay. Acting quickly to pay off high-interest debt saves money in the long run.
Increased Stress: Delaying important financial actions can lead to an accumulation of stress and anxiety, which can, in turn, impair your ability to make sound financial decisions.
Potential for Rash Decisions: When you constantly procrastinate, you might eventually rush into decisions without adequate research or consideration, leading to poor financial outcomes.
Recognize this type of behavior and set weekly money meetings with yourself to help you move forward – one task at a time. Grab an accountability partner too!
Step 15: Long-Term Vision: Setting Up For Sizeable End Gains
The journey to becoming a millionaire is often a marathon, not a sprint.
Nurturing a long-term vision for your financial future is essential in guiding your daily decisions and motivating you to stay the course.
To ensure sizeable end gains, you need to establish and maintain a future-oriented mindset:
Set Long-Term Financial Goals: Establish clear, achievable long-term financial goals that align with your desired = future. Whether it’s attaining a specific net worth, owning property outright, or securing a comfortable retirement, these goals should inspire your action plan.
Strategic Planning: Develop a comprehensive financial plan that includes savings, investments, retirement accounts, and estate planning. This plan should act as a living document that you can adjust as your circumstances and goals evolve.
Patience is a Virtue: Recognize that wealth typically accrues over time, and not without fluctuation. Stay patient and avoid knee-jerk reactions to short-term market swings or temporary setbacks.
Regular Investments: Commit to making regular investments, even in small amounts. Over time, consistent contributions can result in substantial wealth through compounding interest.
It’s about creating financial disciplines that compound over time, ensuring that with each day, month, and year, you’re progressively building towards a considerable nest egg.
FAQ: Climbing the Financial Ladder Without a Silver Spoon
Getting rich with no money might seem like a paradox, but it’s a trajectory that many self-made millionaires have pursued successfully. The blueprint involves a combination of mindset shifts, disciplined financial habits, and strategic action.
You have to take proactive steps to increase wealth even when starting from zero.
Starting from nothing and achieving millionaire status requires a multifaceted strategy, encompassing personal development, financial planning, and an entrepreneurial approach to income generation.
Wealth creation is a journey, and starting from zero means that progress may be slow initially.
However, by adopting these steps and maintaining a disciplined and proactive approach, you incrementally increase your chances of accumulating significant wealth.
Ready to Become a Millionaire with Nothing?
Are you ready to become a millionaire with nothing but your ambition, intellect, and unwavering resolve? If your answer is a resounding yes, then it’s time to take the first step.
With every small victory and learned lesson, you inch closer to your ultimate goal.
Your journey starts with dedication, a commitment to yourself that from this day forward, you will work relentlessly toward the life you envision.
Wealth is not just about the money you accumulate but also the knowledge, experience, and relationships you develop along the way. Wealth creation is often not a straight line but a series of strategic moves and consistent behaviors that, collectively, lead to financial success.
Remember, your current financial position is just a starting point – with the right mindset and actions, significant financial growth is within the realm of possibility.
Your next step is working towards becoming financially independent.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
Inside: Escape the cycle of being broke with insightful tactics. Learn to invest, save smartly, spot financial traps, and build secure money habits today.
You are desperate right now. You want to know why I am broke.
I get it. This is a situation I have been in before and just recently when I lost my main source of income.
The feelings of you can’t afford anything may send you down a steep spiral of depression.
So, how do we escape?
Here are the tips I used before and plan to use again.
Top Reasons for Why I am Broke
#1 – The Mindset Traps That Keep You Broke
A mindset that cultivates a sense of scarcity rather than abundance can be a massive roadblock to financial prosperity. When you’re shackled by thoughts like “I am always broke,” you unwittingly set the stage for a self-fulfilling prophecy.
The mental narrative that convinces you wealth is unattainable can keep you trapped in a loop of missed opportunities and poor financial decisions.
You may inadvertently sabotage your potential to earn more, save, or invest wisely by clinging to a defeatist paradigm.
Fixing a broken mindset is about shifting from a state of helplessness to one of deliberate, empowering action.
It starts with self-awareness and is further built through intentional positive affirmations and financial education.
Overcome By: Remember, the mind is powerful—it can be your greatest ally or your most formidable adversary. Change your money mindset.
#2 – Living Beyond Your Means: A Fast Track to Empty Pockets
Living beyond your means is akin to constantly filling a sieve with water, hoping it will someday retain more than it loses—a surefire way to financial drought. It’s a lifestyle where your outflow far exceeds your inflow, and every paycheck evaporates into the ether of consumerism.
With the advent of credit cards and buy-now-pay-later schemes, the temptation to spend money we don’t have has never been greater.
The façade of affluence conceals the grim reality of financial instability.
Acknowledging this trap is step one. Living within one’s means doesn’t imply sacrificing joy or reverting to asceticism; it’s about striking a harmonious balance between the lifestyle you desire and the one you can sensibly afford.
Overcome By: Making choices aligned with your financial reality, finding contentment in simplicity, and prioritizing financial health over transient pleasures.
#3 – Chronic Debt: Borrowing from Tomorrow for Today
Chronic debt is a pervasive issue, ensnaring individuals in a vicious cycle of borrowing today and worrying about repayment tomorrow. This pattern often stems from an urgency to fulfill immediate desires or needs without adequate financial resources.
Alarmingly, the trend of increasing consumer debt signals a culture obsessed with instant gratification as consumer debt is $16.84 trillion in Q2 2023, according to Experian. 1
Being in debt should not be normal.
The onus of breaking free from chronic debt lies in reevaluating your relationship with money. It means slowing down the urge to splurge, meticulously planning for future financial obligations, and carving a path towards debt repayment.
Overcome By: Find the discipline to not only stop accumulating debt but also to aggressively tackle existing debts through methods like debt snowball or debt avalanche strategies.
#4 – You Haven’t Learned to Plan and Budget for a Brighter Tomorrow
The lack of a strategic financial plan and a detailed budget is tantamount to navigating unknown terrain without a map. Without these critical tools, your finances are left to chance rather than choice, leaving you vulnerable to the whims of circumstance.
