Do you want your money to earn you more money?

Well, it can’t do its work hiding in a bank account.

Whether you want to save for your child’s college or prepare for retirement, you’ll reach your goal faster by investing.

Here’s everything you need to know to get started today.

What Is Investing?

When you invest, you purchase something with the expectation of profiting off of it in the future.

In the 1990s, some people thought they were making smart “investments” in Beanie Babies and McDonald’s toys. But traditional investments include things like ownership in a business, real estate assets, or lending money to a person or company in exchange for interest payments.

Why Should I Invest?

Merely saving money isn’t enough to build wealth. A bank will keep your money safe. But, each year, inflation makes every dollar you’ve tucked away slightly less valuable. So, a dollar you put in the bank today is worth just a little less tomorrow.

Comparatively, when you invest, your dollars are working to earn you more dollars. And those new dollars work to earn you even more dollars. The snowballing force of growth is known as compound growth.

Over the long term, investing allows your assets to grow over and above the rate of inflation. Your past savings build on themselves, instead of declining in value as the years pass. This makes it significantly easier to save for long-term goals like retirement.

Related: 15 Expert Tips for Beating Inflation 

When Should I Start Investing?

Yesterday. But if you haven’t started yet, today is a great second choice.

In general, you want to start investing as soon as you have a solid financial base in place. This includes having no high-interest debt, an emergency fund in place, and a goal for your investments in mind. Doing so allows you to leave your money invested for the long-term – key for maximum growth – and be confident in your investment choices through the natural ups and downs of the market.

Benefits of starting young

Compound growth requires time. The earlier you start investing, the more wealth you can create with fewer dollars.

When it comes to investing, time is your most powerful tool. The longer your money is invested, the longer it has to work to create more money and take advantage of compound growth. It also makes it far less likely that one harsh market downturn will negatively impact your wealth as you’ll have time to leave the money invested and recover its value.

Let’s look at an example:

Since 1928, the average return of the S&P 500 (a set of 500 of the largest public companies in the U.S. that is often used to approximate the stock market) is about 10%.

So, let’s say you’re 25 and put $5,000 in the S&P 500. You see a 10% increase in value each year, letting your money continue to grow. When you turn 65, you open your account to find you have over $226,000. An excellent retirement gift to yourself!

However, if you waited until you were 35 to start investing, your value at 65 would only be $87,000. Still impressive, but fewer than half of what you would have had if you started a decade earlier.

Pay off high-interest debt first

View paying down high-interest debt as investing until you no longer have those debts. Every dollar toward principal earns you an instant return by eliminating future interest cost.

If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.

Focus on getting out of debt as fast as you can, then dive into investing.

Have an emergency fund in place

To reduce the risk of having to pull money out of your investments early, have an emergency fund to protect from life’s unexpected twists and turns.

Remember how we said time is the most powerful tool? To start investing, you have to be set up to let that money stay invested. Otherwise, you limit your time horizon and could force yourself to withdraw your money at the wrong time.

To protect yourself from unexpected expenses or job layoffs, save a sufficient emergency fund for your needs. Do not plan for your investment accounts to be a regular source of cash.

Starting small is OK

Sometimes people think they can’t start investing until they have a significant amount of money. But this means many people give up years of compound growth waiting until they feel rich enough. No matter how small, get your money working for you as soon as possible.

Consider our previous example of the $5,000 invested at 25- or 35-years-old. Pretend for a moment the 35-year-old didn’t have $5,000 to invest at age 25, but she did have $500. And she thought, maybe, she could scrape together $50 a month to add to her $500 investment.

If she invested $500 at age 25, and then $50 a month until she had put away a total of $5,000, she would have almost $174,000 at retirement age. That is double what she would have had if she waited until she had $5,000 at age 35.

Starting small makes a significant difference, especially if it means you get in the market sooner.

Investing 101: Basic Investing Terms

The number one thing that scares off new investors is the jargon. The investment market has a ton of jargon. So, we’re going to give you the inside scoop to make it less intimidating.

What is a stock?

A stock, also known as a “share,” is a tiny ownership stake in a business. Public companies allow anyone to buy or sell ownership shares of their business on exchanges.

If you own a stock, you are actually a part owner of the company. Go you! While owning a share of Walmart won’t give you the power to fire the slow cashier at your local store, you do have some rights. You can, for instance, vote on members of the Board of Directors.

What is a bond?

A bond is debt of a corporation, municipality, or country.

By purchasing a bond, you are loaning money to one of these entities. For companies, bonds are typically segmented into $1,000 increments that pay interest every six months, with the full value paid back at “maturity,” i.e., the date the debt is due. Government bonds are typically known as “treasuries.”

What is a portfolio?

A portfolio is a collection of all your investments held by a particular broker or investment provider. You may own some individual stocks, bonds, or ETFs. Everything in your account would be your portfolio.

However, your portfolio can also mean all your investments across all account types, as this gives a better picture of your entire exposure.

What does diversification mean?

Just like you wouldn’t invest all your money in your friend’s idea for a pumpkin-spiced toothpaste business, you don’t want to only invest in one stock or bond. Diversification means owning a variety of different investments, so your success or failure isn’t dependent on just one thing.

To be properly diversified, you want to make sure your investments actually have variety. Owning three different clothing companies still means you’re facing all the same risks. An import tax on cotton products, for example, could crush the value of all three companies at once.

What is asset allocation?

There are three main asset classes for most investors: stocks, bonds, and cash. Asset allocation is how you split your investments across those three buckets.

Stocks offer greater long-term returns, but significantly greater swings in value. These swings, sometimes north of 20% up or down in a given year, can be a lot to stomach. Bonds are safer but provide lower returns in exchange for that security.

You determine your asset allocation by considering the length of time until you need your money, your risk tolerance, and goals.

What are ETFs?

ETFs, or exchange-traded funds, allow you to buy small pieces of many investments in one security.

An ETF is a fund that holds numerous stocks, bonds, or commodities. The fund is then divided into shares which are sold to investors in the public market.

ETFs are an attractive investment option because they offer low fees, instant diversification, and have the liquidity of a stock (they are easy to buy and sell fast). Buying a stock or bond ETF gives you access to numerous investments, all held within that ETF.

Stock funds

A stock ETF often tracks an index, such as the S&P 500. When you buy a stock ETF, you are purchasing a full portfolio of tiny pieces of all the stocks in the index, weighted for their size in that index.

For instance, if you purchased an S&P 500 ETF, you are only buying one “thing”. However, that ETF owns stock of all 500 companies in the S&P, meaning you effectively own small pieces of all 500 companies. Your investment would grow, or decline, with the S&P, and you would earn dividends based on your share of the dividend payouts from all 500 companies.

Bond funds

A bond ETF owns a basket of bonds, often tracking an index, just like the stock ETFs.

These funds could own a mixture of government bonds, high-rated corporate bonds, and foreign bonds. The most significant difference between holding an individual bond and a bond ETF is when you are paid interest. Bonds only make interest payments every six months. Bond ETFs make payments every month, as all the bonds the fund owns may pay interest at different times of the year.

Types of Investment Accounts

If you’re ready to buy stocks, bonds, or ETFs, you may be wondering where these types of investments are held.

There are a few different types of accounts in which you can hold investments. But they can’t live in your standard bank account. Here are your options.

Retirement accounts

Saving for retirement is most people’s biggest long-term goal. With the average person retiring at 62, either by choice or due to layoffs and health issues, most Americans face 20 years or more of retirement in which they need assets to support themselves.

