Most everyone wants to have enough money to feel financially secure. But, achieving financial goals can mean different things to different people—depending on where they are in life or their careers. Whether you’re graduating from college, beginning a new job, starting a family or buying a home, there are some smart financial strategies that could help with attaining those big goals.
So, what are financial strategies anyway? A smart financial strategy is a way to improve financial health and become more economically stable. In practice, this could mean reducing existing debts, saving up more money, spending wisely, or investing for the future.
It can be easy to get overwhelmed by the numbers and complexities of personal finances. Below is an overview of smart personal financial strategies that could help individuals to get closer to achieving their short-term and long-term money goals.
Smart Financial Strategies to Aim For
Build and Maintain an Emergency Fund
When faced with an unexpected big expense or being laid off, it can be helpful to have saved up an emergency fund—a cash reserve that is only tapped, well, in case of an emergency.
Starting an emergency fund might cover common expenses for anywhere from three to twelve months. So, if a person normally spends $3,000 per month, then they could strive to set aside $9,000 to $36,000 in their emergency fund. Naturally, this amount will vary based on individuals’ unique financial situations and income vs. expenses.
Now, if that dollar amount sounds a little daunting, it’s always possible to start smaller—setting aside a fifty or one hundred dollars a month. With some money management accounts, users can even automatically transfer a set amount to a vault one a specific date each month (e.g., payday). Over the course of a year, that bit-by-bit approach to saving money can add up to a much larger sum.
Once a person has tackled high-interest debts, they may have more income available to squirrel away towards their emergency fund.
To stay on track with saving for an emergency or unexpected expense, individuals may want to set up an automatic transfer from their main money account to a savings or vault. People could pre-schedule automatic transfers for the time of the month when they have more disposable cash in their accounts—when they’re paid or just after paying for necessary monthly costs, like rent or a car lease.
Some savers prefer to host their emergency fund in a high-yield savings account, which over time would accrue larger amounts of interest. This can add extra dollars to the account with time, assuming the individual doesn’t need to tap into what’s been saved.
Ready for a Better Banking Experience?
Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!
Paying Off Debt
Debt can be a budget killer. With high interest rates and fine-print fees, individuals can end up paying significantly more than an initial charge on outstanding recurring debts, whether student loans or credit cards.
Private student loans can come with variable rates, going as high as 12.99%—depending on the lender. Fixed-rate private student loans may charge up to 14.5% When it comes to credit cards, the average interest rate is 14.58% for existing accounts and 17.87% for new accounts . If a person gets charged hundreds or even thousands of dollars in interest per month on existing debts, it could take longer to pay off the initial borrowed amount.
In terms of adopting smart strategies that can lead to greater financial independence, a good place to start is by paying off high-interest debts as quickly as possible. Two popular debt-repayment approaches are called the snowball method and avalanche approach.
With the snowball method, you pay down your smallest debts first—no matter what the interest rate is. Once that smallest debt is paid off, you could then apply that payment amount towards the next debt, and so on.
For instance, if a person pays $150 a month to one debt, they could continue paying that sum to their next smallest debt after the first one has been paid down. At the same time, you’ll make minimum payments on all other debts to keep the payment history intact. Over time, the additional payments “snowball”—building up to less overall debt.
And, with the avalanche method, a person opts to pay off the debt with the highest interest rate first. Once the highest debt gets paid off, they’ll then roll the regular payments on that now-cleared debt into their next highest debt, all while paying the minimums on other debts at the same time.
While the avalanche method may make more sense mathematically, the snowball method can be more psychologically motivating. The snowball approach can keep some people motivated, since they’ll see quicker progress towards paying down one of their high-interest debts.
However, if a person can commit to the avalanche method, they may end up saving more in total interest paid than with the snowball financial strategy.
Using Credit Cards Wisely
Credit card debt can land cardholders in financial hot water. However, using credit cards judiciously can come with certain benefits (assuming the cardholder regularly pays down what they buy).