Budgeting is perhaps the most fundamental step toward taking ownership of your financial future. It gives you a clear snapshot of where your money is going, which is essential for making informed spending decisions.
However, many avoid the budgeting process, perceiving it as restrictive or complex. The truth is that budgeting liberates you from the anxiety that comes with uncertainty. It empowers you to align your spending with your financial goals and to find a balance between today’s necessities and tomorrow’s aspirations.
Overcome By: Choose a budgeting method whether it be the zero-based budget, the 50/30/20 rule, or the envelope system, the key is to find a method that resonates with your lifestyle and stick to it.
#5 – No Emergency Fund to Weather Financial Storms
An emergency fund is an essential bulwark against the financial tempests life invariably hurls your way. Without it, a single unforeseen event—a job loss, a medical emergency, or an urgent car repair—can capsize an already precarious financial ship. The lack of an emergency cushion extends an open invitation to debt and financial strain.
The data tells a stark tale:
A statement from the Consumer Financial Protection Bureau highlights that nearly a quarter of consumers (24%) don’t have an emergency savings account. 2
Additionally, 39% have less than a month’s worth of income saved for emergencies, setting the stage for potential financial disaster. 2
This precarious situation has become more pronounced with the increasing cost of living and high inflation rates witnessed in 2021-2023.
Overcome By: Structured, automatic savings transfers to facilitate the gradual growth of your emergency fund without it feeling like a financial blow. The goal is to build a reservoir robust enough to cover several months of living expenses, providing a comfortable buffer that can help you bounce back from setbacks without the need to borrow money at high-interest rates or liquidate precious assets at inopportune times.
#6 – Lack of Understanding of The Power of Investing
Understanding the power of investing is key to grasping the potential of a seed. A seed, given the right conditions, can grow into a flourishing tree. Similarly, investing allows your finances to grow beyond the confines of stagnant savings.
Yet, many people fail to harness this power due to a lack of understanding or fear of the unknown. This was me for many years until I decided to learn to trade stocks.
A common misconception surrounding investing is that it’s solely the playground for the rich or financially savvy. This myth steers many away from multiplying their wealth via investments, leaving them to rely solely on their primary source of income. Moreover, a lack of understanding often leads to panic during market volatility, resulting in ill-timed decisions to buy high and sell low—contrary to sound investment strategies.
Overcome By: Invest money consistently into a low-cost mutual fund or ETF that tracks the overall S&P. Then, continue your investing education on how to invest in stocks.
#7 – Wasteful Spending Habits
Wasteful spending habits are the quiet thieves of financial security. They nibble away at your earnings, leaving you wondering where your money has gone at the end of each month. This pattern often goes unnoticed, as it’s usually composed of small, seemingly insignificant purchases that accumulate over time.
The danger of wasteful spending is its subtlety.
It’s the daily coffee on the way to work, the meal out because cooking feels like too much of an effort, or the impulse buys during the sale season.
Individually, these do not seem like considerable expenses, but together, they can consume a substantial portion of your budget.
To curtail this financial leak begins with recognizing and acknowledging these habits. Tracking every penny spent can be an eye-opening experience, illustrating just how quickly the ‘little things’ can add up. With this awareness, one can then consciously decide where to cut back.
Overcome By: Adopting a minimalist approach, where value and purpose become the benchmarks for every expense, can help combat wasteful spending. Questions like, “Do I really need this?” or “Will this purchase add value to my life?” can serve as useful filters. Take up a no spend challenge to see your mindless consumption.
#8 – Fail to Recognize the Patterns That Lead to a Near-Empty Wallet
Failing to recognize the patterns that deplete your wallet is akin to ignoring the signs of a leaking roof until it caves in—it’s a disaster in the making. Often, it isn’t one significant financial blunder, but rather a series of small, recurring missteps that lead to the near-empty wallet syndrome.
For instance, routinely underestimating monthly expenses can lead to a perpetual state of surprise when the bills pile up.
Similarly, neglecting to keep tabs on bank account balances may result in overdraft fees that, over time, take a sizable bite out of your funds.
Disregarding the accumulative effects of late payment charges or routinely paying only the minimum on credit card balances can exacerbate financial distress.
Overcome By: To reverse this trend, one must become a detective in their own financial mystery. Start by scrutinizing bank statements and tracking expenses. Look for patterns, like repeated late-night online shopping sprees or habitual dining out, which contribute to the thinning of your wallet. Use budgeting apps or spreadsheets to flag these patterns visually, making it easier to identify and amend them.
#9 – How Fear and Denial Contribute to Ongoing Money Issues
Fear comes in several forms: fear of failure, fear of taking risks, and even fear of facing the truth about one’s financial situation. It can immobilize individuals, preventing them from making necessary financial changes or taking action that could otherwise mitigate or reverse money woes.
For instance, the fear of losing money might dissuade one from investing in potentially lucrative opportunities, leaving them stuck in the low-yield safety of a savings account.
Further, there’s the psychological phenomenon of denial—a defense mechanism that numbs the pain of reality. When faced with mounting debt or budgetary failure, denial kicks in, allowing individuals to live as if the problem doesn’t exist. Unfortunately, ignoring overdue notices or dodging calls from creditors doesn’t make debts disappear.
Denial only deepens the financial hole, often leading to larger, more complex problems.
Overcome By: To confront these challenges, it’s crucial to adopt a stance of brutal honesty with oneself. This means acknowledging fears and confronting financial shortcomings head-on. Professional help, such as financial counselors or advisors, can provide support and guidance to navigate these tricky emotional waters.
#10 – No Clear Financial Goals and Plans
The absence of clear financial goals and plans is like embarking on a voyage without a destination. It not only leads to aimless wandering but also ensures that you miss out on the focus and motivation that well-defined objectives provide.
When you lack clarity on what you’re saving for or what you wish to achieve, there is little impetus to resist the temptations of immediate gratification or to weather the short-term sacrifices that long-term gains often require.
