Personal Finance 101

Let me guess: You’ve heard personal finance experts and influencers say that credit cards are bad and that you should cut yours up immediately.

Yep, we’ve all read those warnings. And many of us have probably wondered if they were right and maybe even felt guilty for swiping our credit cards on the regular.

If this is the only type of personal finance expert you’ve been following, then you’ll probably be surprised to see me say that I love credit cards. 

While it’s true that credit cards have high interest rates and have caused many Americans to go into debt, when used correctly, they’re an incredible tool. In fact, not only do most credit cards not have to cost you a dime, but you can even make money by using credit cards.

If you’re going to add credit cards to your personal finance toolbox, then it’s important to understand how to use them responsibly and in a way that really benefits you (and not the credit card issuers).

The problem with credit cards

Before we talk about how to use credit cards responsibly, we should first acknowledge some of the problems with credit cards and why some people seem to have such strong feelings about them.

One of the biggest problems with credit cards is the amount of money they cost consumers in interest each year. When you carry a balance on your credit card (meaning you don’t pay off the full balance each month), you’ll pay interest on that amount.

Unfortunately, the average credit card interest rate at the beginning of 2022 was 16.13%. That number is only going to rise as interest rates do. And because the average credit card balance is $5,525, many Americans end up paying an awful lot of interest each year.

Credit card interest, more than any other kind, can hold you back from reaching your financial goals. Not only are the interest rates notoriously high, but that interest compounds daily, meaning the interest that accrued is added to your credit card principal and also begins to accrue interest.

So why have so many people managed to accrue large amounts of credit card debt? There are three primary reasons I can pinpoint:

1. People spend money they don’t have. Rather than spending money that’s already in their bank account, they spend money they haven’t earned yet. Then they pay those purchases off in the future when they get paid.
2. People lose control of their spending. Swiping a credit card is painfully easy sometimes, especially if you’re struggling with emotional spending. 
3. People use credit cards as an emergency fund. When financial emergencies pop up and you don’t have an emergency fund in place, a credit card may be the only option.

Unfortunately, all of these factors result in people getting into financial trouble with credit cards, which is why some financial experts advise so strongly against them. The good news is that if you learn to use them correctly, you can avoid these problems for yourself.

Read More: How to Pay Off Credit Card Debt Fast

The benefit of credit cards

Before I dive into tips for using credit cards responsibly, let’s talk about a few benefits of using credit cards. 

BUILDING CREDIT

One of the biggest advantages to using credit cards is how they can help you build your credit history and credit score. Now, some personal finance experts (*cough* Dave Ramsey *cough*) will tell you that a credit score is unnecessary because it only encourages the use of more debt.

This couldn’t be further from the truth.

First, there are some situations where debt is simply unaffordable. For example, most people I know can’t afford to buy a home in cash. In that case, a good credit score is vital.

But even if you’re not taking on more debt, a credit score is important. Landlords can run your credit to decide whether to rent you an apartment. Insurance companies use your credit score to set your insurance premiums. Even employers can use your credit score when deciding whether to offer you a job.

So yes, a credit score is important.

The best way to build your credit using credit cards is to use your cards each month but use less than 30% of your balance. If you use more than 30% throughout the month, then you can pay your balance weekly instead of monthly to keep your running balance lower.

The other step to building credit with credit cards is to pay your balance off in full each month. Doing so will show lenders and credit bureaus that you can use debt responsibly. Plus, it will help you avoid those costly interest charges we talked about earlier.

Read More: 7 Hacks to Boost Your Credit Score Quickly

REWARDS

My personal favorite perk of using credit cards is the rewards you can earn. Depending on how much you spend on your card and the credit cards you use, you could earn thousands of dollars of rewards and perks each year.

There are a few different ways you can earn rewards on credit cards.

First, many credit cards offer a welcome bonus, where you’ll get a large number of points if you spend a certain amount of money (usually around $3,000) in the first few months of having the card. One of these bonuses alone helped Brandon and me take an almost free trip to an all-inclusive resort in the Dominican Republic.

Another way to earn rewards with a credit card is through your regular spending. Many credit cards offer a certain percentage of either points or cash back on each dollar you spend. You can use those points for statement credits, gift cards, money in your bank account, free travel, and many more.

In addition to these rewards, many premium credit cards offer perks that include hotel and airline statement credits, travel insurance, extended warranties, and many more.

SAFETY

Carrying a credit card is far safer than carrying either cash or a debit card, thanks to the fraud protection they all come with. Basically, you aren’t on the hook for fraudulent purchases made with your credit card.

Technically debit cards also offer this fraud protection, but here’s the problem: When someone fraudulently uses your debit card, the money leaves your bank account. And while you’ll probably eventually get that money back if the purchase was really fraudulent, it could take a while. In the meantime, you’re simply out that money.

But in the case of fraudulent transactions on a credit card, you never have to worry about the money leaving your bank account, and the credit card issuer won’t require you to pay for those charges.

How to use credit cards responsibly

Now that we’ve talked about some of the advantages and disadvantages of using credit cards, it’s time to dive into what we’re really here to talk about: using credit cards responsibly.

