Everybody approaches money in their own way. Some watch every account like a hawk, others hand the reins to a professional and trust that everything is fine. Most people fall somewhere in between.
Regardless of which side of the spectrum you currently occupy, here are a few small changes everyone can make to position your accounts for as much success as possible.
1. Automate
Perhaps the biggest way to impact your finances is to automate as much as possible. Have your paycheck deposited directly. Set up “triggers” in your bank account so that the moment your paycheck posts, predetermined amounts are sent to various accounts such as student loan repayment, mortgage, investments, savings, and others.
Automation takes the stress out of money. The decision on how to spend every penny is made when you are in a good frame of mind and thoughtful about your goals. It prevents you from having to worry about whether you paid the mortgage or sent the monthly car payment. When financial stress no longer takes up space in your mind, you are free to focus on more important matters.
2. Refinance
There are several approaches for paying down debt, as we have written about here. You should take your entire financial picture into account before you decide on the best path to pay down debt. But no matter what path you choose, it is wise to refinance student loans and mortgage payments whenever possible in order to save on both monthly and total repayment costs.
For example, when it comes to student loans, many of you will have the Federal Loan Forgiveness Program as an option if you work at a non-profit, though working at a non-profit doesn’t mean the program is automatically right for you.
As of the writing of this post, interest rates are very low and several companies (SoFi, Meet Earnest, Common Bond, and DRB to name a few) are offering low fixed and variable-rate loans for those willing to refinance.
Those who are not yet clients at our firm are eligible to receive a .25% interest rate discount from SoFi when you sign on as a client. To learn more, click here.
3. Spend Mindfully
Do you ever spend an hour or more scrolling through screen after screen on your phone without really looking at anything? That’s what some refer to as mindlessness: activities performed without intention or thought. Mindless spending works the same way.
It is easier than ever to spend money. Credit card information is stored on every device so that when you happen to see a product you want - even if you never knew it existed before that moment - you can tap a screen and it will be at your door the next day.
This modern convenience is fun, but it can be financially destructive if we don’t keep it in check.
Mindful spending is when we apply intention and thought to every purchase. It pays no attention to impulses or cravings, but it keeps your spending firmly between the predetermined boundaries set by your budget or a strong financial plan. Read more here about how financial planning is a form of impulse management.
4. Maximize contributions
Have you seen The Marshmallow Test? A researcher brings a child into a room and sits them at a table where one giant marshmallow sits on a paper plate. The researcher says they’re going to leave the room and the child is welcome to eat the marshmallow, or they can wait for the researcher to return at which point the child will get two marshmallows.
Some kids eat the marshmallow the second the researcher walks out. Some hold off for a little while but eventually give in. And a few waited the entire time and got an extra marshmallow when the researcher returned.
Contributing to investment accounts is basically the same thing. It’s tempting to contribute only a little and hold onto your cash for immediate use. But delayed gratification is a beneficial trait when it comes to investing. You can buy something now with your cash, or you can put it in an investment account and at some point down the road your one dollar will grow into many. The more you put in, the more it grows, so make sure you are making maximum contributions to your accounts.
The contribution limits for most investment and retirement accounts increase every year by at least a small percentage. In 2019, however, some limits increased more than expected. See a list of notable contribution limit increases for 2019 here.
5. Use Rewards Cards or Cash Back Systems
Credit cards can be financially harmful when they’re not used well. But with a little discipline and mindful spending, you can leverage them in your favor. As we wrote here, there are plenty of credit card companies whose cash back or rewards programs are quite advantageous. Use credit cards to cover purchases or expenses you plan to make anyway, and the rewards benefits can cover a multitude of future costs as well.
In some cases, points can convert into cash, but before you use your points to pay your credit card bill, know that those points may be worth far more when paying for flights or some other specific expense category. What would normally be an extra $1,200 from the conversion of your points into cash, can easily turn into a $4,000 value if used strategically.
Credit cards can also be used to boost your credit rating. Again, when used strategically, factors like your credit utilization ratio can drastically improve.
Don’t be afraid of credit cards, but do use them wisely.
LAY A SOLID FOUNDATION
Finances can become overwhelming when there is no plan, structure, or purpose. It is especially complicated by the ever-changing forces in your world: new jobs, economic instability, major life events, and more.
Good financial planning provides a solid foundation so that when those major shifts occur, you only need to make a slight course correction rather than overhaul the entire system.
The five practices above are a great start to that foundation. Put them into practice, because great financial planning can make all the difference.