Setting clear and measurable financial goals lays the groundwork for creating effective plans to reach them.
Overcome By: To break this cycle, begin by reflecting on what you value most and where you would like to be financially in the future. Whether it’s achieving debt freedom, owning a home, funding education, or planning for retirement, having specific goals in mind will define the purpose of your financial activities. Craft a plan that outlines the steps needed to accomplish them.
#11 – Laziness is your Game
When you approach your finances with a laissez-faire attitude, it’s akin to ignoring the health of a garden; without regular attention and effort, it’s bound to wither. Financial laziness can manifest in various ways, from failing to review bank statements and ignoring budgeting to neglecting opportunities to cut costs or boost income.
Each act of omission is a step closer to the financial doldrums.
Procrastination or avoidance might seem less painful at the moment, but they ultimately compound the problem. Contrary to what some might think, simple acts of financial diligence, such as cash management or regularly doing household chores, do not require Herculean effort.
Moreover, they set a foundation for sound financial habits that thwart needless spending.
Overcome By: Schedule time for financial management much like an important meeting.
#12 – Keeping up with Others is Breaking Your Bank
The urge to keep up with others—often termed the ‘Keeping up with the Joneses’ or ‘Keeping up with the Kardashians’ phenomenon—is a profound pressure that exerts an invisible, yet powerful, force on financial habits. This social comparison can lead to an insidious form of competition, one that disregards personal financial realities in favor of an illusory social standing.
It’s an impulse driven by comparison, where the benchmark of success is set not by personal satisfaction, but by the possessions and lifestyles of others.
The decision to upgrade to a luxury car, splurge on designer clothes, or redo a perfectly functional kitchen stems not from need, but from a desire to project an image that matches or surpasses those in your social sphere.
Financial guru Dave Ramsey encapsulates this philosophy with his common saying, “Live like no one else will now, so in the future, you can live like no one else can.” This means making money moves that are right for you, not those dictated by social pressures, which can sometimes involve humbler living now for a wealthier future.
Overcome By: Breaking free from the shackles of this social competition requires introspection and a bold reaffirmation of personal values. Adjusting focus towards personal financial goals and aspirations, rather than mirroring others’ spending decisions, is key.
#13 – Need Help Differentiating Needs from Wants
The blurring line between needs and wants is a common financial pitfall that can lead individuals deeper into the morass of money woes.
Needs are essentials, the non-negotiable items necessary for survival—food, shelter, healthcare, and basic utilities.
Wants, on the other hand, include anything that is not vital for basic survival but enhances comfort and enjoyment of life.
The difficulty in distinguishing between the two often stems from habituation. What starts as a luxury, like eating out at restaurants, getting a high-end smartphone, or subscribing to multiple streaming services, can quickly become perceived as essential. This is particularly difficult in a consumer-driven society, where advertising and social media constantly inflate our perception of what we ‘need’ to lead a fulfilling life.
The result? A budget that’s stretched thin on non-essentials, leaving little room for savings or investment.
Overcome By: Regularly reassess expenses and ask the hard questions about whether a purchase is genuinely essential or merely a desire dressed up as a need.
#14 – You Don’t Make Enough Money to Cover Your Expenses
When your income doesn’t cover expenses, the strain can be relentless. This financial imbalance is often the stark root of the “I am broke” refrain. In such cases, every dollar becomes precious, and the financial breathing room feels nonexistent.
The reason is straightforward: if what comes in is less than what goes out, deficits and debt are the inevitable outcomes.
Addressing this challenge requires a two-pronged approach—increasing income and/or reducing expenses. For many, reducing expenses is the immediate reflex, and while it’s an essential strategy, there’s only so much you can save, but no limit to how much you can earn.
Overcome By: Focus on making more money. This could mean asking for a raise, seeking better-paying job opportunities, pursuing a side hustle, making money online, or acquiring new skills that offer higher income potential.
Long-Term Solutions to Build a Secure Financial Future
Building a secure financial future is an aspirational goal for many, but achieving it requires a strategic approach characterized by foresight, discipline, and an understanding of personal finance.
Becoming financially independent doesn’t happen by magic chance; it’s the result of deliberate actions taken with consistency over time.
Here are the foundational blocks for constructing a sturdy financial edifice:
Invest in Financial Literacy: Knowledge is power, and this is especially true in the realm of finance. Educate yourself about budgeting, investing, insurance, taxes, and retirement planning. Reliable resources include books, online courses, podcasts, and workshops.
Set Clear Financial Goals: Define what financial success looks like for you, whether it’s being debt-free, owning a home, or achieving financial independence. Detailed goals provide direction and motivation for your financial plan.
Create a Robust Budget: A flexible budget isn’t a one-time exercise but a living document that should evolve with your financial situation. It should reflect your income, fixed and variable expenses, and financial goals.
Establish an Emergency Fund: This is the bedrock of financial security. Aim to save three to six months’ worth of living expenses to protect yourself from unforeseen circumstances without falling into debt.
Pay Off Debt: High-interest debt is a major impediment to financial growth. Utilize strategies like the debt snowball or avalanche methods to tackle debts efficiently. Once you’re debt-free, avoid accumulating new debt.
Diversify Income Streams: Relying on a single source of income is a risk. Look for opportunities to create additional streams of income, such as side businesses, freelance work, or passive income from investments.
Invest Wisely: Make your money work for you through smart investments. Consider diversified portfolios, retirement accounts, and tax-efficient investment strategies to grow your wealth over time.
Plan for Retirement: The future is closer than you think. Contribute regularly to retirement accounts like 401(k)s or IRAs. Take advantage of employer match programs if available, as they’re essentially free money.
Protect Yourself with Insurance: Ensure you have adequate insurance coverage for health, life, property, and potential liabilities. This helps to guard against catastrophic financial losses.
Breaking the Cycle of Being Broke
Just like becoming broke is often a gradual process—a few uncalculated loans, hasty investments, and numerous credit card swipes. Suddenly, financial stability seems like a far-off dream.