1. UNDERSTAND YOUR CREDIT CARD TERMS

First and foremost, it’s important to understand your credit card terms. You can find these by logging into your online account and finding your credit card agreement or another document that shares this information. The details you’ll want to look at include:

• Purchase interest rate
• Balance transfer interest rate
• Annual fee
• Over-limit fee
• Late fee
• Foreign transaction fee
• Statement date
• Payment due date

Once you know your credit card terms, keep them in mind as you use your card. Always pay your bill on time, and proceed with caution anytime you use your card in a way that will require you to pay unwanted interest or fees.

2. ONLY SPEND MONEY YOU HAVE

Here’s how most people use their credit cards: They put expenses on them throughout the month, often for groceries, eating out, and other spending. When they get paid next month, they use a part of that paycheck to pay off their credit card bill.

The problem with using your card that way is that you’re using money you don’t actually have yet. You’re using February’s income to pay for January’s spending rather than using January’s income.

The best way to avoid this problem is to spend only money you already have. If you’re going to spend $100 on groceries and put it on your credit card, that $100 should already be in your bank account to pay off that credit card bill.

The easiest way I’ve found to limit myself to only spending what I have is to get one month ahead on my budget. Click over to the post to learn how!

3. KNOW YOUR CREDIT LIMIT

It’s critical that you know your credit limit for a few different reasons. First, if you spend over your credit limit, you’ll usually be subject to some sort of fee. It’s an expense that could be easily avoided by paying attention to your card balance and spending.

The other reason it’s important to know your credit limit is how it affects your credit score. One of the most important factors when it comes to your credit score is your credit utilization, which is the percentage of your available credit that you use at any given time.

In general, the higher your credit utilization, the worse it is for your credit score. It’s recommended that you keep your utilization below 30%.

When you know your credit limit, it’s easy to ensure your credit utilization is low. Suppose you have a credit limit of $10,000. You’ll know to keep your balance below $3,000 at all times.

If you use your credit card for all of your spending as I do, then you can pay off your card more often to ensure your credit utilization doesn’t get too high. I have a recurring note on my to-do list to pay my credits cards off in full every Monday.

4. PAY YOUR BILLS ON TIME

It probably seems like common sense that using your credit card responsibly includes paying your bill on time. But it bears repeating because the average household pays an average of more than $100 per year in late fees.

The simplest way I’ve found to ensure I never pay a bill late is to set up automatic payments. I have automatic payments set up on every single bill I have, so even if I stopped checking in on my accounts, my bills would get paid.

Another solution for ensuring your bills are paid on time is to create a bill calendar. You can create a digital calendar or a physical calendar and write down the date that each of your bills is due, including your credit card.

Paying your credit card bill on time will help you avoid annoying late fees and will help keep your credit score healthy since one late payment can cause a major ding in your credit (and multiple late payments can do even worse).

5. MONITOR YOUR MONTHLY STATEMENTS

Most of us probably don’t get actual credit card statements in the mail each month. Instead, they’re available on your credit card issuer’s website. But whether you get a physical copy or see them online, it’s worth looking them over at least once per month.

First, looking at your credit card statement at least once per month can help you stay on top of your spending and notice any bad spending habits. It’s easy for overspending to slip through the cracks, but looking at your statements forces you to face it head-on.

The other reason it’s important to check your monthly statements is to make sure there’s nothing there that shouldn’t be there. If there are any fraudulent charges on your credit card, you’ll want to know right away so you can alert your credit card company.

6. PAY YOUR FULL BALANCE

We’ve already talked about how many Americans have fallen into credit card debt, and most of us don’t want to be there. The single best tip for using your credit cards responsibly is to pay your balance off in full each month.

Not only will paying off your full balance help save you money on interest and avoid racking up debt, but it will also help your credit.

Unfortunately, there is a myth floating around out there that carrying a credit card balance actually helps your credit score. That’s simply not true. Sure, it’s important to show your credit card companies you can use debt responsibly — which requires that you actually use your credits. But you’ll get even more benefits if you pay them off in full.

What if you have credit card debt?

You might be reading this post already in credit card debt and wondering how it applies to you. I’ve put together a few more tips specifically for people who already have credit card debt.

AVOID RACKING UP NEW DEBT

It probably goes without saying, but avoid increasing your credit card debt if you can help it. I understand that sometimes financial emergencies happen, and additional debt is unavoidable. But if possible, don’t let your balance grow anymore.

PAY MORE THAN THE MINIMUM AMOUNT

If you make only your minimum payment each month, it could take you years to pay off your current credit card debt.

Let’s say you have $10,000 in credit card debt with an interest rate of 18%. Based on the normal formula to calculate the minimum payment, you’ll pay about $250 per month, and it will take you a little over five years to pay off the debt.

But over that five years, you’ll pay more than $5,300 in interest. Yep, more than half of the amount you initially borrowed. But if you doubled your monthly payment, you’d pay it off in just two years and pay only about $2,000 in interest.

STOP USING YOUR CREDIT CARDS

Using a credit card that already has a balance on it can make it even more difficult to get out of credit card debt.

First, when you’re mixing old purchases with new ones, it can be difficult to separate them and know how much you should pay each month.

It’s also easier to convince yourself that it’s okay to go into just a bit more debt.

Let’s say you have $5,000 in credit card and want to make a $100 purchase that you can’t quite afford. Instead, you put it on your credit card. What’s another $100 on a $5,000 balance, right?

The problem is that most of us don’t do this just once (and I know this from personal experience). Instead, you’ll use this argument to justify purchase after purchase as your debt continues to grow.

For the time being, it’s better just to avoid using any credit cards with balances already on them.