To help you prepare for this massive goal, the government offers tax incentives. However, if you invest in these accounts, your access to your funds is limited until 59 ½. In some cases, there are penalties for withdrawing your money earlier.

Here are the type of accounts that offer tax savings.

Employer-sponsored accounts

Employer-sponsored retirement accounts such as 401(K)s, 403(B)s, 457s, and more, allow employees to save for retirement directly from their paycheck. Some employers offer contribution matches as a perk to double-down on your retirement preparation.

Typically, you put “pre-tax” money into these accounts, which means you don’t pay income tax on those dollars. Any money invested grows without tax until you ultimately withdraw it for living expenses in retirement. As you withdraw funds, you will pay income tax on the withdrawals. However, most people are in a lower tax bracket in retirement so pay lower rates.

As of 2020, you can contribute up to $19,500 in a given year to one of these accounts, not including any employer contribution. If you are 50 years or older, you can contribute up to $26,000 a year.

Traditional vs. Roth IRA

If you don’t have access to an employer-sponsored retirement account or have already maxed out your contribution, you can also open an Individual Retirement Account (IRA) to invest.

There are two types of IRAs: Traditional and Roth.

A Traditional IRA works the same way as employer-sponsored plans when it comes to taxes. Any money contributed will be treated as “pre-tax” and reduce your taxable income for that year.

A Roth IRA, on the other hand, is funded with post-tax dollars. This means you’ve already paid your income tax, so when you withdraw it in retirement, you don’t pay income or capital gains tax. The money is all yours. Roth IRAs offer excellent tax benefits but are only available to certain income levels. If you make more than $135,000 a year as a single filer or over $199,000 as a married filer, you aren’t eligible for a Roth IRA.

As of 2020, you can contribute up to $6,000 per year to an IRA. If you are 50 years or older, you can contribute up to $7,000 a year.

529 college savings plans

These accounts, offered by each state, provide tax benefits for parents saving for college. Operating like a Roth IRA, contributions are made post-tax, but all withdrawals are tax-free as long as the funds are used for higher-education expenses.

Your state may offer tax benefits or contribution matches for investing in your local 529 plan, but you can utilize any state’s 529. Since each state has different fees and investment options, be sure to find the best 529 for your money.

Brokerage accounts

Brokerage accounts offer no tax benefits for investing but operate more like a standard bank account to hold your investments. There are no limits on annual contributions to these accounts, and you can access your money at any time.

Cash or cash equivalents

Since investing should only be undertaken for the long-term, you may need to hold onto cash while saving for shorter-term goals. In that case, a traditional bank account might not do the trick. Checking and savings accounts offer incredibly low interest rates, if any at all, which means you are entirely at the mercy of inflation.

Luckily, there are cash accounts that pay higher interest:

A CD, or Certificate of Deposit, is a savings account that restricts access to your cash for a specified period (6 months, 12 months, 24 months, etc.). There is a small penalty if you want to withdraw your money before the term is up, but these accounts typically offer a higher interest rate in exchange for the lack of access.

High-yield online savings accounts are the middle ground between CDs and traditional savings accounts. They pay higher interest than a conventional savings account but still allow a few transactions a month so you can access your cash if you need it. Many online high yield savings accounts have no deposit minimums or fees.

Money market accounts are very similar to high yield savings accounts, but with slightly higher interest rates and higher deposit requirements. For instance, CIT Bank’s money market account offers a 1.85% interest rate but requires a $100 minimum deposit.

In any of these accounts, your cash deposited is not at risk. FDIC insurance guarantees you your money back, even if the bank that holds your account goes bankrupt.

Related: Best Online Savings Accounts for 2023

Where to Focus First

When first starting to invest, it can be hard to choose between the multiple types of investment accounts. As you begin, remember to focus where you see the most value.

First, contribute enough to your employer-sponsored retirement plan to get the full value of any match the company offers. This is free money and an instant return on your investment. If you aren’t sure if your employer offers a contribution match, reach out to HR for the most up-to-date policies.

Second, max out contribution limits on your tax-advantaged accounts – if you are primarily saving for early retirement or a child’s college. The tax benefits in these accounts save you money that you don’t want to turn over to Uncle Sam unnecessarily.

Finally, invest any excess capital in brokerage accounts. This will help you save for long-term goals like buying that vacation house in ten years.

Note: The above assumes that you have paid off all high-interest debt and have a solid budget in place. If you haven’t done those things yet, get them squared away before you start investing.

7 Golden Rules for Investing Money

You may be a rookie investor, but that doesn’t mean you need to make costly rookie mistakes. Follow these seven golden rules and you’ll be on the path to success.

Click here to see the whole infographic.

1. Play the long game

Never invest for the short-term. The market moves up and down in natural cycles that can’t be timed. Investing for fewer than three to five years doesn’t give you enough time to rebuild asset value if you hit a downturn at the wrong time.

2. Don’t put all your eggs in one basket

Don’t put too much of your money in any one stock or bond where one issue could destroy your wealth. Diversify with low-cost, index ETFs and avoid stock picking.

3. Make investing a monthly habit

Despite headlines continually calling a market top or bottom, no one can accurately determine where we are in the cycle at any given time. The best way to guarantee that you buy at the right times is to make investing a monthly habit. Invest each and every month, regardless of headlines or market performance.

Related: How to Get Started Investing with $100

4. Invest only what you can afford to lose

Investing is risky. While the long-term trend has historically been upwards, there are also years of deep declines. If you need money in the near-term, or the thought of seeing your account balance drop 20% makes you sick to your stomach, don’t invest those funds.

5. Don’t check your portfolio every day

Investing is the one place where a “head in the sand” strategy might be the smartest method. Set up auto deposits into your investment accounts each month and only look at your portfolio once every three to six months. This reduces the likelihood of panic selling when the market falls or piling in more money when everything seems like rainbows and butterflies.

6. Keep your fees low

Mutual funds and ETFs have expense ratios. Many brokerages charge trading fees. Investment providers from financial advisors to robo-advisors charge management fees. All these fees eat away at your wealth over time.

Sticking to index funds and ETFs keeps your fees low while guaranteeing you see the performance of the market so that you can keep more money in your pocket.

7. Listen to Warren Buffet’s investing advice

Warren Buffett is possibly the most famous investor in history. He’s created a multi-billion-dollar net worth in just one generation. Learn from his advice to invest for your own future.

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

“I never invest in anything I don’t understand.”

“If you don’t find a way to make money while you sleep, you will work until you die.”

“The stock market is a device for transferring money from the impatient to the patient.”

“It is not necessary to do extraordinary things to get extraordinary results.”

How to Start Investing Today

An easy way to start investing today from your phone or laptop is by opening an account with Acorns, a micro-investing app ideal for beginner investors.

The basic plan, Acorns Invest, starts at just $1/month with a free $10 sign-up bonus for new users.

When you make a purchase with a linked debit or credit card, Acorns rounds up to the nearest dollar and invests your spare change. You can boost your Round-Ups by 2x, 5x, or 10x.

In addition to Round-Ups, you can set up recurring daily, weekly, or monthly investments to your Acorns portfolio. Its Found Money service will also find cashback opportunities from 200+ partners and automatically invest your savings when you make a purchase.

