Do you find yourself crossing off each passing date on the calendar with increasing dread as you realize how far you still have to go to meet your savings goals? Did this entire year throw you entirely off your financial game plan?
Well, make room in that boat of yours, because we’re in it with you.
Luckily, there’s no time like the New Year to make meaningful steps towards financial well-being. Follow these three simple tips for a more fiscally-sound future.
#1 Save More Without Spending More
Oftentimes, we spend more money when we earn more money—it’s basic human nature. After all, what’s the point of working hard for that paycheck if you never spend it on anything?
Remember: financial well-being is a marathon, not a sprint.
Start growing your financial assets by following a few simple saving (rather than spending) tips:
- Live on a fixed budget – Just because your monthly paycheck is growing doesn’t mean your monthly expenses should, too. If you increase your income and expenditure at the same rate, you’ll never amass meaningful savings. Instead, set a fixed budget to live on, and save the rest.
- Automated savings deduction – Set up a high-yield savings account that automatically transfers a certain percentage of each paycheck into your savings. You’ll hardly even notice it’s gone, and you’ll definitely be thankful for it when you remember it exists.
- Impose a savings threshold before spending – Give yourself a number that you have to reach before spending money on anything big. This way, you’ll know you can afford this big purchase (a car, a vacation, the down payment on a home mortgage) while still having enough in the bank in case of an emergency.
The bottom line: Don’t deprive yourself by squirreling absolutely all of your money away for a rainy day but avoid frivolous spending just because you “have the money.”
#2 Claim Tax Allowances Wisely
Tax season is confusing enough already without all the financial decisions that need to be made. Not only do you have to determine how many allowances you can claim, but you should start considering how many you should claim.
Remember: the allowances you claim will significantly impact how much and especially when you pay the government.
There are two potential outcomes based on the way you fill out your W-4 and, particularly, Section 5, which asks for the total number of allowances you are claiming:
- You claim the maximum number of allowances and receive a sizable tax return later on. Getting a large deposit from the government feels great, but this may not be the best decision for you. By deducting more taxes off each paycheck, the government is essentially borrowing your money interest-free.
- Alternatively, you could claim fewer or no allowances and receive the additional money spread out across each paycheck. On one hand, you’ll have a little extra cash in the bank each month to put towards bills, rent, and necessary expenses, but on the other, you may struggle to pay back such a hefty tax bill come April.
The bottom line: For most people, the best choice is to withhold as close to the amount you’ll end up owing as possible. You might receive a small return, or owe a menial amount, but you’ll maximize your income each month without overpaying your taxes (because the government should be lending you money, not the other way around).
#3 Pay Down Debt in a Way That Works for You
When a huge percentage of each monthly paycheck is going towards debt payments, how do you ever save up for anything else?
Remember: “work smarter, not harder” can apply to paying off debt, too.
Create a solid debt plan by choosing the method that works best for you:
- The snowball method – Pay off your debts by starting with the smallest balances first. You’ll make consistent progress towards a debt-free lifestyle by completely freeing yourself from certain debts on a shorter timeline. You will, however, pay slightly more in interest by the time you pay off your largest debts.
- The avalanche method – In the exact opposite fashion, pay off your largest debts first. This will save you more money in interest payments over time and you’ll pay off those large debts faster, but it may be disheartening not to see any real progress for the first several months.
The bottom line: The avalanche method is the mathematically smarter choice but won’t work if you become discouraged staring at the massive mountain of debt you have to climb. The snowball method, on the other hand, provides regular incentives and builds motivation.
They Call It “Savings” For a Reason
Improving your financial well-being can take time, patience, and years’ worth of savings. But if you limit your spending, capitalize on your tax returns, and focus on paying off debt, you can be on the right track before the New Year even hits.
Remember: Rome wasn’t built in a day—your financial nest egg won’t be, either.