Are credit cards right for you?

Listen, I love credit cards. I love how they help my credit score, and I especially love the money I save with credit card rewards. But I can also acknowledge that credit cards aren’t right for everyone.

If you’re someone who struggles to control their spending, then credit cards may not be right for you. Unfortunately, they’ll likely do more harm than good to your credit score. And the rewards you earn on your credit cards will be outweighed by the interest you end up paying.

If you really aren’t sure whether using credit cards is the right move for you, try asking yourself this one question: Can I commit to sticking to my budget and paying off my full credit card balance each month?

If the answer is yes, then you can probably benefit from credit cards. If the answer is no, then it’s probably better to skip them.

You can see my favorite credit cards by visiting the full list of my favorite money tools and resources.

More than 97 million people plan to set financial goals for themselves. But without a solid plan in place and the right habits to back it up, it can be challenging to reach those goals.

Trust me – I was the queen of setting goals and new year’s resolutions for myself. But then, I would become disappointed that they would never come to fruition.

That’s because I never took action to make them happen. I thought I could go from zero to 100. But without a solid plan in place and the right habits to back it up, reaching new goals can be challenging.

In reality, reaching your goals has more to do with the habits you create. Whether your goal is related to your personal finances, your health, your relationships or anything else, your habits will ultimately determine whether you succeed.

In this article, you’ll learn 14 good financial habits you can adopt in 2023 to help you reach your financial goals this year and beyond.

Track your spending

To change anything in your finances, you need to know where you are now, including where your money is going.

I never used to track my spending, yet I’d be confused as to how I ran out of money each month. When I finally sat down and tracked my spending, I was shocked.

I learned I was spending a lot of my income on dining out and food delivery. I also learned that those small Target runs throughout the month were really adding up in my budget.

Tracking your spending can open your eyes to where your money is going. It shows you where you’re overspending and can help you set a budget for the future.

For me, tracking my spending helped me see where I was starting from so I could figure out where I wanted to go. It helped me get real about where I could cut back and how much I could start putting toward my goals if I did.

Set financial goals

I talk to so many people who tell me that they know they should be spending money, but they don’t know how much to save or how to do it. And even if they did know, they don’t really have the motivation to do so.

This is what happens when you don’t have specific financial goals. It’s much harder to save when you really don’t know why you’re saving.

But when you set financial goals, you know exactly why you’re saving and how much you need to save. For example, if I know I want to spend $3,000 on a vacation with my husband next year, I can figure out how much to save each month to make it happen.

Plus, the thought of meeting your goal will provide all the motivation you need. If I know I have a dream vacation coming up next year, I’m probably going to be a lot more motivated to save than I would be without a goal.

Schedule a weekly money date

Checking in on your finances is so important. I sit down once per week and update my budget, record all of my expenses, and adjust anything I need to. I also sit down monthly to close out my budget for the month and plan the following month’s budget.

Having a regular money date with yourself is a great way to stay on top of your finances. Put it on the calendar, so you never forget. 

And if you share finances with someone else, you can have a regular money date to talk about your family finances. For my husband and I, money dates usually include us talking about what our spending looked like the previous month, what special occasions might be coming up in the next month, and any changes we’re considering making to our budget or finances.

Pay yourself first

For years I would tell myself that I would save all the money I had left at the end of each month. But the end of every month would roll around, and I’d somehow never have anything left.

I finally learned the solution to this problem: paying myself first.

When you pay yourself first, you decide ahead of time how much you want to save each month, whether it be in your emergency fund, retirement account, or toward a financial goal.

Then, you transfer that money over to savings as soon as you get paid, before you have a chance to spend the money.

I’ve found the best way to do this is to automate my savings so that I never have to remember to do it.

Read More: How to Pay Yourself First and Finally Start Saving Money

Budget one month ahead

One of my favorite budgeting hacks is to be one month ahead with my budget.

Most people budget with the current month’s income. In other words, they use their January paycheck to pay their January bills.

But when you’re one month ahead on your budget, you use your January paycheck to pay February’s bills.

This type of budgeting has tons of benefits. First, this one-month buffer serves as a small emergency fund. It also helps you to avoid timing your bills to your paychecks, as many people have to do.

If you want to give it a shot, I have an entire guide on how to get one month ahead on your budget.

Use your credit cards responsibly

I love credit cards. I put just about everything on a credit card. The problem is that most people are using credit cards incorrectly.

First, many people put their expenses on a credit card and then pay it off with the next month’s income. This means they’re spending money they haven’t even earned yet.

Another habit people have is to charge things to their credit card but then not pay off the full balance.

Here are a few rules of thumb for using credit cards responsibly:

1. Only spend money you already have in your checking account
2. Keep your credit card utilization below 30%
3. Pay your balance off in full every month

Read More: How to Use Credit Cards Responsibly

Make more than your minimum debt payments

When you have debt, it can be tempting to simply pay the minimum monthly payment the lender requires of you. That way, you have more money each month to spend on other things.

The problem is that you end up spending way more money in the long run. Depending on the amount of debt you have, paying your debt off faster could save you hundreds, thousands, or even tens of thousands of dollars in interest.

The sooner you pay your debt off, the sooner you have that money available each month to put somewhere else in your budget.

And remember, there are other downsides to having debt. Suppose you wanted to buy a house. If you have too much debt, a lender is unlikely to approve you for a mortgage.