The same goes for breaking the cycle of being broke. It is about moving from living paycheck to paycheck with no savings, drowning in debt, and making questionable spending decisions to become financially stable.
Even though our society may see being broke as normal, it is possible to embrace financial prudence to defy such norms. It’s time to delve into the reasons behind the perpetuation of brokeness and unveil practical steps toward lasting financial freedom.
What do I do if I’m broke?
Finding yourself in a financial predicament where the end of your money arrives before your next paycheck is a stress-inducing scenario.
When faced with the stark reality of being broke, here’s a step-by-step guide to help you navigate through and set the stage for a more stable financial future:
Assess Your Situation: Take stock of all your available assets and resources. This includes checking account balances, any savings, and items you could potentially sell for quick cash. Understanding what you have can help you gauge your immediate next steps.
Prioritize Your Expenses: Sort your expenses by urgency and necessity. Essentials like rent, utilities, and groceries come first. Non-essentials or discretionary spending should be paused or significantly reduced until your financial situation improves.
Reduce Costs Immediately: Eliminate any non-essential expenses. Cancel or suspend subscriptions, memberships, or services that are not vital. Consider cheaper alternatives for necessary expenses, and utilize community resources, such as food pantries, if needed.
Negotiate with Creditors: If you’re struggling to pay your bills, proactively reach out to creditors to discuss payment options. Many are willing to work with you on a revised payment plan to avoid defaults.
Seek Additional Income Sources: Consider taking on a side job, selling unused items, freelancing, or offering your skills for short-term gigs. Even small amounts of additional income can make a significant difference when you’re broke.
Consider Assistance Programs: Look into local, state, and federal assistance programs. You may be eligible for temporary aid to help with food, housing, or utility bills.
Borrow with Caution: If borrowing is unavoidable, be cautious and choose the most cost-effective options such as loans from family or friends, a personal loan with a low-interest rate, or a hardship withdrawal from your retirement account (as a last resort).
Remember, being broke can happen to anyone, so there’s no shame in it.
The key is to take swift, decisive action to mitigate the immediate crisis while also planning longer-term strategies to prevent recurrence. By addressing the issue head-on and adjusting your financial habits, you can initiate the journey from being broke to becoming financially buoyant.
FAQ: Navigating Away from Being Broke
Finding yourself consistently broke at the end of each month is an indicator that there’s a disconnect between your income and your spending habits.
It’s often the result of several factors or behaviors that, when combined, result in a cycle of financial scarcity. Here are common reasons why this might be happening:
No Budget or Poor Budgeting
Overspending
Impulse Purchases
Lack of Emergency Savings
Failure to Track Expenses
Living paycheck to paycheck
High Debt Payments
Remember, understanding why you’re broke at the end of the month is the first step towards financial stability.
Saving money when funds seem stretched to their limit is a challenge that requires creative strategy and discipline. Even with a tight budget, there are ways to eke out savings without significantly impacting your day-to-day life.
If saving a significant amount seems daunting, start by saving your change. Physically save coins or use apps that round up your purchases to the nearest dollar and save the difference. Check out my mini savings challenges.
Saving money when it seems there’s barely enough to cover the bills begins with a commitment to take whatever steps are necessary, however small they may initially seem. Every dollar saved is a step towards financial resilience and a buffer against future financial challenges.
Investing can be a powerful tool for building wealth over the long term, and it’s often considered a key component of achieving financial stability. However, for those who are currently struggling to make ends meet, the decision to invest should be approached with caution.
Investing typically involves committing money with the expectation of achieving a future financial return. It has the potential to outpace inflation and increase your wealth due to the power of compound interest. Nevertheless, it often carries the risk of losing the invested capital, a risk that those in financial distress may not be in the position to take.
Feeling Broke without Money – Time to Make A Change
Feeling broke is a stressful and demoralizing experience, but it’s also a clarion call for change. It signals that your financial health needs attention and that your money management strategies may require a significant overhaul.
However, the situation is not without hope; with determination and the right approach, it’s possible to transform your financial landscape.
The journey away from the precipice of being broke begins with honesty, introspection, and a willingness to adapt. It’s about confronting uncomfortable truths, devising a clear plan, and taking decisive action. From crafting and adhering to a precise budget, cutting unnecessary expenses, to seeking additional income streams—all these steps are essential in the path to financial stability.
Remember, feeling broke isn’t a permanent state. Mindset is everything.
It’s a challenge to be met, an opportunity for growth, and a chance to steer the course of your financial ship towards calmer and more abundant waters. Your future self will thank you for the changes you implement today, so take that first step now.
>>>It’s time to make a change—because you deserve the peace of mind that comes with financial security.
Source
Experian. “Experian Study: U.S. Consumer Debt Reaches $16.84 Trillion in Q2 2023.” https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/. Accessed January 25, 2024.
Consumer Financial Protection Bureau. “Emergency Savings and Financial Security.” https://files.consumerfinance.gov/f/documents/cfpb_mem_emergency-savings-financial-security_report_2022-3.pdf. Accessed January 25, 2024.
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Speaking with your current lender about refinancing options is a great first step if you currently have low credit.
Key Takeaways:
Refi programs exist to specifically help low-credit applicants.
A cosigner with a high credit score can help you successfully apply for refinancing.
Mortgages with APR may be more costly in the long run.
When you refinance your mortgage, you’re basically replacing that mortgage with a different loan. Your lender will then use that new mortgage to pay off the old one first, so you’ll only have one monthly payment.
A refinance can have different interest rates and terms. A lower interest rate can result in less expensive monthly payments and reduce the overall cost of your loan. Conversely, shorter terms can help you pay down a new loan much faster via larger monthly payments.
It’s certainly possible to refinance with bad credit once you know your options. We’ll discuss several popular options and explain how Credit.com can help you find strong mortgage rates based on your current circumstances.
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Can You Refinance With Bad Credit?
Your credit score plays a major role when you apply for a loan, but refinancing and is certainly possible. In fact, Federal Housing Administration (FHA) loans can help you secure financing with a credit score between 500 and 579 if you provide a 10% down payment.