It only takes a few minutes to set up an account. Once you complete your profile, Acorns suggests one of its five portfolio options based on the information you provided. However, you have the option to override its suggestion if you prefer a portfolio with more or less risk.

The platform automatically rebalances your portfolio and reinvests all dividend payments to continue growing your investments.

Acorns is a smart option for hands-off investors and those just getting started. As your account grows, the $1-3 monthly fee stays the same, effectively making the service cheaper over time.

The post How to Invest: A Beginner’s Guide to Investing in the Stock Market appeared first on DollarSprout.

Remember your piggy bank or loose change jar you had as a kid? How you would drop all your nickels, dimes, and quarters in there until it was packed full?

If you’re like me, every time you brought that change in the bank it added up to more cash than you thought.

Acorns wants to take this “out of sight, out of mind” savings strategy to the next level. They round-up your expenses to the nearest dollar, then invest your nickels and dimes for future goals.

Recently, the company added retirement accounts, a debit card account, and a $10 sign-up bonus.

But can this micro-investing strategy really grow your wealth? Let’s take a look.

What Is Acorns?

Acorns is part spare change jar, part robo-advisor. This app rounds up your purchases on linked credit or debit cards — now with the option to boost those round-ups by 2x, 5x, or even 10x — and invests that money for you.

Acorns offers three levels of service:

Invest: $1/month

Summary: Round purchases up to the nearest dollar and invest the difference in a taxable account. Add cash to your investments regularly and get kickbacks to boost your investments from purchases at partner retailers.

For $1 per month, this is Acorns’ lowest cost option. To sign-up, you connect your bank account and link any credit and debit cards where you want round-up investments to occur.

Then you select the amount of money you want to contribute to your Acorns investment to get started. There is no minimum, but the app won’t actually begin investing for you until your Round-Up balance equals $5 or more.

Finally, you’ll answer some questions about your financial situation, goals, and risk tolerance. Acorns will use this to recommend one of its five ETF-based investment portfolios. You can override their selection if you want more or less risk in your portfolio.

In addition to your Round-Up investments, you can set recurring investments that occur daily, weekly or monthly. Acorns Found Money service is also partnered with over 200 brands that give you cash back, automatically invested, for purchases.

Note: This account level used to be free for college students for up to 4 years, but Acorns no longer offers this perk.

Invest + Later: $2/month

Summary: Original Acorns plus the ability to invest in an Individual Retirement Account (IRA).

In 2018, Acorns added retirement investments to their platform. Now you can invest in a Roth, Traditional, or SEP IRA with Acorns. Investments into your Acorns Later account occur the same way as with the original Acorns service.

Invest + Later + Spend: $3/month

Summary: Acorns online checking account with full bank services, FDIC insurance, and the ability to boost your Acorns + Acorns later investments with instant Round-Up and cash back from local retailers.

The most recent addition to the Acorns platform is a digital checking account. Acorns Spend is a full-service checking account allowing digital direct deposit, mobile check deposit and payment, and unlimited fee-reimbursed ATM withdrawals.

Acorns Spend allows for real-time Round-Ups, custom spending strategies to boost your savings, and increased Found Money cash-back with up to 10% invested from local places you regularly visit.

How Does Acorns Work?

Acorns’ investing service, like most robo-advisors, is based on Modern Portfolio Theory created by Dr. Harry Markowitz. It has five optimized portfolios to choose from and automatically rebalances your portfolio and reinvests all dividend payments regularly.

Each Acorns portfolio is made up of ETFs, or Exchange Traded Funds, with exposure across multiple asset classes. These ETFs have internal expenses that equal about 0.10% of your investment over time.

As you add money to your account through Round-Ups or scheduled deposits, Acorns will invest that money for you based on your risk-profile. If you are using the basic Acorns account, this will occur in a taxable investment account.

You can withdraw your money from Acorns at any time, but investment withdrawals can take 5 to 7 business days. And the reality is, you don’t want to use your Acorns savings as a regular source of cash.

Investing is a long-term game. By pulling money from this account for day-to-day expenses and goals, you’ll increase the chance of losing money in the market.

Acorns Review: Frequently Asked Questions

With so many options out there, investors have questions. Here are the top queries we’ve seen around the web that we’d like to cover in our Acorns review.

Are small Round-Up investments enough to matter?

When it comes to saving for your future, every little bit helps.

At the same time, should Round-Up investments be the core part of your investing strategy? No.

But even investing $30 a month at a 7% market return adds up to over $4,900 in 10 years. Put that same amount in an online savings or money market account, and you’re only looking at just under $3,900. And the gap between investing and saving only increases over time. That’s the power of compound growth.

How much does Acorns cost?

Acorns offers three plans:

• Invest, $1 per month
• Invest + Later, $2 per month
• Invest + Later + Spend, $3 per month

For small accounts, the $1 monthly fee is very high and offsets any reasonable potential gain from the investments.

Let’s assume you had 50 Round-Up transactions a month, at an average round up value of $0.40. The Acorns app would invest $20 for you each month but would take 5% of those savings in Acorns fees.

As your account value increased, that percentage would decline. But you would need to have $5,000 invested before Acorns’ fees were as low as Betterment at 0.25%. And Betterment offers those fees with no minimum investment threshold and with access to a retirement account. You would need $10,000 invested in an Acorns IRA to match Betterment’s fees.

What a $1/mo Fee Means for a Taxable Account:

Are there risks with investing with Acorns?

As with any investment, performance isn’t guaranteed. Investing has risks which means the value of your portfolio can trend up and down over time. While the S&P 500 has consistently provided returns around 8% annually, year-to-year variations could mean your account loses substantial value — sometimes in excess of 10% or more.

The biggest risk for Acorns users is deciding to stop contributing to your account and keeping it small. Remember, the smaller your account balance remains, the more impact the monthly fee has on your overall account balance.

If you have plans for your money in the next three to five years, opt for a high-interest savings account instead. 

Related: DollarSprout’s Chime Bank Review

Is it okay to invest large sums of money with Acorns?

For hands-off investors with large sums to work with, the flat-rate fee may look attractive. For example: If you have over $10,000 to invest in the Invest + Later membership level and your fees drop to below the levels of top robo-advisor competitors like Betterment and Wealthfront, Acorns appears to be a cost-effective option.

However, I would still not recommend investing large amounts with Acorns. Their investment options aren’t as robust as the bigger players. Portfolios include less diversification across asset types and no ability to customize asset allocation outside the five key portfolios.

In addition, if you are primarily investing in a taxable account (the basic Acorns level), you don’t get tax-loss harvesting to improve long-term returns offered by many competitors.

Finally, you don’t get access to professional financial support with Acorns. Larger robo-advisors provide some access to Certified Financial Planners (CFPs) to answer your burning questions. You might not have any today, but as your portfolio grows or we hit a downturn in the market, it can be a comforting option.

Who is Acorns best for?

Acorns is best for new investors who are looking for a hands-off solution to growing their savings.

Is Acorns Worth It? 

When it comes to round-up investing apps, Acorns is among the best in the business. It’s easy to use, has an excellent education platform for new investors, and simple, straightforward fees.

However, whether the $1-3 monthly fee is a benefit or a detriment really depends on your account balance. If you’re only adding a few dollars a month to your Acorns account, that $1 a month will hinder your investment growth.

$10 Bonus

$0 Account minimum Need $5 to start investing your funds.

$1 to $5 Monthly Fees Depends on plan you choose.