Read More: Debt Snowball vs. Debt Avalanche: Which Strategy is Right For You?

Avoid monthly payments

Stores try to convince you to spend money by looking at a purchase as a monthly payment rather than as the full purchase price. New financial services allow you to use a monthly payment for just about everything these days, whether it’s a $1,000 computer or a $25 shirt.

But remember that payment plans force you to spend more money in the long run. And you normalize the habit of having monthly payments.

It’s better to pay for everything you can in full.

Certainly, there are exceptions. When it comes to buying a house, you’ll almost certainly borrow money and have a monthly payment. But for smaller purchases, avoid monthly payments as much as possible.

Continue to learn about money

Even if you feel like you’ve got your financial shit down, there’s always room to learn more. Even though I have a lot of experience in personal finance and help coach others, I still regularly read personal finance books and listen to personal finance podcasts.

As you reach certain goals, there’s likely more to learn for the next one. Let’s say you finally paid off all your debt and have learned to stick to your budget. Now it might be time to pick up a book on investing.

Learn your spending triggers

Everyone has their own spending triggers. For some people, a sales email in their inbox is a trigger. For others, it’s walking into Target. For others, it might be having a really bad day.

One of the best ways to save money is to identify your spending triggers and find ways to combat them.

Let’s say your spending trigger is sales emails from your favorite store. An easy way to combat this would be to unsubscribe from that store’s emails.

I used to struggle with emotional shopping, especially as my first marriage was ending. When I was particularly upset, I’d spend money. I overcame that by dealing with my emotions head-on rather than looking for a different outlet.

Maintain an emergency fund

I think 2020 taught everyone the importance of having an emergency fund. Millions of people lost jobs this year, Congress dragged its feet in getting aid to the people who really needed it, and the pandemic resulted in huge medical bills for many families.

Even if your finances weren’t affected by the pandemic, chances are you’ve had a financial emergency in the past that you struggled to pay.

If you’re just getting started and have high-interest debt like credit cards to pay off, I recommend saving at least one month’s worth of expenses in your emergency fund. Eventually, you can work your way up to 3-6 months.

The important piece is replenishing your emergency fund when you use it. Let’s say you’ve got an emergency fund of $5,000 and end up with $1,000 worth of car repairs. Your emergency fund is down to $4,000. Your next financial priority should be replenishing that $1,000 before you start saving for something else.

Read More: How to Build an Emergency Fund and How Much to Save

Meal plan

Meal planning has been the single most effective way for me to cut down on grocery spending.

If I go into the grocery store without a list, it’s pretty much a guarantee that I’m going to overspend. But if I make a meal plan and grocery list ahead of time, I’m good about sticking with it.

Not only does meal planning help me only to buy the things I really need, but it also allows me to price meals out ahead of time so I know roughly how much I’ll spend.

Give to causes you’re passionate about

For many people, 2020 really showed the importance of financially supporting causes that are important to you. 

Charitable giving in 2020 increased from the previous year, despite the financial struggles many faced. And a special provision in the tax law has allowed everyone to deduct up to $300 for donations, even if they don’t itemize their deductions.

Chances are you already know which causes are most important to you, whether it’s combating climate change, protecting animals, promoting diversity, etc.

Whatever it is, take a look at your budget and see if you can swing a small monthly donation to your favorite causes.

Don’t try to keep up with the Joneses

Everyone has probably heard the phrase “keeping up with the Joneses.” And most people probably brush it off, thinking it doesn’t apply to them.

But you might be surprised.

As we earn more money, we tend to subconsciously increase our spending to go with it — aka lifestyle inflation.

We upgrade apartments or homes. We buy nicer cars. We eat at nicer restaurants than we did when we had our first jobs. We spend more on clothing, home decor, etc.

There’s nothing inherently wrong with any of these things. In fact, I tell my coaching clients they should identify areas of their lives where they spend guilt-free — for Brandon and I, it’s live music and eating out.

But it becomes a problem when you spend more in every category.

A good way to combat this problem is to decide ahead of time how you’ll upgrade your lifestyle. If you get a raise, decide ahead of time which spending categories you’ll increase and which will stay the same. That way they don’t all increase without you noticing.

Final Thoughts

2023 can be the year you finally turn your finances around and reach all of your goals. By implementing just a few of the good financial habits on this list (or more than a few), you’ll be amazed at the progress you see.

One of the most common questions I get from people who are ready to get serious about investing is the best tool to use.

Of course, many of us get our start investing in a workplace retirement plan, such as a 401(k) or 403(b). But there are also options to help you invest for retirement outside of your employer. Those options include a traditional IRA and Roth IRA.

Both traditional and Roth IRAs come with some advantages and disadvantages, especially as it relates to your taxes. As a result, each may be best suited to a certain type of investor.

In this article, I’ll explain the differences between the two types of retirement accounts and how to choose the right one for you.

What is an IRA?

An IRA (which stands for individual retirement account) is a tax-advantaged investment account to help you save for retirement. Unlike 401(k) plans, which are offered through an employer, IRAs are for individuals to invest on their own.

You can open an IRA at just about any brokerage firm. Once you open the account and start contributing money, you can decide how you want to invest the money within the account.