Five Options for Refinancing With Bad Credit
It’s possible to secure new funding with low credit. Below are five of the most popular options for low-credit refinancing.
1. Talk to Your Current Lender
If you’re in good standing with your current mortgage lender, talk to them about refinance options. Being in good standing means you’ve regularly made on-time mortgage payments and haven’t had any issues with your lender.
Lenders make money on your mortgage. If you want to refinance to extend your mortgage payments—to reduce your monthly payments, for example—the lender could make more money off your loan in the future. Your current lender may want to keep your business and could be more likely to work with you.
2. Use a Cosigner
A cosigner is someone willing to help you take on the responsibility of making regular mortgage payments. Cosigners with good credit can help you secure funding you normally wouldn’t be eligible for.
Cosigners can be spouses, relatives, close friends, or business partners. If you’re attempting this approach, make sure you have a strong financial plan to show your cosigner that you’ll make timely payments. With a cosigner, your credit history is linked, so missing a payment can hurt both your credit scores.
3. Use an FHA Streamline, Simple, or Cash-Out Refinance Loan
FHA-backed mortgages are known to have less strict credit requirements, and the same applies to refinances. If you have bad credit and late payments on your credit report, you might consider FHA programs—especially if you already have an FHA loan.
Streamline FHA Refinance
Streamline FHA refinance programs are for those with an FHA mortgage who want to refinance with an FHA loan. Your mortgage must be current, and you can’t get more than $500 cash out of this refinance. Appraisals aren’t a requirement for these loans.
There are two types of streamline loans:
Credit qualifying: You provide the income and credit documentation you normally would when getting a mortgage. If you’re taking one of the borrowers off the mortgage during the refi, you must use this option.
Noncredit qualifying: At least some credit review—and a review of past performance on your existing mortgage—is required. But it may not be as comprehensive as a credit-qualifying loan.
Simple Refinance
Simple refinance is another option that doesn’t allow cash out. This program is only relevant for refinances on primary residences or secondary residences with HUD approval. You also have to be up-to-date on mortgage payments.
Cash-Out Refinance
FHA cash-out refinance programs let you get some cash back during refinance if you have equity in your home. You’re limited to 85% to 95% of equity, depending on the status of your current mortgage.
To qualify, you must have had the property for at least 12 months and made the last 12 mortgage payments in the month they were due. Other credit and financial factors may also apply.
4. Apply for a VA Refi Program
The VA provides several refinance options for those who are eligible because they’re qualifying veterans, active-duty service members or eligible family members. As with FHA refinance options, you can find programs that support straight or cash-out refinance.
Interest Rate Reduction Refinance Loan
This is a refinance option that gets veterans a lower interest rate on their mortgage. Here’s who’s eligible:
Veterans
Active-duty service members
Members of the National Guard or Reserves called to active duty
Some surviving spouses
Current Reserve and National Guard members (after six years of qualifying service)
Cash-Out Refinance
This VA refinance has the same eligibility requirements as the Interest Rate Reduction Refinance Loan. The loans typically come at market rates and include a VA funding fee.
5. Consider the USDA Streamlined Assist Refinance Program
The United States Department of Agriculture (USDA) offers a few refinance programs but notes that the Streamlined Assist refi is the most popular. It doesn’t require an appraisal unless a subsidy is involved. A full credit review is not required. However, the loan must have been paid on time for the previous 12 months and is only available for certain types of homes.
Improve Your Credit Before You Refinance
If you can’t find a refinance that works with your credit score—or you don’t find one that works for you—you might want to improve your credit before applying for a refi. Start by accessing 28 of your FICO® scores via ExtraCredit® to see where you stand.
You can improve your credit by:
Making on-time payments. Payment history accounts for a large part of your credit score.
Paying down revolving credit, such as credit cards. Credit utilization is another big part of your score.
Dispute credit errors on your report with the credit bureaus to repair your score.
Find the Right Mortgage for You
No matter where you’re at, finding a mortgage is an exciting—and overwhelming—process. Whether you’re ready to start looking for a refinance now or want to wait until you’ve improved your credit, Credit.com can help you with your goals.
We offer tools that help you find competitive mortgage rates and provide a mortgage calculator for anticipating your financial needs.
Inside: Are you looking to maximize your rewards and credit card hacks? This guide will teach you the most effective methods for using your hacking, signing up for bonus rewards, and making efficient card purchases.
Credit card use extends beyond just making purchases. Savvy credit card users understand that with the right set of hacks and optimal usage, there’s a world of rewards that are ripe for the picking.
Money saved can be money earned, and this simple philosophy forms the cornerstone of these 25 credit card hacks you’ll be learning about today.
Why do credit card hacks matter? Well, I just received a $700 check for credit card rewards. That is enough to pay for a weekend trip away.
What are Credit Card Hacks?
Credit card hacks are creative strategies employed by credit card users to maximize the benefits and rewards offered by their credit cards while also potentially saving more money.
This trend has become more popular in recent years due to the rise in premium travel and cashback cards that offer lucrative ongoing rewards programs. Users who learn about these hacks can save you money on travel or just put cold hard cash back in your wallet.
With strategic approaches, these hacks provide an avenue to optimize rewards and navigate the financial landscape more effectively.
Proven Credit Card Hacks to Maximize Rewards
Tip #1 – Utilize sign-up bonuses
One of the most attractive features of credit cards is the sign-up bonuses they offer, which are essentially rewards that cardholders can earn after meeting a certain spending threshold within a specified timeframe. The bonuses can range from hundreds to even thousands of points, miles, or cash – favorably impacting your rewards balance.
To illustrate, if you take the Chase Sapphire Preferred® credit card, both partners in a household can get up to 50,000 extra points each as part of the sign-up bonus.
Bonus tip: Stagger your applications, so once one person gets the bonus after meeting the spending requirement, the other person can then apply and achieve the next round of bonuses.
