Cashology by FNBO

Extra Paycheck Month - Making the Most of Your Money

Episode Summary

The extra paycheck month. Oh, those are nice months. They help you catch up a little bit. Maybe pay off a bill or put a little extra away in savings. Or splurge on something you want. But how can you make the most of your money, all year round, so that you’re not waiting on that extra paycheck to make things right? How can we build our personal wealth? That’s the question for today. Tune in now.

Episode Notes

TALKING POINTS

What’s the first thing we need to do to make the most out of our money?

• Managing your money well takes some persistency. 
• You’ve got to have an approach and stick to it.
• And the first thing I always tell people is to pay off debt, especially high interest debt like credit cards.
• Pay off credit cards.
• Pay off auto loans.
• Pay off student loans.
• Don’t know which one to start with? Tackle the one that’s charging you the most interest.
• Devote some extra money to it, pay that balance off and then tackle the next one.

What about mortgage loans? Where do they fit in this mix?

• I like to call mortgage debt good debt.
• Because it’s actually returning money to you.
• Paying off your mortgage builds equity in your home and gives you tax benefits.
• And these days mortgage loans have very low interest rates compared to other types of loans.
• So, you could use an extra paycheck to pay down your principal.
• But for most people it’s smarter, overall, to use extra funds to pay down credit cards and auto loans.

What’s the next step in this smart plan to make the most out of our money?

• After paying off debt, living below your means tops the list.
• Think about it. If you’re living below your means, then you’re not accumulating debt and you’re saving a part of your income.
• Nearly 50% of Americans live beyond their means, which means their income won’t cover their expenses.
• You can try to increase your income.
• But a quicker solution is to cut your expenses.
• The best solution of course is to do both.
• Start by creating a monthly budget and sticking to it.
• Subtract your bills from your income.
• Anything left over – or most of it – should go into savings.
• Start asking yourself, “Just because I can afford it, should I buy it?”
• Ask that of major expenses and minor expenses.
• Saving $20 a week on minor expenses can add up and help you live below your means.

We’ve talked a lot about paying off debit and cutting expenses. What about the other side of the equation? How can we make the money we have work hard?

• First, make sure your checking account or savings account is paying you interest.
• A money market account or certificate of deposit are also good options and can often pay a bit higher interest than a standard checking or savings account.
• Whatever you’re doing, start saving more now.
• Whether you’re 25 or 45, compounding interest on these types of accounts help you build wealth. 
• The sooner you start saving, the more money you’ll have when look to buy a home or when you retire.
• Try saving 5% to 15% of your monthly salary.
• And review your spending every month and try to find ways to move more to savings.
• Small sacrifices can help you increase your wealth.

When it comes to savings, what type of savings account should people build first?

• If you don’t already have one, build an emergency savings fund.
• We all need one of those, and lots of people haven’t even started one. 
• I say this because an emergency savings fund helps you cover unexpected expenses without using a credit card.
• If you can use your emergency savings instead of a credit card, it will keep you out of a financial hole that can take time to climb out of. 
• Having three to six months of living expenses in an emergency savings fund is what I recommend.

What about retirement accounts? Where do they fit in?

• If your employer offers a 401-k plan, sign up, participate, and if you can max out the annual contribution limits, by all means, do it.
• The 401-k is the primary vehicle for retirement savings these days.
• And employers will match your contributions up to a certain percentage of your salary.
• Make sure you have all the information from your employer on that and at the very least contribute enough to get all the matching dollars offered.
• A typical match is about 3% of your salary. 
• So imagine getting a 3% raise just for contributing to your 401-k. Pretty good.
• If your employer doesn’t offer a 401-k, you still have options.
• You can talk to your bank or investment advisor about Individual Retirement Accounts, including Roth IRAs and “solo” 401-ks.
• Any of them can help you build wealth and most come with tax advantages.
• You don’t have to be making a ton of money to open these accounts. 
• But it’s important to get started and seek out the advice of your banker or investment advisor on which one may be right for you.

Spend less, save more, take advantage of the retirement accounts available to you.

• You’ve got it. 
• And start today. 
• The sooner you start the sooner you can see your wealth grow.