Why open an IRA

If you already have a 401(k) through your employer, you might be wondering why an IRA is necessary at all. There are a few reasons why I recommend everyone open an IRA, even if you have an employer-sponsored retirement plan:

1. An IRA allows you to invest above and beyond the 401(k) contribution limits
2. An IRA allows you to diversify your tax advantages — If you have a traditional 401(k), you can open a Roth IRA, and vice versa
3. An IRA gives you more control over your investment decisions

What is a Traditional IRA?

A traditional IRA is similar to a 401(k). You can contribute to the account throughout the year and then take a tax deduction for your contributions. Contributing to a traditional IRA reduces the amount of taxes you owe in that year.

The money grows in the account. Once it comes time to take money out during retirement, you’ll pay income taxes on your withdrawals.

What is a Roth IRA?

A Roth IRA is also a tax-advantaged retirement account, but you get the tax advantage at a different time.

When you contribute to a Roth IRA, you do so with after-tax money. There’s no tax break in the year you contribute the money. The money grows in your IRA, and then you can withdraw it tax-free during retirement.

Similarities and differences

Traditional IRAs and Roth IRAs have a lot in common, but there are also some key differences you need to know. Here’s a table to explain all of the similarities and differences:

*For the traditional IRA, whether you can deduct your contributions depends on your annual income and whether you have a retirement plan through your employer. If you don’t have a workplace retirement plan, you can deduct your contributions no matter what your income. If you have a workplace retirement plan, you can no longer deduct your contributions once your income reaches $78,000 for a single filer and $129,000 for a married filer.

Should I choose a Traditional IRA or Roth IRA?

Plenty of people find themselves overwhelmed when choosing between the traditional IRA and the Roth IRA. It ultimately comes down to your personal financial and tax situation.

Ultimately, it depends on your financial situation today compared to what you expect your financial situation to be in the future. 

Traditional and Roth IRAs give you a tax advantage at different times. A traditional IRA gives you a tax break in the year you make the contribution. Because you can deduct your contributions, your taxable income – and, therefore, the amount you owe in taxes – is lower.

As a result, a traditional IRA may be the right option for someone with a high income today who expects to have a lower income during retirement. You take the tax benefit now while your tax rate is high rather than later when your tax rate will be lower.

On the other hand, a Roth IRA tends to be a great option for people early in their careers who expect their incomes to grow. You can pay the full tax amount in the current year when your tax rate is relatively low. Then, you won’t have to pay taxes when you withdraw the money when your tax rate may be higher.

If you’re still struggling to choose the right IRA, you can use a Roth vs. traditional IRA calculator where you enter some basic financial information, and it recommends the right retirement savings tool for you.

INCOME LIMITS ON IRAS

As a caveat to the information about, there are certain income limits applied to IRAs.

We’ve already addressed the income limit on deducting your contributions to a traditional IRA. However, there is also an income limit on contributions to a Roth IRA. If your income is higher than the limit, you can’t contribute directly to a Roth IRA.

These income limits may impact which IRA you choose. After all, there’s no use contributing to a retirement account if you won’t get the tax benefits. If income limits prevent you from taking advantage of these accounts or fully enjoying the benefits, it may be worth choosing a different option or contributing more to your workplace retirement plan.

As a final note, self-employed individuals have more options aside from the traditional and Roth IRA. Learn more about how to save for retirement when you’re self-employed.

Final Thoughts

Choosing the right type of retirement account can be overwhelming. Hopefully, this explanation of the differences between the traditional IRA and Roth IRA will help you find the right account for you.

And remember — both of these accounts help you to save for retirement in a tax-advantaged way. As long as you’re setting money aside for the future, you’re on the right track.

I didn’t start tracking my net worth until I was in my late twenties. If I’m being honest, I didn’t think it was all that important. I thought my income was the metric that really mattered.

But here’s the problem with that: your income is just a snapshot of your finances. It doesn’t show the big picture.

And by not paying attention to my net worth, I was able to conveniently ignore my lingering debt and low savings rate.

But once I started tracking my net worth each month, I really saw my finances start to transform. I felt more motivated to make extra debt payments and move money into my savings account.

Not sure what net worth is or why you should care about it? Not sure how net worth is calculated? Stay tuned, because we’re going to cover all of that in this article.

What is net worth?

Your net worth is the difference between your assets and your liabilities. It’s one of the most important financial metrics there is. It helps to measure your overall financial picture and track your progress toward meeting your financial goals.

How do you calculate net worth?

Your net worth is the difference between what you own and what you owe. And with a little math, it’s easy to figure out on your own. Here’s how to get started.

1. Add up all of your assets. This includes money in your bank and investment accounts. It also includes the dollar value of any assets you own such as real estate, vehicles, or valuable collectibles.
2. Add up all of your liabilities. Your liabilities include any money you owe. This could include student loans, credit card debt, car loan, mortgage, medical debt, back taxes, and anything else you owe.
3. Subtract your liabilities from your assets. The difference between these two numbers is your net worth. The formula looks like this:

Assets – Liabilities = Net Worth

SEPARATE YOUR NET WORTH FROM YOUR SELF WORTH

Thanks to student loans, most people today (nearly 70%) graduate from college with significant debt. And unfortunately, this means they’re also graduating with a negative net worth.

Adding up your net worth for the first time and finding that it’s negative can be shocking and, frankly, a punch to the gut. Trust me, I went through that feeling myself.

As you calculate your own net worth, please separate your net worth from your self-worth. Your net worth is just a number. It says nothing about you as a person or your value as a human. About one in five households have a net worth that’s either zero or negative.