Tip #2 – Increase credit limit
The principle behind this is simply buffering your “credit utilization ratio”, which is how much of your total available credit you are utilizing.
To illustrate how a credit limit increase will work, let’s consider an example: with a credit limit of $10,000 and a credit usage of $3,000, your utilization ratio stands at 30%. But once your credit limit increases to $15,000 with the same credit usage, your utilization ratio drops to 20% – which is a noticeable improvement.
Remember, when requesting a credit limit increase, some card issuers might execute a hard inquiry on your credit report, which could temporarily decrease your score. Hence, you should try to find out beforehand whether your issuer is likely to perform a hard or soft credit pull. Soft inquiries won’t affect your credit score, making them the preferable approach.
Tip #3 – Master balance transfers
A balance transfer, executed proficiently, can be an effective way to handle significant credit card debt. By focusing on reducing the cost of debt through lower interest rates, balance transfer can accelerate your debt repayment process while saving you considerable money over time.
This is what one of my clients did and the date when the 0% interest ended was very motivating to pay off their debt.
This process entails the shuffling of debt from one card (usually one with a high interest rate) to another card—preferably with a 0% promotional APR offer. With this interest-free period, you can focus on repaying the principal balance, hence clearing your debt faster.
As a finance expert, make sure balance transfers are only beneficial if you’re mindful of the terms, like how long your 0% rate will last and what fees are involved in the transfer to the new card.
Tip #4 – Purchase prepaid cards with credit
Need a way to spend a certain dollar amount by a certain deadline? Then, look at purchasing prepaid cards with a credit card as a strategy to earn extra rewards points. This method entails buying prepaid cards or gift cards using your credit card, and later using these prepaid cards to cover those expenses you typically will use.
In other cases, customers have reported that their credit card companies have clawed back rewards points that were initially given for gift card purchases. Double check their terms and conditions, many issuers, including American Express, explicitly exclude such transactions from earning rewards. 1
Tip #5 – Harnessing the 15/3 Methodology
The 15/3 Methodology is a credit card hack that intends to optimize your credit utilization ratio—one of the significant factors that impact your credit score.
Here’s how it works: You pay off a majority of your card’s balance 15 days before your statement date, and then pay off the remaining balance three days before the statement date. By doing this, you create the illusion of a lower balance, which can positively impact your credit score.
There is still a debate about whether or not this strategy improves your credit card score. Paying your bill on time will definitely improve your score.
Tip #6 – Strategies to earn additional rewards through third-party programs
An often overlooked but highly effective credit card hack is utilizing third-party apps and websites that offer additional rewards when you shop at participating retailers and restaurants. These rewards are additional to the cash back, miles, or points awarded by your credit card.
One such app is Dosh, a cashback app. By linking your credit card to your Dosh account, you can earn up to 10% cash back from participating retailers on top of the rewards earned from your credit card. Similarly, apps like Drop and Bumped give users points for every dollar spent, and these points can be redeemed for gift cards.
Furthermore, many airlines and hotels participate in dining rewards programs where you’ll earn extra rewards at select restaurants. Airlines like United, Southwest, Delta, and hospitality giant companies like Marriott and Hilton actively participate in such programs.
Tip #7 – Earn a credit card sign-up bonus then canceling the card right away
Also known as credit card flipping or churning, the tactic of earning a credit card sign-up bonus and then canceling the card right away has been employed by some savvy credit card users to maximize rewards.
However, this practice isn’t as easy or beneficial as it appears. While it sounds like an accessible system to generate easy money, it comes with several potential pitfalls that could make it a risky move.
Firstly, numerous card issuers have, over the years, implemented stricter rules to deter this practice. Chase, for instance, has the 5/24 rule indicating you can have only five new credit cards within the last 24 months. 2
Repeatedly opening and closing the same card can result in a declined application or rescinded bonus and hurt your credit score-perceived as credit misbehavior by the issuer.
It can also be viewed as unethical and potentially lead to you being barred from opening accounts with that issuer in the future.
Churning can negatively affect your ability to get approved for future credit cards and loans because lenders may think you’re a risky borrower.”
Tip #8 – Develop a multi-card system
This method aims to cover all your spending by using different cards that offer elevated rewards for certain purchase categories.
For instance, we have one card that pays an unlimited flat rate of 2% on all purchases. Then, another rewards card offering increased category rewards, with travel and gas. Then a there card that rotates through various categories each quarter.
Diversifying your spending amongst several credit cards can help you to earn the maximum possible rewards. However, endowing yourself with several credit cards is not for everyone as it requires careful financial management. In some cases, the potential of overspending can outweigh the benefits.
Tip #9 – Transfer points between multiple cards
Transferring points between cards (provided they are from the same issuer) is another useful strategy whereby you can redeem them at their maximum possible value.
The goal is to make your spending work for you and maximize the rewards you can earn from daily expenses. However, people should employ this strategy responsibly and ensure they’re not overspending just to earn rewards.
In such a strategy, points on traditional cashback cards can be transferred to airline and hotel partners when you also have a transferable points card like the Sapphire Reserve or Sapphire Preferred. So, not only are you earning cashback on your purchases, but you’re also accumulating lucrative points that can be redeemed for travel.
Tip #10 – Don’t use cash
In the world of credit card rewards, cash is no longer king. Whenever feasible, you should consider using your credit cards instead of cash or debit to pay for everyday purchases. This allows you to earn rewards on purchases you’re making anyway.
The best way to implement this is for you to bills with their credit cards instead of cash or debit and set this up on autopay. This serves a dual purpose of potentially earning rewards on these payments whilst also conveying a positive message to the banks about your money management skills, leading to possible credit score improvements.
However, this method works best when your spending doesn’t increase as a result. Only use your credit card for expenses that you’d normally pay in cash and for which you already have the money set aside to pay.
Tip #11: Time your purchasing
Being strategic about when you make your credit card purchases can help you wring out some extra benefits.
One way to optimize your earning potential and maintain a healthy credit score is to plan your large purchases around your credit card’s billing cycle. Making your most significant purchases immediately after your statement date ensures that you have the longest possible repayment period, effectively offering you a short-term, interest-free loan.