DollarSprout Rating

The Acorns app is easy to use and perfect for new investors who are learning the ropes. Investors make purchases using a linked card. Acorns rounds up to the nearest dollar and invests the extra change. Users can also set automatic recurring investments on a daily, weekly, or monthly basis.

Show Hide more

Pros:

• Free investing for college students
• Completely automated
• No account minimum
• Higher-tiered plans offer cash back at specific retailers

Cons:

• They charge an account fee and other fees for IRAs
• Limited portfolio options
• Monthly fee can be a high percentage for those with smaller account balances

The post Acorns Review 2023: Pros, Cons, and How It Works appeared first on DollarSprout.

You’ve got money goals. Whether you want to get out of debt, save for retirement, or afford that luxury vacation in Cabo, there is one thing you know you have to do:

Get control of your spending.

Creating a budget doesn’t have to be scary or overly restrictive. In fact, a good budget is flexible! It knows that your life is ever changing and helps you prepare for that reality. The only requirement of a good budget is that it helps you get conscious of your spending — and live within your means.

Here’s how to make a budget that works for you, so you can stress a little bit less about money.

Step 1: Find the Right Method for You

There are many budgeting methods, each of which has its merits. We’ve summarized three of the most popular methods below that will teach you exactly how to make a budget plan. Consider your personality and choose the one that sounds most attractive to you. Don’t worry if it takes a little trial and error!

Option 1: 50/30/20 Budgeting Method

Best for: People who want a budget, but also want to keep things simple.

The easiest budget rule, the 50/30/20 method is indifferent to your exact spending on electricity vs. your cell phone bill this month. All that matters is that your spending stays within three main categories: Needs: 50%, Wants: 30%, Savings: 20%.

The benefit of the 50/30/20 rule is that no one category is expected to be static. The composition of spending can be different every month. But as long as your spending fits into the limits set by the broad categories, you’ll continue moving toward your goals.

It is simple, yet powerful. You are always saving for the future, but you don’t get bogged down with the details.

Option 2: Zero-Based Budget

Best for: People who want full control over the purpose of every dollar in their budget. A zero-based budget operates under the idea that any dollar not tracked will be spent — and probably on something silly.

With a zero-based budget, you assign every dollar a job. If you have $4,000 of income and only $3,500 of expenses in your budget, you aren’t done. You must give the remaining $500 a task. Are you saving $200 for retirement? Putting aside $50 for your daughter’s college? Create budget categories and assign values until your income minus your assigned outputs equals zero.

This method takes time. It requires that you look at every single expense in your budget. But practiced well, users find they have fewer unexpected expenses and more confidence that their spending expresses their values.

Option 3: Envelope System

Best for: Habitual over-spenders who need more discipline built into their budget.

Meant for those who really struggle with overspending, the cash envelope method is rigid.

Originally a cash-based method, you would withdraw all the money you planned to spend that month in cash, then split it into individual envelopes for all your expenses — cell phone, groceries, gas, clothes, and so on. If you run out of money in an envelope before the month is up, you’re out of luck. You either need to move money from another envelope, or just wait until the following month.

Luckily, there are now apps to help you follow the envelope method while still using debit and credit cards. However, there are some big-name proponents (like Dave Ramsey) of continuing to use cash over an app. They believe it fosters greater awareness and good habits.

Step 2: Decide How You’ll Track Things

Creating a budget once won’t change your financial life. To have an impact, you need to continue budgeting consistently. That means you need a way to track your budget.

Here are some popular options:

Option 1: Use a budget worksheet

The pen and paper method isn’t fancy, but it gets the job done.

Especially for beginners, tracking expenses has the benefit of making you carefully consider where you stand in a way that more automated budget systems don’t.

Option 2: Use a budget app

If you prefer to operate in the 21st century, there are numerous apps to help you track your new budget.

Personal Capital is a good budgeting app for those following the 50/30/30 rule (and it’s free!). It allows you to set a spending target and alerts you to progress throughout the month. It also automatically breaks expenses down into categories for you, so you can easily see where your money is going.

Other popular free options include Mint and PocketGuard. Alternatively, I’ve been using You Need A Budget since college, but it does have a monthly fee – unlike the other options listed here.

Option 3: Write it all down in a bullet journal

Can’t find a worksheet or app that works for you? Or do you just love being creative? Bullet journals allow you to bring organization and beauty to your budget tracking.

Get a quality notebook, check out some bullet journal layouts for inspiration, and design your unique budget journal.

Now, choose your tracking method and get to work.

Step 3: Figure Out Your After-Tax Income

You can’t determine your budget until you know how much you have to spend.

To figure out how much you have available to spend each month, you need to determine your after-tax income. This is the amount that comes in on your paychecks and that you have available to spend.

Add up all your sources of income in a given month. Your job, your spouse’s job, any side hustles, and passive income. This is your base.

Note: If you get paid every two weeks, you know there are some months you get a lucky third check. Don’t try to add that payment in and create an average month. Build your budget around a two-check month, then use the little bonus to fuel your savings goals.

Bonus: Want more spending money? Check out these 50 online side hustle ideas.

Step 4: See Where You Are Currently Spending

Hold on tight. It’s about to get real.

Before you can finish your budget, you have to reflect on where your money is really going. And if you’re starting a budget because you know you’ve been overspending, this can be tough. Just remember not to beat yourself up for past spending. You’re making positive steps to be more financially responsible. That’s all that matters!

Review your last 2-4 months of expenses and break them down into spending categories. Look at bank and credit card statements to help you get a sense of where you’re at. In places where you use cash, try to make a best guess at your spending. Also, make note of any minimum payments on debt, as that also has a white-knuckled claim on your money.

Have your list of categories, along with what you are spending on average, on hand.

If you are using the 50/30/20 method, here is what you would do next:

Allocate 50% of your income to needs

Your most significant and crucial budget category is needs. But what are needs?

Needs are comprised of living expenses and essentials; items like your rent or mortgage, utilities, and home and auto insurance. These are expenses that you can’t forgo without a major inconvenience. (Your cable package and yoga classes don’t count.)

You’ll also want to include any minimum payments on debt. These are required expenses and should be treated as “needs” instead of debt repayment.

Make a list of all the items in your needs list with their associated expenses. If the total is more than 50% of your income calculated in Step 3, find places to cut. If you can’t get to 50%, the overage will have to dip into your 30% “wants” budget for a while.

Allocate 20% of your income to debt repayment and savings

After needs, the 50/30/20 budgeting method prioritizes savings. You need to save for your future, every single month.

Calculate 20% of your monthly after-tax income from Step 3. If you aren’t a math whiz, just open up your phone and multiply your income by 0.2. This is the amount you need to contribute to saving money in your emergency fund or retirement accounts.

However, if you still have debt, you can also include extra principal payments in this 20%. Getting out of debt is an investment in your future, and the 50/30/20 rule knows that.

Related: How to Save $5,000 with the 52-Week Money Challenge 

Allocate 30% of your income to wants

What is left over after your spending on “Needs” and “Saving” is the maximum you can spend on wants. This is your quality of life spending, like choosing between an unlimited or a budget cell phone data plan, going all out or having a cheap date night, or choosing between a 5-star restaurant and ordering Chinese take-out.

You’ll want to reflect on the spending categories you compiled earlier from your last few months of spending. What items were left after removing the needs? Does the sum fit in the remaining 30% of your budget? And if not, where can you cut?

Remember that you also need to set aside cash for longer-term wants, like your annual family vacation.

