Finding Money to Save or Invest
If you are spending all your income, and never have money to save or invest, you’ll need to look for ways to cut back on your expenses. When you watch where you spend your money, you will be surprised how small everyday expenses that you can do without add up over a year.
How much does a cup of coffee cost you?
If you buy a cup of coffee every day for $1.50, that adds up to $547.50 a year. If you saved that $547.50 for just one year, and put it into a savings or investment account that earns 5 percent a year, it would grow to $698.76 by the end of five years, and by the end of 30 years, to $2,366.26.
That’s the power of compounding. With compound interest, you earn interest on (1) the money you save, as well as (2) the interest that has previously been earned. Over time, even a small amount saved can add up to big money. If you are willing to watch what you spend and look for little ways to save on a regular schedule, you can make your money grow. You just did it with one cup of coffee.
If a small cup of coffee can make such a huge difference, start looking at how you could make your money grow if you decided to spend less on other things and save those extra dollars. If you buy on impulse, make a rule that you’ll always wait 24 hours to buy anything. You may lose your desire to buy it after a day. And try moving any extra money left in your checking account to your savings account every couple weeks. You’ll be surprised at how quickly small money can add up!
Pay Off Credit Card or Other High Interest Debt
Speaking of things adding up, few investment strategies pay off as well as, or with less risk than, paying off all high interest debt you may have.
Many people have wallets filled with credit cards, some of which they’ve “maxed out” (meaning they’ve spent up to their credit limit). Credit cards can make it seem easy to buy expensive things when you don’t have the cash in your pocket—or in the bank. But credit cards aren’t free money.
Most credit cards charge high interest rates—as much as 18 percent or more—if you don’t pay off your balance in full each month. If you owe money on your credit cards, the wisest thing you can do is pay off the balance in full as quickly as possible. Virtually no investment will give you the high returns you’ll need to keep pace with an 18 percent interest charge. That’s why you’re better off eliminating all credit card debt before investing. Once you’ve paid off your credit cards, you can budget your money and begin to save and invest. Here are some tips for avoiding credit card debt:
Put Away the Plastic
Don’t use a credit card unless your debt is at a manageable level and you know you’ll have the money to pay the bill when it arrives.
Know What You Owe
It’s easy to forget how much you’ve charged on your credit card. Every time you use a credit card, keep track of how much you have spent and figure out how much you’ll have to pay that month.
Pay Off the Card with the Highest Rate
If you’ve got unpaid balances on several credit cards, you should first pay down the card that charges the highest rate. Pay as much as you can toward that debt each month until your balance is once again zero, while still paying the minimum on your other cards.
The same advice goes for any other high interest debt which does not offer the tax advantages of, for example, a mortgage.
Manage Your Credit Score
Your credit score—a number between 300 and 850—is the financial barometer that measures the creditworthiness and risk potential of an individual consumer.
It’s one of the tools banks and lenders use to determine the interest rate you’ll pay on a given loan. The higher your credit score, generally the lower the interest rate charged, and the lower your payments. A lower interest rate can mean big savings over time. A higher credit score also makes it easier to be approved for new lines of credit, such as a mortgage or car loan.
You can improve your credit score. These guidelines may help:
- Pay your bills on time, every time.
- Don’t get close to your credit limit.
- A long credit history will help your score.
- Only apply for credit that you need.
- Check your credit report annually at AnnualCreditReport.com and make sure the information is correct.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.