Many credit cards give rewards in return for account holders spending money when shopping. For instance, a user may be able to get 1% to 5% back on grocery store purchases. With some cards, it’s possible to earn points that can be used toward discretionary expenses like travel, eating out, hotels, and more.
Generally, credit cards offer fraud protection, which means that if a card gets stolen (or their account gets hacked), fraudulent charges are not paid by the cardholder—unlike, say, with cash.
When it comes to healthy financial strategies, it’s also possible to use your credit cards to build up one’s credit score. One factor that lenders might consider is a loan applicant’s credit history (including the number of active accounts open and their debt-to-income ratio).†
Smart financial strategies for credit cards include paying off the entire bill on time and keeping old lines of credit open so the account holder’s credit history is longer. Also, it’s advisable to aim for a lower credit utilization ratio—which is how much debt a person has in relation to how much credit is available. A credit utilization rate below 30% is, generally, considered “good.”
Another one of the smart financial strategies is to use credit cards for 0% interest balance transfers. If someone has a credit card with a high-interest rate, they could apply for a balance transfer credit card, pay a fee to transfer over their card’s balance, and then get more time to pay down the existing debt interest-free.
Some cards offer up to 18 months interest-free. However, it can be smart to pay off the transferred debt before the end of the agreed-to 0% interest period. Otherwise, a higher interest rate will kick in on whatever has not been paid off. In some cases, the interest after the zero-interest period could be higher than what was paid on the original card.
Budgeting Incoming and Outgoing Money
Budgeting is a classic way to keep tabs on how much money is coming in and how much is being spent each month. If a person is not yet budgeting for their expenses, whether essential or discretionary, it can be one of the simplest ways to track money. When adopting financial strategies for budgeting, a good place to start with the 50/30/20 rule.
With this budgeting rule, a person spends 50% on needs, 30% on wants and 20% on savings. Needs include housing, utility bills, car payments and debts. Wants span entertainment, new gadgets and fun. Savings could include an emergency fund, retirement account and investments.
Budgeting can be made easier with Google Sheets or Excel, or by using an app like You Need a Budget or money management account that comes with budget tracking tools, like SoFi Checking and Savings®. Digital personal finance apps can be easy to use, because they can connect directly to cash or bank accounts, giving users insights on spending patterns and money habits.
Considering Reducing Monthly Expenses
After tracking their monthly expenses, some people like to see where they can trim and tighten their spending. Some pricey expenses that could be pared down include:
Housing Costs
If rent is gobbling up a huge amount of income each month, moving to a less expensive place or area could help with cutting back on spending. If an individual ends up moving to a more economical city or town, it’s likely that local housing costs, groceries, and the general amount it takes to cover day-to-day living expenses will go down as well.
Transportation
In terms of transportation, drivers could try to get out of an expensive lease and purchase or lease a less expensive vehicle. Alternately, a person could utilize public transit or carpool with colleagues to save on gas. One good financial strategy is to shop around for lower car insurance rates.
Pricey Cable Plans
If a person spends a significant amount each month on non-essential items or services, they may want to try to reduce their discretionary costs, too. For instance, instead of paying an expensive cable bill every month, one could only pay for Hulu and Netflix. Many internet providers run promotions, so it may be worth thinking about switching to a less expensive provider.
Eating Out vs. Cooking at Home
In lieu of eating out every day, budget-minded individuals could cook at home. Buying ingredients is, generally, much less expensive than dining in a restaurant or picking up take-out. And, if cooking is intimidating, perhaps invest in a pressure or slow cooker to ease into cooking at home.
Shopping Online
Online shopping can tempt many to spend unnecessarily. It’s just so darned easy to click-to-buy when a credit card is saved online. So, some savings seekers opt to delete their credit card details from their favorite online shops.
This adds one extra step (digging the card out of the wallet) before being able to purchase. Those added seconds can give shopping lovers a second chance to decide whether the item in their cart is really essential. Some people also like to sign up for services, like Honey, which automatically search the web for promo codes and online coupons at checkout.