Furthermore, if your issuer has a rewards cut-off at the end of a calendar year, you can make larger purchases ahead of time to push yourself into a higher rewards bracket.
Tip #12 – Make Micropayments
Rather than making one full payment, consider making multiple payments over the billing cycle, commonly referred to as ‘micropayments.’ This helps keep your running balance low and, in turn, your credit utilization ratio – the percentage of your available credit limit you’re using – also low, positively impacting your credit score.
Plus it helps to keep your checking account at a more accurate level.
Tip #13: Have your spouse apply for the same credit card
Known informally as the “two-player mode” amongst credit card hacking enthusiasts, having your spouse or partner apply for the same credit card can be an effective strategy to earn double the sign-up bonus. This approach is based on the idea that instead of just adding your spouse or partner as an authorized user to your card, they should apply separately.
For instance, if a card like the Chase Sapphire Preferred® offers a 50,000 points bonus on sign-up, both partners can potentially earn up to 100,000 points collectively, essentially doubling the bonus.
But remember, this hack should be used strategically – you should stagger your card applications and ensure each of you fulfills the spending criteria to qualify for the bonus.
Tip #14 – Importance of prompt payment
Quite possibly the hack with the most significant impact on both your credit score and your pocket, prompt payment of your credit card bill cannot be overstated.
Making on-time payments can drastically improve your credit score since your payment history is the most heavily-weighted factor that credit scoring models consider.
Plus paying your balance in full each month can help you avoid interest charges and penalties, effectively saving you money in the long run.
Tip #15 – Know What Rewards you Want
Rewards such as travel miles, discounts at partnered retailers, cashback, or access to premium experiences like airport lounges or concert tickets are available, depending on your card.
By understanding and leveraging these varied rewards, you can get the most excellent value out of your credit card expenses.
Cautionary Advice on Credit Card Hacks
While credit card hacks can undoubtedly offer substantial benefits when done right, pitfalls can ensue if one isn’t careful.
Pitfall #1 – Overspending
For starters, these hacks can inadvertently lead to overspending or unnecessary purchases. Be wary of making purchases you don’t need or can’t afford in an attempt to earn more rewards or meet the spend necessary for a sign-up bonus.
Consequently, the pursuit of credit card rewards could also lead to accumulated debt if you’re not diligent about paying off your balance in full each month. The interest that you need to pay on balances carried over can easily eat up the value of any rewards earned.
Pitfall #2 – Impact on your Credit Score
Applying for multiple cards can lead to hard inquiries on your credit report, which can temporarily lower your credit score. Similarly, canceling cards after acquiring the sign-up bonus could harm your credit utilization ratio and your length of credit history, both key factors in your credit score calculation.
Additionally, irresponsible habits like ‘credit card churning’ and ‘paying for everything with credit’ may risk your relationship with card issuers. Some companies might close accounts or even ban individuals from opening new ones if they’re perceived as abusing the system.
While some of the top-tier reward and travel credit cards often come with hefty annual fees, not all of them are worth paying. This is especially true when a card’s annual fees outstrip the value of the rewards earned.
Before you sign up for a credit card with an annual fee, it’s advised to read the fine print and estimate what you can earn from it. You should evaluate whether the perks, bonuses, rewards, and credits offered offset the annual fee cost.
Personally, I don’t use any cards that have an annual fee.
Pitfall #4 – Paying interest
Credit card interest can significantly impact your overall financial health if you’re not careful. The money invested toward paying it off could be better used elsewhere – for saving, investing, or spending on your needs and desires. Hence, one of the best “credit card hacks” out there is to simply stop paying interest.
You want to focus on debt free living.
Pitfall #5 – Avoiding counterproductive habits like “balance surfing”
Balance surfing is a strategy where you continually move credit card debt from one card with an ending 0% APR promotion to another card with a new 0% APR offer. While this approach can potentially delay interest payments, it can become a dangerous cycle if you find yourself simply transferring debt instead of reducing it.
Meanwhile, the total debt remains the same. Without a consistent debt repayment strategy, this method can lead to an endless cycle of balance surfing.
What are some of the best credit card rewards and hacks for 2024?
As we venture into the new year, some credit card reward strategies remain timeless while others evolve in response to new credit card offers and updated reward programs. In 2024, here are some of the best credit card hacks worth considering:
Take Advantage of Updated Card Offers: Credit card issuers frequently update their card offers and rewards programs. Ensure you stay updated on these changes to maximize your card benefits.
Focus on Cards with Flexible Reward Categories: Some cards, like the Bank of America® Customized Cash Rewards credit card, allow you to choose your highest cash-back category (like online shopping, dining, or grocery stores). These flexible category cards can be more advantageous as you can adapt them to your spending habits.
Leverage Rotating Categories: Cards like the Chase Freedom Flex℠ and Discover it® Cash Back offer 5% cash back on up to $1,500 in purchases in various categories that rotate each quarter, once you activate. Plan your spending in advance to leverage these rotating categories optimally.
Remain Alert on Loyalty Program Partnerships: Many credit cards and airlines have partnerships with other brands. This can mean increased rewards when shopping with those brands, so always watch for new partnerships or promotions.
Revisiting Annual Fees: If your credit card perks no longer justify its annual fee due to changes in lifestyle or spending habits, consider downgrading to a no-fee card from the same issuer. This way, you can save on annual fees without closing your account which could potentially harm your credit score.
Diversify Your Rewards: While it may be tempting to concentrate all your spending on a single card, diversifying your rewards can make you earn more. Consider employing a multi-card system to maximize rewards across different spending categories.
Your credit card should be a tool to enhance your financial flexibility, not a burden that leads to financial stress.
Frequently Asked Questions (FAQs)
Deciding whether to focus on paying off a single card or distributing payments over several cards can seem complicated, but there are a couple of methodologies to strategize your payoff.
