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A centuries-old proverb often attributed to Ben Franklin emphasizes that going to sleep early and waking up early can make a person "healthy, wealthy and wise." A modern twist on that phrase could be that being wise about your money might lead to good health and great wealth.
It may not be easy to achieve great wealth, but sound financial health definitely isn't out of reach. Here are seven key tips for pursuing financial success.
1. Save Automatically
Following the often-repeated advice to "pay yourself first," one of the moves that can put you on the path toward financial success is to automate your savings. How? The most direct route involves automatically shifting a portion of each paycheck to one or more savings or investment accounts.
With automated savings, you don't need to constantly remember to allocate a percentage of each paycheck for savings or retirement. In addition to helping you build savings for your financial goals, automating the process makes budgeting easier.
2. Invest in a Workplace Retirement Plan
Another route to financial success is investing in an employer-sponsored retirement plan such as a 401(k), 403(b) or 457(b).
If you enroll in one of these plans at work, you'll not only automatically put money aside for retirement, but you'll also enjoy tax advantages. Contributions to a 401(k) 403(b) come out of your paycheck before income taxes are paid, decreasing your amount of taxable income. The contributions and earnings in one of these plans normally aren't taxed until you withdraw money, which typically happens after you retire.
Workplace retirement plans become even more attractive when your employer matches some of all of your contributions. That kind of "free" money isn't found in many places, and makes investing in one of these accounts a wise financial move.
Generally, experts recommend stashing at least 15% of your pretax income in a retirement account.
3. Create an Emergency Fund
Part of your savings plan should include an emergency fund.
Some experts advise earmarking 5% of your take-home pay for an emergency fund to pay for surprise expenses, such as car repairs or a hospital stay. Generally, an emergency fund should contain enough money to cover three to six months' worth of everyday expenses. Keeping your emergency savings separate from other money helps reduce the temptation to spend it.
The cash in your emergency fund should be easily accessible. In other words, you might not want to keep your emergency money in an investment account or someplace where you'd be penalized for an early withdrawal, such as a certificate of deposit (CD) or individual retirement account (IRA). Consider stashing your emergency savings in a high-yield savings account or money market account that earns higher interest than a basic savings account.
4. Stick to a Budget
To stick to a budget, you first must create a budget. But establishing a budget often is easier than following it.
To create a budget, track your monthly income and spending. You can do this with the free income tracker, spending tracker and budget tool from the Consumer Financial Protection Bureau (CFPB). Or you can monitor your spending and income with a spreadsheet or a budgeting app.
Whatever budget-setting method you pick, be sure to stick to your budget. But how do you do that? Here are tips for staying on track with your budget:
- Frequently review your budget, perhaps every day.
- Resist impulse purchases like new shoes or the latest electronic gadget. Plan to make purchases only when your budget allows or you save for them.
- Delay big purchases. Take time to weigh the pros and cons of a major purchase. Doing so might lead you to the conclusion that you can't afford that new car or TV.
- Limit how much you spend on groceries and other household basics.
- Resist the temptation to use credit cards for splurges.
- Look for ways to cut costs. For instance, consider the number of streaming services you're paying for. Do you really need all of them?
- Enlist an accountability partner or group. This is someone you trust, such as a parent or sibling, or a group of people, who can act as budgeting cheerleaders.
- Automate monthly bill payments so you never miss a payment and simplify your budgeting.
5. Pay Off Credit Cards
If you don't pay off your full credit card balances each month, you could be racking up hundreds or even thousands of dollars in interest charges.
As of August 2022, the average interest rate on credit cards that charge interest was 18.43%, according to the Federal Reserve. From 2018 to 2020, Americans paid $120 billion in credit card interest and fees, working out to about $1,000 per household, the CFPB says.
To avoid credit card interest and fees, you should pay off each credit card balance in full every month or make purchases only with cash. If you're trying to pay down your card balances, use a plan such as the debt avalanche method or debt snowball method to help you organize and stick to a payoff plan.
6. Avoid High-Interest Loans
Payday loans and car title loans are among the loans that hit consumers with extremely high interest rates.
A payday loan generally is a short-term loan for up to $500. According to the CFPB, a typical two-week payday loan with a fee of $15 for each $100 borrowed equates to an annual percentage rate (APR) of nearly 400%, which is well above the normal APR for a credit card or loan.
Similarly, a car title loan is a short-term loan that usually must be prepaid within 15 to 30 days. To borrow money through one of these loans, you hand over your vehicle title to the lender. You also must pay a fee. The typical monthly finance fee of 25% translates to an APR of about 300%, according to the Federal Trade Commission.
If you must borrow money, search for a lower-interest loan or use a lower-interest credit card instead of turning to a payday loan or title loan.
7. Pay Bills on Time
Paying your bills on time (particularly credit card bills) can help you steer clear of late fees and can help boost your credit score. A higher credit score can pave the way for better lending options, such as lower interest rates.
Payment history is the most important factor in your credit score, making up 35% of your FICO® Score☉ , the credit score used by 90% of top lenders.
To ensure you make timely bill payments, consider setting up automatic bill pay or activating payment reminders.
The Bottom Line
From automatically saving money to paying your bills on time, you can make a number of moves right now to achieve financial success. As part of your financial success plan, consider regularly checking your free Experian credit report and free Experian credit score.