More than any other, this step can be tricky. You’ll have to make choices. Unfortunately, we can’t do everything we want. But if we understand our own priorities, we can do anything we choose. Reflect on which of your “wants” is most important to you, then skip the things that don’t bring you as much joy.

Note: For “Needs” and “Wants,” 50% and 30% are the max you can spend. Spending less, in support of greater savings or debt repayment, will help you reach your financial goals faster.

Step 5: Set Your Priorities

What do you want to achieve with your money?

While your ultimate goal might be saving for a long vacation or new house, you first need to build a solid financial base. By getting the necessary foundation right, your security won’t be thrown off by one unexpected expense. Setting your priorities is key to ending financial stress.

These are a few key money priorities you want your budget to tackle:

Build an emergency fund

If you’re still living paycheck-to-paycheck, your first goal is setting up a $1,000 emergency fund. We all know life loves sneaking up on us.

We recommend saving your emergency fund in a high-interest online savings account that provides safety plus guaranteed returns. This will ensure that you don’t spend that money, while allowing it to continue to work for you while it waits on the sidelines.

Once you’ve tackled your $1,000 starter emergency fund, you’ll want to continue to add to it. Depending on your job, a 3-6 month emergency fund is ideal. This will protect you from more considerable financial surprises, like a job layoff or health issue.

Pay off high-interest debt

Debt is an anchor on your money goals, particularly high-interest debt like credit cards. Every dollar you pay in interest is a dollar you can’t spend on your real month goals.

If you are still forking over part of your budget to lenders every month, you’ll want to start paying down debt. Organize what debts you have, decide which you want to pay off first, and start attacking your balance.

Get a full employer match on your 401(k)

Who doesn’t like free money? If you aren’t getting the full match on your 401(k), you’re missing out on the easiest free money you’ll ever get.

An employer 401(k) match is your company paying you to save. It’s an instant return on your retirement savings, and you should never leave that money on the table.

If you aren’t sure what your company’s 401(k) program offers, reach out to HR. Then adjust your contributions to maximize your match (a.k.a. free money).

Set up automated savings for retirement

Covered the basics? Good! Now you need to start getting serious about preparing for retirement. If you don’t already have one, you’re going to want to open an IRA (Individual Retirement Account).

These accounts offer excellent tax benefits to incentivize you to save money for the future.

Determine how much of your monthly 20% savings allocation will go towards retirement. Then, set up an automatic deposit into your account each month through your IRA provider (most places nowadays have this functionality). With automated investing, you’ll be building a nest egg without even thinking about it.

Step 6: Track Your Progress

It’s official: you’re all set up! But you’re far from done.

Budgeting is a long-term game. You need to check in on your spending regularly to ensure that your needs and wants aren’t creeping beyond their 50% and 30% income designations. Plus, you’ll need to add new budget categories and delete others over time.

We recommend reviewing your budget on a weekly basis at the beginning.

Checking in every week will allow you to make course corrections before things get too far off track. Make note, if you’re budgeting with a spouse, you both need to be involved in the review. Having one person in a relationship dictating the budget isn’t a recipe for long-term success.

Eventually, you’ll get a feel for your spending habits and will be able to extend the time between meetings. However, always try to review your budget at least once a month. Even the most practiced and thoughtful spenders see money slip through the cracks when they lose focus!

Related: Empower Finance Review: The Budgeting App That Does It All

Step 7: Re-Evaluate and Make Adjustments

One of the biggest mistakes new budgeters make is not sticking with the budget long enough. They get frustrated when they overspend in a category or an emergency expense sets them back on their goals. Not understanding that there is no such thing as a normal month or a static budget, they conclude that they are “just bad at budgeting”… and then they give up.

These are the moments to power through!

The first budget you make won’t be your last. You are new to tracking your expenses, so you are going to get things wrong. The important thing is to continue monitoring, review where your weak points are, and adjust your habits and budget accordingly.

Learning how to make a budget makes you more conscious of your money.

Continually striving to reach your goals drastically increases your chances of getting there, even if you stumble sometimes. Re-evaluate whenever necessary, but don’t give up. You can do this!

The post How to Make a Budget in 7 Easy Steps appeared first on DollarSprout.

And even though real estate investing is one of the most popular ways to reduce risk and diversify a portfolio, getting started usually requires a lot of money upfront. That’s where Fundrise steps in.

Fundrise is an online real estate investing company. They aim to bring residential and commercial real estate investing to the average person — and eliminate the need to have tens of thousands of dollars to get started.

With direct investment REITs, your money goes straight to the properties. That means you get exposure to dozens of assets with a single investment.

But should crowdsourced real estate investing have a place in your investment portfolio?

*This is an endorsement made in partnership with Fundrise. While we do earn a commission from partner links on DollarSprout, our opinions and judgments are our own. 

Fundrise Review at a Glance

Open Account

$500 Account minimum

0.85% Management Fee

DollarSprout Rating

Fundrise is a platform designed exclusively for crowdsourced real estate investing. It offers diversification, access to experts to ask questions, and options for balanced investing, long term growth investing, or supplemental income investing. It's also open to both accredited and non-accredited investors.

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Pros:

• Open to non-accredited investors
• Low investment minimum
• Historically strong returns

Cons:

• Limited liquidity
• Fee structure isn’t entirely straightforward
• Methodology hasn’t been tested in a strong market downturn yet

If you have a long-term investment outlook and are looking to diversify into real estate without a tremendous amount of capital to commit, Fundrise is a solid choice.

However, due to the newness of crowdsourced real estate investing in general, Fundrise is not a good fit for someone who isn’t prepared to see potential steep valuation drops in an economic downturn.

Fundrise Reviews BBB

Fundrise has an A+ rating with the Better Business Bureau. According to BBB, Fundrise has been accredited since 11/23/2016 and they have been in business for 7 years.

What Is Fundrise?

Before we go too far in our Fundrise review, we need to talk about what exactly it is. Fundrise is a real estate crowdfunding company founded in 2012. Its main products are eREITs and eFunds. They allow the average investor to access broader portfolios of real estate assets by purchasing shares.

At Fundrise, with just $500 you can invest in a starter portfolio of private real estate deals.

eREITS are real estate investment trusts that focus on private commercial real estate. Those REITs either buy and manage income-producing commercial properties or offer mortgages to such assets.

eFunds are portfolios of single-family housing rentals or developments in areas where there are housing shortages.

Investors in Fundrise make money in two ways:

1. Quarterly dividends from the property management, rent, or mortgage payments of the assets, and
2. Changes in the property values.

These REITs are a unique aspect of Fundrise. Most crowdfunding platforms require you to individually invest in each project, instead of buying a more diverse portfolio.

Fundrise App

There are questions about the “Fundrise app” circulating, but as of yet, Fundrise has not released an app for their service. Everything is done through the Fundrise website (which is mobile friendly) but not on a dedicated app. You can still use Fundrise on your mobile device but just be sure to go directly to their website to login.

How Does Fundrise Work?

To date, Fundrise has invested over $1.4 billion in over 150 real estate assets across the U.S. These assets are divided into five eREITS and three eFunds with a range of risk profiles and investment goals.

Fundrise looks to offer improved investment returns for the average investor. They do this by taking advantage of the premium returns typically experienced in the private market.

Public investments – things traded on an exchange like stocks or bonds – have higher liquidity and transparency, which increases demand and drives prices up. Fundrise estimates that this liquidity sacrifices one-third of your long-term returns.