The Debt Avalanche method suggests focusing on the card with the highest interest rate first. Once you’ve paid this card off in its entirety, you then move on to the card with the next highest interest rate. This can potentially save you more money in the long term as it targets high-interest debt first.
Alternatively, the Debt Snowball method, proposed by financial guru Dave Ramsey, recommends paying off the card with the smallest balance first, then moving on to the card with the second-smallest balance. While you may not save as much money in interest compared to the debt avalanche method, the psychological motivation of paying off a credit card balance entirely may be more important for maintaining consistent repayment.
Either method requires you to make minimum payments promptly on all cards to avoid late fees and possible credit score damage.
Getting credit card points without spending any additional money may seem like wishful thinking, but there are certain strategies that you can employ to achieve this. Strategically managing your credit cards can turn your everyday spending into reward points, miles, or cash back.
Referral Bonuses: Many credit card companies offer referral bonuses to their existing cardholders who refer friends or family members. If the person you referred gets approved for the card, you can earn bonus points.
Cardholder Perks: Credit card companies often run promotions offering bonus points for certain activities. These can range from enrolling in paperless billing, adding authorized users to your account, or completing an online financial education course. Check with your card issuer to view any current promotions.
Shopping Portals: Many credit card issuers, and even airline and hotel rewards programs, have their own online shopping portals where you can earn additional bonus points for every dollar spent. If you were already planning on making an online purchase, consider making it through these portals to earn extra rewards.
Sign-up Bonuses: Some cards offer sizeable sign-up bonuses for new cardholders who meet a required minimum spend within the first few months. Although this technically requires spending money, it doesn’t require spending more money if you use your card for purchases you were already planning to make.
While implementing certain credit card strategies can potentially earn you higher rewards or save money, they can also unintentionally harm your credit score if not executed responsibly.
Several factors can contribute to this potential downfall:
Opening and Closing Accounts: A high frequency of card applications can lead to multiple hard inquiries on your credit report, which might lower your score in the short term. Closing credit cards, especially older ones, can affect both your credit utilization ratio and the age of your credit history, two significant factors in your credit score calculation.
Carrying a Balance: Maintaining a high credit utilization ratio—i.e., carrying a large balance relative to your credit limit—can negatively impact your credit score.
Late Payments: If these deadlines are not strictly adhered to, they could result in late payments, which can seriously harm your credit score.
Excessive Spending: Some tactics lead to unnecessary spending to earn more reward points or meet an initial spend required for a sign-up bonus. Not only can this increase your credit utilization ratio and potentially lower your credit score, it can lead to debt if these balances are not paid off in time.
While both rewards cards and travel rewards cards offer perks to their users in return for spending, the primary difference lies in the kind of rewards they offer and their target user base.
A Rewards Card generally offers cash back, points, or miles for every dollar spent, redeemable in a variety of ways. This is the type of card I prefer. For example, you may redeem your accumulated rewards as cash back into your account, use them to purchase products or services, or exchange them for gift cards. The flexibility of rewards makes these cards are suitable for people with varied spending habits and prefer a variety of redemption options.
A Travel Rewards Card, on the other hand, is designed specifically for frequent travelers. These cards earn you points or miles on specific travel-related expenses, like booking flights or hotel stays. The redeemed rewards are typically used towards further travel-related expenses like airfare, hotel stays, or car rentals. Travel Rewards Cards often offer additional travel-centric perks like free checked bags, priority boarding, airport lounge access, and more.
Consider your spending habits, lifestyle, travel frequency, and preference in terms of reward redemption.
Protecting yourself from credit card fraud is an important aspect of managing your credit card usage effectively.
Monitor Your Accounts Regularly: Keep a thorough watch on your credit card statements for any unauthorized or suspicious charges. Report them to your credit card issuer as soon as possible.
Use Secure Networks: When making online purchases, only shop on secure websites (look for “https” in the web address), and avoid using public Wi-Fi networks for transactions.
Keep Your Personal Information Safe: It’s important to dispose of old credit card statements properly, and avoid giving out credit card information over the phone unless you initiated the call and you trust the recipient.
Protect Your PIN and Password: Don’t share these with anyone, and avoid using easily guessable combinations like birth dates or the last four digits of your social security number.
Enable Account Alerts: Most banks now offer optional security alerts that can be sent via text message or email whenever a charge above a certain amount gets made to your account.
Protect Your Computer and Phone: Make sure your devices are equipped with up-to-date antivirus software and that your phone is locked with a secure password or fingerprint identification.
In case you become a victim of credit card fraud, know the steps to protect yourself – report it to your bank or credit card company immediately, file a report with the Federal Trade Commission, and report it to the three major credit bureaus, requesting them to put a fraud alert or a credit freeze on your account.
Also remember, credit cards don’t have routing numbers.
Making the Most of Credit Card Hacking
When used wisely, credit card hacks and reward strategies can play a significant role in stretching your budget and rewarding your spending. These secrets of savvy credit card use — from aligning your card to your spending habits, making the most of sign-up bonuses and reward categories, to understanding the ins and outs of your credit card’s rewards structure — can help maximize your potential rewards and save money.
Personally, we use all of our credit card rewards to pay for our travel expenses.
However, it’s paramount to remember that these tips and tactics should not encourage unnecessary spending or carrying a balance. Only spend within your means, ensure you pay off your balances each month to avoid interest charges and remember to safeguard your credit score by handling credit card applications and closures cautiously.
Ultimately, credit card hacks and rewards should fit within your overall financial plan and goals, adding value to your everyday spending habits and rewarding you for well-managed financial practices.
Remember your goal is to reach your FI number.
Source
Reddit. “American Express Clawing Back Points Earned From Gift Card Purchases.” https://www.reddit.com/r/AmexPlatinum/comments/14hywaq/american_express_clawing_back_points_earned_from/. Accessed January 19, 2024.
CNN. “What is the Chase 5/24 rule?” https://www.cnn.com/cnn-underscored/money/chase-5-24-rule#:~:text=The%205%2F24%20rule%20is,your%20approval%20odds%20with%20Chase. Accessed January 19, 2024.
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