You can take steps to increase your net worth, but don’t wait until you do to value your self-worth.

Read More: How to Develop a Positive Money Mindset

Why is net worth important?

You might find yourself wondering why your net worth really matters. That was me for years. I thought that my income level was far more important. After all, it had more of an impact on my day-to-day life.

But your net worth is actually super important! It represents the big picture of your finances and gives you an idea of how you’re using the money you make.

IT TELLS YOU WHETHER YOU’RE MOVING IN THE RIGHT DIRECTION

One of the benefits of tracking your net worth every month is that you can start to notice a trend. Does the number get bigger every month? Then you’re moving in the right direction by paying off debt and increasing your savings. But if the number gets smaller each month, it’s time to make some changes.

IT TELLS YOU HOW PREPARED YOU ARE FOR THE FUTURE

People often use income as the most important metric in their finances. But your income isn’t guaranteed. If you lose your job tomorrow, you’ll be stuck relying on your savings to pay the bills. And considering many Americans are living paycheck to paycheck, the amount of money they were making no longer matters when the job is gone. 

Your net worth gives you an idea of just how prepared you are to deal with a financial emergency like a job loss, as well as how prepared you’ll be for retirement.

IT PUTS YOUR DEBT INTO PERSPECTIVE

It’s easy to ignore your total debt and just focus on the monthly payment. This might feel better at the moment, but it doesn’t help you to pay it off any faster. By calculating your net worth, you’re forced to come to terms with the impact your debt has on your overall financial picture.

IT MAY BE A FACTOR WHEN YOU’RE APPLYING FOR A LOAN

When you borrow money, lenders want to know you’re going to be able to pay back what you owe. If you already have significant debts and not many assets, then a lender may see you as a bigger risk. You could end up being denied a loan, or get approved for a loan but have a high interest rate.

How to grow your net worth

You might be a little discouraged seeing your net worth for the first time — I know I was! For those of us graduating from college with debt, it can be discouraging to start adulthood with a negative net worth. But there are plenty of ways to boost it!

• Pay off debt. All of your debt counts as a liability in your net worth. The fewer liabilities you have, the higher your net worth is. As you pay down your debt, you’ll see your net worth increase.
• Automate your savings. I used to struggle so much with saving. I’d tell myself that I’d save whatever I had left at the end of the month, but then there would never be anything left when that time came. The easy solution? Automation. Set up an automatic transfer from your checking account to your savings account right after payday and you never have to worry about spending that money on something else first.
• Start investing. Investing is a great way to boost your net worth even faster than just saving. Because rather than just having your money sitting there and adding a bit to it each month, it’s growing without you having to do anything. 
• Cut your expenses. One of the reasons people don’t see their net worth grow each month is that, even though they make good money, they spend it all each month. By reducing your expenses each month, you can start to see your net worth grow.
• Increase your income. Cutting expenses is great and all, but you can only do it to a point. You still have bills to pay. Plus, you don’t want to cut everything you enjoy from your budget. Instead, you can increase your income to start saving more.

Read More: How We’re Planning to Pay Off Six Figures of Debt

Tools to help you track your net worth

Tracking your net worth regularly is an excellent way to check in on your progress and make sure you’re moving in the wrong direction. But I’m guessing you don’t want to sit down and do the math each month! Here are a few ways you can easily track it:

1. You Need a Budget: My favorite budgeting app also happens to have a reports feature where you can track your net worth. I love watching mine change each month as I increase my savings and pay off debt!
2. Personal Capital: This digital tool is also great for tracking your net worth. You link all of your bank, debt, and investment accounts. Then your financial dashboard reports your net worth. Plus, it’s free, so if you aren’t already using a budgeting app like YNAB, then Personal Capital is a great alternative.

Final Thoughts

I spent years thinking my net worth wasn’t really important. I focused solely on my income as a measure of my financial success. It wasn’t until I started tracking my net worth that I was able to look at the big picture and start seeing progress in my finances — progress that’s going to serve me in the future.

I haven’t always been good at saving. I’ve always kept a savings account at my regular bank, but admittedly, I didn’t put much money into it.

I always said I’d transfer whatever money I had left at the end of each month. But whenever the end of the month rolled around, there was nothing left.

When I finally decided to turn my finances around, one of the first things I did was build a small emergency fund.

But then the problem was that I had a large sum of money sitting in the bank, earning next to nothing in interest. So I finally got around to opening a high-yield savings account, meaning my money is making even more money.

Are you going to get rich using a high-yield savings account? Definitely not. But they’re an excellent first step for anyone who wants to maximize their savings and earn a bit of extra money each month without any additional work.

What is a high-yield savings account?

A high-yield savings account (HYSA) is just like any other type of savings account, except it pays a much higher return.

The savings account at your regular bank pays you interest each month. But in most cases, it’s a few cents per month. Not really anything to get excited about. But the rates on high-yield savings accounts can be significantly larger.

Consider this: the rate on a typical savings account is about 0.05%. The rate on a high-yield savings account is usually at least 0.50%. And when interest rates are higher, it can be 2.0% or higher. So the rate on a high-yield savings account is 20x to 40x the rate on a traditional savings account.

How do high-yield savings accounts work?

High-yield savings accounts use compound interest, meaning you earn interest each month, and then that money gets added to your principal. 

Your interest rate is known as your APY (annual percentage yield). But most of these accounts pay monthly.