However, the average investor can’t get into private investing on their own. You often need hundreds of thousands, if not millions of dollars to do private deals.

So, Fundrise uses the collective might and assets of thousands of investors to get a seat at the table.

Fundrise actively finds and acquires midsize real estate on behalf of investors. Then the company improves the assets to increase yields from property management fees, rents, or an eventual sale of the asset.

Alternatively, the company offers mortgage loans for large commercial projects. In those cases, the investors are compensated by the interest payments from the mortgages.

Then, each of the acquired assets is allocated to one of five eREITs or three eFunds.

At Fundrise, you aren’t investing in a specific asset, or even a particular eREIT or eFund. Investors have the choice of three main portfolios – Supplemental Income, Balanced Investing, or Long-Term Growth – that each offer different risk profiles based on your investment goals.

 

 

 

 

 

 

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Real Estate is still one of the best ways to bring in extra money every month and grow your net worth! ⁣ ⁣ There is so much information on the internet to learn about Real Estate investing. ⁣ ⁣ People like @gpstephan and @meetkevin cover so much real estate investing information on their YouTube channels, making real estate investing so much simpler. ⁣ ⁣ Do you own or hope to own real estate one day?

A post shared by DollarSprout Personal Finance (@dollarsprout) on Oct 17, 2019 at 10:00am PDT

Fundrise Review: 4 Options

Here’s a breakdown of the 4 main Fundrise options:

Long-Term Growth

• Aim to earn returns via appreciation in share value, with fewer dividends
• Invest in a growth-oriented real estate private equity strategy
• Portfolio allocated more toward equity real estate assets

Balanced Investing

• Aim to earn returns via a blend of dividends and appreciation
• Invest in a balanced mix of income and growth strategies
• Portfolio allocated across both debt and equity real estate assets

Supplemental Income

• Aim to earn returns via quarterly dividends, with less appreciation
• Invest in an income-oriented real estate private equity strategy
• Portfolio allocated primarily to debt real estate assets

Starter Portfolio ($500 Minimum)

• Instantly diversify across 36+ real estate projects
• Most popular choice for new investors
• Free upgrade to any of the 3 advanced plans above

Fundrise Fees, Facts and Figures

Frequently Asked Questions on Fundrise

New types of investing naturally create a whirlwind of questions. While we could make this section pages long, we are going to stick to the top questions to which we think you should pay attention.

What returns can I expect from Fundrise?

That’s the million dollar question that we need to cover in our Fundrise review. Unfortunately for you (and me) I am not a fortune teller.

While we can look at historical returns to get an idea of potential future returns, no one knows what the future will hold.

However, Fundrise does have a promising track record.

Taking a look at historical returns, Fundrise has been around the high end of its projected long-term returns in 3 of the last 4 years.

In that time, the company has grown assets under management (the number of dollars they are actively investing) significantly, which also plays into the steep cumulative total returns chart shown below.

Fundrise and other asset managers do provide projected annual returns to help guide investors to their target returns. They don’t want you floating out there in space expecting a 200% return when they were aiming for 10%.

Fundrise’s Balanced Investing Plan has a projected annual return over 20 years of 7.8% to 11.5%. Both of the other plans fall in very similar ranges. The Supplemental Income plan targets a slightly lower return and the Long-Term Growth plan is marginally higher.

Note: This projected range is simply some (very) smart people doing their best to predict the future. They could be wrong. You could see better returns, or you could see much worse.

And when you start changing the timeline — for instance, if you want to take your money out in 5 or 10 years, the range of potential returns widens. It should go without saying that investing in real estate is designed to be a long term investment strategy.

Related: Looking for faster ways to make money? Check out these 25 ways you can make money online.

Couldn’t I just buy a publicly-traded REIT?

Yes and no.

A publicly traded REIT will give you exposure to commercial and residential real estate, likely with lower fees and greater liquidity. But there are a few fundamental differences to remember.
Publicly traded REITs are more likely to be correlated with the stock market than the broader real estate market as the investor base is more likely to be stock market investors, so they follow similar behavior.

Most publicly traded REITs are much larger than Fundrise, and thus have to focus on larger deals. A small deal won’t make a dent in their overall returns. Fundrise gives you access to a different class of real estate, namely mid-sized commercial and residential assets.

Returns for publicly traded REITs are generally lower than non-traded REITs over the long-term. However, this has not been tested for Fundrise. The company is only six years old and crowdsourced real estate investing for the average investor is a very new concept.

What happens if I need to sell my shares?

Fundrise expects investors to hold shares for at least five years.

Luckily, you do have the option of selling shares before then if you need to.

Investors can request share redemptions from Fundrise on a quarterly basis. Except for the 90-day guarantee window, sales are based on the current market price.

We need to note, however, that there are fees associated with selling before a five year holding period.

• Within 90-days of initial investment, Fundrise will buy back your shares at your original cost.
• Shares held 90 days to 3 years are sold at a 3% discount to the current price.
• 3 to 4 years are sold at a 2% discount.
• 4 to 5 years are sold at a 1% discount.
• There is no fee for selling shares held for over 5 years.

It is important to consider that this is a request to sell your shares, not a guarantee. Fundrise sets a certain amount of cash aside each quarter to handle share redemptions. If requests exceed that limit, the company may not be able to honor all requests.

This is important because we have never seen how Fundrise performs in a downturn. If investors all request redemptions at one time, it could cause a bank run on the platform.

You will still have the asset value of the real estate backing your shares, but if Fundrise has to sell an asset quickly or at an inopportune time to honor redemptions, it could significantly impact returns.

An influx of redemption requests has shut down hedge funds and private equity funds in the past, and it is a risk here.

Are there any hidden fees I need to know about?

Unfortunately, yes. Our Fundrise review would not be complete if we did not share all fees involved.

Fundrise is upfront about their 0.85% asset management fee and 0.15% advisory fee. But the other fees? You’ll have to dig through the offering circulars filed to find them.

Non-traded, private REITs like Fundrise are complex and have underlying fees that come up in the course of business. Quantifying the impact of these fees is difficult because it depends on the activities of the fund over the course of time.

Fees associated with setting up a new eREIT or eFund can amount to 0% to 2% of the money raised from investors.

You may experience development fees of up to 5% of total costs, excluding land, in eFunds that are building new properties. And there are fees when Fundrise sells property from an eFund.

Overall, Fundrise’s fees are roughly 10% of those charged by similar non-traded REITs. This is somewhat comforting, as the SEC has shown that just up-front fees at non-traded REITs can often consume up to 15% of an investor’s initial investment.

Before investing in Fundrise, or any non-traded REIT, take the time to read the Offering Circular for the fund and the SEC’s Investor Bulletin on the topic to understand the potential fees and risks.

Who Should Invest with Fundrise?

Fundrise can be great for investors who have a long-term outlook and are comfortable tying up their investment for several years. While you can sell your Fundrise shares inside the 5-year holding period, fees will apply.

It’s also ideal for investors who want to diversify beyond stocks and bonds without getting into the hands-on nature of real estate. With Fundrise’s eREITs and eFunds, even the process of selecting assets is out of your hands.

And finally, you have to be comfortable with the risks. Keep in mind that this platform and investment methodology has yet to be tested in an economic downturn such as the housing crisis in 2007-’08.