Negotiating Better Deals
If you don’t have time to call up your providers and search for better deals, apps like Trim can analyze an individual’s spending patterns, negotiating internet, cable, phone and medical bills while canceling older subscriptions. Users pay a fee for this service, but it could end up saving dollars that would otherwise get spent unknowingly.
Opening a Retirement Fund
When it comes time to retire, money will be needed to pay for everyday life. That’s why it’s a good financial strategy to start a retirement fund as soon as a person starts working. There are many different types of retirement accounts to choose from, including a Roth IRA (which individuals can open on their own and contribute to with after-tax money), a 401(k) (which is a plan through an employer, and a traditional IRA (which people open on their own and gets taxed upon withdrawal).
If an employer offers retirement fund matching, take advantage of it! Matching entails putting a percentage of a paycheck automatically into one’s retirement. The employer then matches that deposit with the same amount. Employer matching can speed along an individual’s path towards saving for retirement.
In terms of how much to save for retirement, it can be smart to put aside at least 15% of pre-tax income every single year. Doing so can help individuals later on in their life to avoid needing to delay retirement because not enough had been saved prior.
Searching for Low Interest Rates on Loans
Big expenses—going to college, purchasing a car, buying a home, repairing a house, or moving—can come with a big price tag. So, many individuals seek out loans to cover these big-ticket items. When taking out a loan, some smart financial strategies include shopping around and comparing interest rates—looking for the lowest interest rate possible.
As with any debt, it’s essential to pay back the loan on time every month to avoid late payment fees or dings to one’s credit history. For some, it may also be possible to refinance a loan and secure a lower interest rate.
Getting Started with Investing
For those stashing money in a traditional savings account, it’s likely that the money is earning very little interest. As a result, some individuals choose to invest their money with the hopes of earning a higher return over time.
Investing is one the financial strategies, however, that can come with higher risks. Few investments, including those in the volatile stock market, are guaranteed to make a return. For instance, investing in stocks can bear higher returns but stocks can also plunge in value. Indeed, some investments are riskier than others.
Speaking with a financial advisor can help many to understand the pros and cons of investing and whether it’s the right choice for them.
Here’s an overview of common kinds of investments:
Investing in the stock market
While investing money in the stock market can result in a higher return, it’s not guaranteed. It can be safer to invest in already profitable companies that pay out dividends, which distribute some of a company’s earnings to investors. However, more seasoned investors may choose to take on more risks, investing in start-ups or lesser known companies.
Micro-investments
Should a person want to purchase stocks that are more expensive, like Amazon or Apple®, but can’t afford buying an entire share, it’s possible to complete a micro investment. Micro investments are fractions of stocks and a good way to get in on the market without taking too big of a risk.
Mutual funds
Mutual funds are diverse investments; rather than investing in one stock, an investor is putting their money into a collection of them. The fund has a manager who decides what they’ll do with the money. Typically, investors are charged a fee to invest in these funds.
Investment bonds
Investment bonds, which are loans made to a company or government, are significantly less risky than stocks. But, it’s worth remembering that lower risk also typically comes with a lower return. Many people get US Treasury Savings Bonds when they’re children and cash them in at a later date.
High-interest savings accounts
Some high-interest savings accounts offer around 0.45-0.70% interest on deposited funds—higher than the average of 0.05%. There’s no risk of lost saving, as long as account holders stay below the FDIC-insured limit of $250,000. Interest rates on savings accounts could vary, however.
Whichever method gets chosen, there are investment brokers and financial advisors who can offer guidance on how to utilize income and savings.
The Takeaway
Keeping tabs on income, expenses, savings and investments is one smart financial strategy. With so much to track when it comes to personal finances, novel budgeting tools could help users to develop smarter financial habits and trim back on unnecessary spending.
Opening an online bank account with SoFi lets you save, spend, and earn 4.20% APY. Members also get access to complimentary benefits, like spending reports and financial planning.
Curious about keeping tabs on your income and expenses? Organize finances and save for financial goals with SoFi Checking and Savings.
†Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
SOMN20067