Imagine that you have your $10,000 emergency fund in your savings account with an interest rate of 1.0%. 

In the first month, you’d earn $8.30 in interest. The next month, you’d earn interest on the full $10,008.30. It doesn’t sound like it makes a big difference, and it’s definitely not enough to get rich. But after one year, you’d earn about $100.46 in interest. 

And when interest rates are higher and your savings account has a return of 2.0% or more, you would have earned $201.84 in your first year.

What should you use a high-yield savings account for?

A high-yield savings account is not an investment. If you’re looking for an investment opportunity to grow your wealth, a savings account isn’t a replacement for a brokerage account.

It’s also not the best place for money that you expect to need soon. It can take a few days to transfer money from your high-yield savings account to your checking account. For money you use regularly, it might be better kept in a savings account at your normal bank or in your checking account.

Here are some good uses for your high-yield savings account:

• Your emergency fund. This is my favorite. It’s just a big chunk of money sitting in the bank not getting touched. By putting it in a high-yield savings account, I can earn a little money on it each month. And here’s a tip for you: Every month when my emergency fund earns interest, I put that money toward one of my other financial goals. 
• Financial goals less than 3-5 years out. The stock market can be a great way to save for financial goals, but not short-term financial goals. The market can be volatile, and the last thing you want is to have your brokerage account take a nosedive right before you plan to use that house downpayment fund. As a result, use a savings account for goals less than 3-5 years out. Brandon and I want to buy a house in the next couple of years, so we’re using our Ally savings account to save.

Is my money safe in a high-yield savings account?

As I mentioned earlier, a high-yield savings account is not an investment account. And it doesn’t come with the same risks as investing. In other words, there’s no chance of your account balance decreasing unless you actually take money out.

As long as the bank you choose is federally insured (it should say if it is on the website), your money is insured by the FDIC up to $250,000 per person across all of your accounts.

What to look for in a high-yield savings account

INTEREST RATE

The interest rate should be one of the biggest factors you consider when choosing the right savings account. After all, that’s the whole point, right?

The interest rate you can get is going to vary by bank. Right now (November 2020), the good ones are anywhere from 0.50% to 1.0%.

Keep in mind that they can change. When I signed up for my Ally account, the interest rate was 2.0%. Right now, it’s 0.60%.

When the Fed lowers interest rates, rates go down across the board — including in high-yield savings accounts. When interest rates increase again, you can bet that the rates on these savings accounts will also increase.

And if you sign up for an account and the rate suddenly goes down, don’t panic. If one bank is lowering its rate, chances are the rest are too.

Edit: This post was originally written in 2020 when interest rates were at historically low amounts. At the end of 2022, when interest rates are higher, the rates in HYSAs are nearing 3%.

EXTRA FEATURES

Before signing up for a high-yield savings account, read up on what special features the bank offers. For example, Ally Bank offers a bucket feature. You can create individual buckets within your savings account for different things you’re saving for. I have one bucket for my emergency fund and one for my future house downpayment. 

ACCESS TO YOUR MONEY

Obviously, you want to be able to get ahold of your money when you need it. And I’ve seen many people who prefer to keep their money in a savings account at the same bank as their checking account so they can do instant transfers.

While I agree that you should make sure you can easily transfer money from your savings account, I actually like the idea of having it at a different bank.

I use my high-yield savings account for my emergency fund. If I need to transfer money, it takes 2-4 days to hit my checking account. This means that I can’t impulsively spend that money. But 2-4 days is still short enough that if I lose my income and need to live off my emergency fund, I’ll have it in my checking account in time.

FEES

Anytime you’re going to sign up for a financial product, you should find out what fees come attached to it. None of the best high-yield savings accounts I’ve seen have fees. So if the one you’re looking at does, run the other way.

Which is the best high-yield savings account?

There are so many high-yield savings accounts to choose from, and there really isn’t one that’s better than all the rest. It’s all about finding one that feels good to you.

My favorite savings account is Ally (<< that’s not an affiliate link, I just really love their product). I really love the buckets features. I can visually break up my financial goals without having to open multiple savings accounts.

I also use a Capital One high-yield savings account for my business — it’s where I keep my tax money until it’s time to send it to the IRS.

A few other popular options are:

• Marcus by Goldman Sachs
• Citibank
• SoFi

Final Thoughts

A high-yield savings account is a great way to earn a little extra cash on the money you’d be putting into savings anyway. It’s the perfect place to store your emergency fund or the money you’re saving for a big financial goal.

In the summer of 2020, Brandon and I bought an RV, sold most of our belongings, and hit the road to travel full-time. It’s been amazing, but we hit a few bumps in the road.

Most notably, our car started on fire. Yes, you read that right. It literally started on fire.

As you can imagine, there wasn’t much that could be done to salvage it, and we had to replace it quickly.

When this happened, I started to panic a little. You see, my husband and I have both had our fair share of financial hiccups along the way, and we’ve both had times when our credit scores weren’t very good. I immediately started to worry about whether we’d be able to get a car loan.

This worry came out of habit after years of worrying about money. In reality, Brandon and I have worked hard to be in the financial situation we are in today. All of that work not only allowed us to get a loan to replace our car, but our good credit scores also allowed us to get a good interest rate, so we wouldn’t be throwing away a ton of money on interest while we paid off the loan as quickly as possible.