Related: 18 Passive Income Ideas to Build Wealth Around the Clock

Fundrise Review Summary

Fundrise’s technology brings private real estate investing, and the potentially higher returns, to investors in an easy-to-use platform.
However, the simple packaging and optimistic future return projections featured prominently on the site may lead some investors to overlook the higher risks associated with such an investment.

These risks are buried in the 200+ page offering circulars filed with the Securities and Exchange Commission for each of their nine investment plans.

Higher potential returns come with higher risks. Don’t invest in Fundrise without taking the time to understand the long-term commitment you’re making.

Check your asset allocation to ensure that you need more real estate exposure. Be sure to include your home and any publicly traded REITs.

If you’re a risk-averse investor that gets queasy watching the ups and downs of the stock market, this probably isn’t for you.

But if you are positive on the long-term outlook for commercial real estate and urban housing, want to diversify beyond stocks and bonds, and are willing to take the associated risks in hopes of achieving higher long-term returns, Fundrise is an easy-to-use and well-developed offering.

With Fundrise’s 90-day guarantee, there is no risk to signing up for a Starter Plan and testing the platform for your own needs.

Hopefully we have answer all of your burning questions in our complete Fundrise review. But if we’ve missed anything, please don’t hesitate to leave a question for us in the comments!

The post Fundrise Review 2023: Risks, Returns & How it Works appeared first on DollarSprout.

Whether you’re broke, have a low income, or have bad credit, the steps are all the same. Spend less than you make and put any extra cash toward paying off your debt.

In practice, though, organizing what you need to tackle first, and knowing how to get started can be overwhelming. It can leave you feeling trapped and prevent you from getting started altogether.

To help you on your way to financial freedom, we’ve put together this simple, step-by-step guide to help you build a debt payoff plan. It doesn’t matter if you have no money or your income is low. Even with bad credit, you can still put this guide to good use.

Let’s walk through the steps to help you get out of debt once and for all.

Step 1: Find Out How Much Debt You Owe

You can’t develop a debt payment strategy until you know exactly what you’re up against.

It’s time to gather up all your debts – from that $40 store credit card balance to your $30,000 car loan – and put it all in one place.

Write down the debts you have, how much you owe on each, the interest rate, and the minimum payment.

If you aren’t sure about the interest rate, take the time to open your accounts to find the exact number. High-interest rate debt is a bigger drag on your success than low-interest debt, so you need to know which is which.

Totaling it all up in black-and-white may be scary, but you’re getting ready to cut that number down! Promise yourself that is the highest your debt number will ever be.

Step 2: Choose Your Approach

Once you know exactly how much you owe, it’s time to put a plan together for how you’re going to get out of debt.

Throwing money at a different debt every month, without tracking your progress, is a surefire way to burnout. You’ll feel like you’re spinning your wheels and will give up too soon.

The best way to pay down debt is to focus on one piece of debt at a time until that is entirely paid off. In the meantime, make only minimum payments on the other debts.

This gives you milestones to celebrate, motivates you to keep going, and keeps you organized along the way.

So the question is, how do you decide which debt to pay off first?

There are two main philosophies when it comes to making this choice, the “Debt Snowball Method” and the “Debt Avalanche Method.”

Debt snowball method

In a nutshell: Prioritize your debts from smallest to largest, ignoring interest rates.

Remember making snowmen as a kid? You would start with a small snowball, then roll it along the ground, picking up more snow until you had a massive snowman belly. That’s the concept behind the debt snowball.

With the debt snowball, you start by paying off your debt with the smallest balance, regardless of the interest rate.

While you pay off that debt, you make minimum payments on all the others.

Why is it called the debt snowball? Because the amount you put toward the principal (your balance) snowballs every month. You keep putting the same amount of money toward your debts, even as you pay each one off, increasing the amount that goes toward the principal over interest.

Debt avalanche method

In a nutshell: Prioritize your debts from highest interest rate to lowest, ignoring size.

The methodology of the debt avalanche is similar to the debt snowball, except with this method your goal is to minimize interest costs. No extra profits for those greedy creditors from you!

With the debt avalanche, you start by paying off the debt with the highest interest rate, regardless of size.

Then move on to the debt with the next highest interest rate.

Why an avalanche instead of a snowball? Because, by eliminating high-interest costs first, you put more of your cash toward actual principal over time. This means getting out of debt somewhat faster (and cheaper).

Decide which debt you will tackle first

What’s more important to you? Getting quick, early wins by paying off small debts, or paying the least amount of interest?

Both the snowball and avalanche methods have their benefits. And while the debt snowball isn’t mathematically the cheapest way out of debt, it is one of the most effective. Pursuing a debt-free life can be a long process, depending on where you are starting. Paying off a few debts early on can really get you excited to keep going.

Action Item: Choose whichever method sounds best for you, then organize your debts in that order. After, you’re ready to start making payments.

Step 3: Make Some Big Changes

While small, day-to-day changes matter, a few big changes can fast track you to getting out of debt. Consider these ideas and decide whether the expense they represent is truly worth it to you.

Get rid of your credit cards

Are credit cards burning a hole in your pocket? It may be time to cut them up.

If credit card debt is part of your problem, sticking to cash and debit cards can help you reset your spending mindset. Nothing is more discouraging when you’re paying off debt than realizing you increased it accidentally with an impulse credit card purchase.

Once you are officially debt-free and used to spending less than you make each month, you can revisit the issue. In the meantime, credit card rewards don’t offset interest charges.

Sell your car

Have a hefty car payment? Consider selling your car for a cheaper, used model to eliminate the debt and reduce your insurance costs.

Look for good used car deals outside of new car dealerships. You’ll have more room to haggle with private sales and at independent, used car dealers. Just be sure you have a good mechanic look over the car before you buy it.

Don’t have a car payment? Decide whether your family can get by with one car instead of two. Dropping your spouse off at work in the morning might feel like a hassle, but if that extra 15 minutes saves you $500 a month, it might be worth it.

Stop investing (for now)

Saving for the future is essential, but when you have expensive debt that is holding you back, you need to set your priorities. Pulling back on investing in the short-term can put you in a better position to invest adequately in the future. View each dollar you save in interest cost as a dollar wisely invested.

Note: We would never recommend cutting your 401(k) contributions to a point where you don’t receive your full employer match. That’s free money, and the instant return is more than worth whatever you are paying in interest.

Cut cable

It’s 2023. You can watch most of your favorite shows online, and even notable sporting events are offering free streaming options.

We watched the Super Bowl last year via Amazon Prime.

If you haven’t cut the cord yet, it’s time! Traditional cable packages run over $100 a month and can be a major drag on your goals.

Sell your unused stuff

We could all do with a bit of minimizing. But instead of heading to the dumpster with your kids’ old toys and that ice bucket Aunt Marge sent you, list them for sale on Decluttr, letgo, or Craigslist.

On average, people have over $1,000 worth of stuff in their house that they don’t use. When we went through our minimizing process, we sold over $1,200 of books, toys, extra kitchen gear, and more.

The fringe benefit of this exercise? You realize how many things you’ve paid good money for that you didn’t really need. That tough reality makes it easier to say no to spending in the future.

Related: How to Make the Most Money Selling on Craigslist

Step 4: Create a Monthly Budget

Want to know how much you can put toward debt each month? You’re going to need a budget.

A reasonable budget helps you understand where your money is going. It alerts you to where cash is leaking out to things that don’t really matter to you. And it clues you in on how much you can afford to spend on the things you do want.

By building a budget thoughtfully and allowing yourself some flexibility, you can reduce money stress by knowing there is always money in the bank for the things you need.

How to make a budget

Before you dive in, remember one thing:  the budget you create today is not set in stone.

Your categories, spending, and habits will change over the first few months; and that is perfectly fine! It will take time to adjust to tracking your expenses and creating awareness of your needs.

1. Figure out how much money you make.

Look up exactly how much you get paid each pay period. This is what you have to work with.

2. Define your core expenses.

Housing, utilities, groceries, insurance – These are nonnegotiable expenses and must be covered first.

3. Write out your debt payments.

For now, assume you only make minimum payments on all of your debts since that is the amount required.

4. Create categories for regular expenses and assign reasonable spending limits to each item.

Don’t be afraid to have many budget categories. It will help you have a greater understanding of where things are going. Some regular expenses include internet, cell phone, household goods, medical costs, pets, haircuts, and car/home repairs. Not every item will have an expense each month; but by setting some money aside for those irregular expenses, you’ll be ready when they hit.

Related: How to Pay Off Unexpected Medical Debt

5. Allocate remaining money between debt paydown and quality of life expenses.

The money that is left over from your income after completing steps 2-4 is what you have to contribute toward your goals and fun. In addition to debt paydown, you may want to allow for dinners out, gym memberships, gifts, etc. Divide the money in the way that best works for you.

Tip: While you may want to run at your goals full speed, always have some pocket money budgeted. Even if it only covers one Starbucks coffee a month, those little treats will keep you sane.

If you have very little money left over after Step 4, you may need to review your core and regular expenses. Without big lifestyle changes, you may be stuck treading water, finding it difficult to ever fully get out of debt.

As you get accustomed to your budget, don’t be afraid to shift money from one category to another. There is no such thing as a normal month. Don’t go on a spending splurge and completely fall off the tracks just because you didn’t accurately predict the cost of a house repair.

Related: 3 Debt Relief Services and How to Choose the Best for You

Step 5: Lower Your Interest Rates to Save Money

The less interest you can pay to your creditors, the faster you’ll be able to escape your debt. Check out these top ways to lower your interest rates.

Consider refinancing your student loans

Student loans dragging you down? You may be able to refinance to a lower rate and shorter term.

Reducing the term of your loans, even with a lower interest rate, will likely increase your current monthly payment. But with fewer years of payments to handle, you can save a bundle over time. SoFi, a top student loan refinancing provider, offers one such service. With no prepayment penalties and no hidden fees, it’s an easy way to save thousands of dollars in interest payments over the life of your loan.

Negotiate your credit card interest rates (or consolidate)

Credit card interest rates aren’t set in stone. It is a competitive market out there for credit card companies, which means they have to be flexible to keep customers.

If you’re a long-time customer and in good standing, it doesn’t hurt to call and ask for a reduction in interest rates. More often than not, they will be willing to make a cut to keep you as a customer.

Things to mention to get them on your side? Let them know how long you’ve been a loyal customer and that you would love to stick around. But, also share that other credit card companies are offering you lower rates, even 0% introductory rates for balance transfers and that you can’t ignore the interest savings. Usually, they swing into customer retention mode, and they may be able to pull some strings.

If that’s not an option, consider a debt consolidation loan. If the average APR on your cards is 24% and you take out a personal loan at 12% APR — and immediately pay off your credit card debt — you’ll be left with a more manageable debt to pay off. It won’t solve your debt issue completely, but there is a time and place where debt consolidation makes sense. 

Consider a balance transfer credit card

Can’t sufficiently lower your interest rate? Consider a balance transfer, which lets you move debt from one credit card to a different card with a lower rate – sometimes even 0%.

Effectively, you are paying off one credit card with another. But if the rate difference is wide enough, it could save you money. Just make sure you get all the details before starting a transfer. Many balance transfer cards charge a transfer fee of 3% to 5%. And they may have limits on how much you can transfer.

While 0% interest sounds fantastic, only undertake a balance transfer if you are serious about paying down debt. Make sure you can pay off the balance during the 0% offer period. Otherwise, you’re just playing hot potato with your balance.

Step 6: Improve Your Spending Habits

Embracing a frugal mindset will reduce your spending and allow you to pursue your goals more effectively. Not sure where to cut? Start with the big stuff.

Save money on food each month

The average American spends 10% of their budget on food, one of the most significant categories after housing._[1] We have to eat, but do we have to pay so much doing it? Here’s how you can cut.

Stop eating out

Not only is eating at a restaurant more expensive, but it is also harder on your waistline. Meals at restaurants cost more and include larger portion sizes and more fat than the average dinner cooked at home.

Over 4% of the American budget (so 40% of total food spending) goes to food away from home. Eliminate dining out from your budget, at least until you are debt-free.

Avoid impulse buys in the grocery store

Before heading to your weekly grocery store shop, take the time to make a list. Check your grocery store’s online circular and take a look at apps like Ibotta, a free app that gives you cash rebates on grocery store purchases, to see what’s on sale. Then, build a meal plan and list around those items.

Once you’re in the grocery store, stick to your list! To avoid extra purchases motivated by hunger, have a snack before heading to the store.

Learn how to say “no”

Nights out on the town, drinks with coworkers, and shopping trips with friends are tempting. But when it doesn’t fit in your budget, you’re sacrificing your future for a little fun today.

Don’t be afraid to say “no” to any event you can’t afford. You don’t have to isolate yourself in your debt-free journey, just be willing to offer an alternative. Suggesting a game night or potluck at your place could mean more quality time with your friends for a lot less money.

Give up your expensive hobbies

Spending $100 a month on yoga classes just isn’t realistic when you’re hustling to get out of debt. Trade in your expensive hobbies for lower-cost options like free YouTube classes or a monthly book club.

Step 7: Increase Your Income

Frugal living is powerful, but it has a limit. You can’t save more than you make. So, to take your debt-free journey to the next level, it’s time to bring in some more dough.

Ask for a raise

If you’ve been working hard and providing value to your company, it never hurts to ask for a raise.

Don’t just drop the request in your manager’s lap though. Ask for feedback, develop your skills, and take on more responsibility. Along the way, proactively let your superiors know what you’ve accomplished. You want your manager to know you deserve a raise before you even walk through the door!

Start a side hustle

Commit a few spare hours in your week to something you’re good at, or a task you enjoy, that can be monetized online. Since the average person watches five hours of TV a day, I’m willing to bet you can make the time.

Related: 42 Legit Ways to Make Money Fast

Start a low-overhead online business

The internet has made it easier than ever to start an online business with close to zero up-front costs.

Set up shop as a freelance writer, proofreader, or virtual assistant, and offer your services to other companies who want outside help with hiring a permanent employee. You can work as many or as few hours as you want, with some people turning their businesses into six-figure, full-time jobs.

Get your first clients by reaching out to local businesses, posting about your new business on Facebook and LinkedIn, or listing your services on Upwork.

Putting It All Together

Whether you’re broke and have no money, living on a low income, or have bad credit, just stick to these steps to become debt free once and for all.

Once you have an action plan for how to get out of debt, achieving debt freedom just requires time. Stay focused on your goal, stick to a budget, trim fat from your spending, and find ways to bring in more income to speed up your journey. Just don’t forget to celebrate all the little wins along the way!

The post How to Get Out of Debt: A Step-by-Step Guide for 2023 appeared first on DollarSprout.