Like Brandon and I, many people find themselves at points in their lives where their credit score is suffering. And just like we did, you are 100% capable of increasing your credit score and making your financial life a heck of a lot easier.

In this article, you’ll learn what a credit score is, why it matters, and how to start boosting yours quickly.

What is a credit score?

A credit score is a three-digit number that represents your creditworthiness (aka how likely you are to pay your bills on time). It’s based on the information on your credit report, which is compiled by three major credit bureaus: Experian, Equifax, and Transunion.

You can think of your credit report as your report card and your credit score as the grade you receive. Credit scores range from 300-850 and are considered either poor, fair, good, very good, or excellent. The higher your credit score, the better.

Why is a credit score important?

Your credit score tells lenders how risky of a borrower you are. In other words, they use the number to decide how likely you are to pay them back when you borrow money.

Your credit score has a huge impact on your finances. It can affect things like:

• Whether you can borrow money. If lenders see you as too much of a risk, you may not be able to get a credit card, car loan, mortgage, etc.
• Your interest rates. Even if you can get a loan, those with lower credit scores will end up with much higher interest rates. A good score can save you thousands of dollars.
• Your ability to get an apartment. When you fill out an apartment application, your credit score is one of the factors the landlord considers. A poor credit score can prevent you from getting an apartment. 
• Your job. Potential employers can access part of your credit report. They might use this information to make a hiring decision, especially if you’re applying for a job where you’ll have access to company or customer money.
• Your insurance rates. Studies have connected credit scores to driving records. Because someone with a low credit score is a greater risk for insurance companies, your premiums will probably be higher. 

How do I check my credit score?

Federal law says that everyone can get a copy of their full credit report from each of the three credit bureaus (Equifax, Experian, and TransUnion) at least once per year by visiting AnnualCreditReport.com.

That being said, your full credit report doesn’t actually include your credit score.

Luckily, it’s not that difficult to get your credit score from other sources. First, you can use a free credit scoring site like Credit Karma or Experian. Depending on your credit card company, they may also provide you with a free credit score.

It’s important to note that there are multiple types of credit scores, including FICO and VantageScore. Experian reports your FICO score, while services like Credit Karma report your VantageScore. The two different major types of credit scores are the reason why the credit score you see may not be the same as what a lender sees.

What is a good credit score?

Credit scores range from 300-850 and break down like this:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very Good
• 800-850: Excellent

850 is a perfect credit score. The good news is that you don’t need a perfect score to get the perks that come with good credit. Those with a score of 800 or above will have access to the best rates on the market. 

If you have a very good score, meaning 740-799, you still have plenty of advantages going for you. You probably won’t struggle to get a loan, and you’ll have access to better-than-average rates.

How can I raise my credit score quickly?

If your credit score isn’t quite where you’d like it to be, you don’t need to panic. Your credit score is an ever-evolving number. And by making a few changes to your finances, you can start to see your score consistently increase.

1. PAY YOUR BILLS ON TIME

Paying your bills on time is one of the easiest things you can do to consistently improve your credit score. 

When you fail to pay a bill on time, the company you owe money to reports it to the credit bureaus. It then shows up on your credit report and damages your credit score. 

Be sure you’re paying your bills on time, and catch up as quickly as possible on any bills you’re currently behind on. 

2. PAY OFF DEBT

Your credit utilization, meaning the percentage of your available credit that you’re using, is one of the biggest factors going into calculating your credit score. 

The lower your utilization, the better. And anything above 30% can damage your credit score. If you’re using more than 30% of your available credit, try to pay some off to get that number below 30%.

3. INCREASE YOUR CREDIT LIMITS

Paying off debt isn’t the only way to improve your credit utilization. You can also try to increase your credit limits.

Most credit card companies have a form on their website you can use to request a credit limit increase. I find that calling their customer service line is more effective. There’s something about talking to an actual person that seems to get the job done better.

4. USE YOUR CREDIT CARDS RESPONSIBLY

Your credit score tells lenders whether or not you use credit responsibly. So the best way to show them that you do is to — you guessed it — use your current credit responsibly.

A few rules of thumb for credit cards include paying off your full balance each month (not just making the minimum payment), and keeping your total usage below 30% at any given time.

5. KEEP YOUR OLD CREDIT CARDS OPEN

We know that your credit utilization is important for your credit score. So is your age of credit, meaning the average number of years you’ve had each credit account. The longer your average age of credit, the better. 

I have lots of people ask me if they should close old credit cards. But keeping them open actually helps improve both your credit utilization and your average age of credit!

6. BECOME AN AUTHORIZED USER

Opening a new credit card can be great and all, but it doesn’t check all the boxes to increase your credit score. It increases your credit utilization but shortens your average age of credit and goes on your credit report as a hard inquiry.

But becoming an authorized user on someone else’s credit card can check all the boxes.

• It reduces your credit utilization, assuming the credit card is under 30% of the limit
• It increases your age of credit, because you get credit for the full life of the credit card
• It doesn’t appear as a hard inquiry on your credit report

I can tell you from personal experience that this one does the trick. My husband had a far lower credit limit than I did, meaning his credit utilization was higher when he used his credit cards. 

We added him as an authorized user on my cards, and his credit score immediately shot up!

7. AVOID APPLYING FOR NEW CREDIT

Applying for new credit can hurt your credit in a few ways. First, it shows up on your credit report as a new hard inquiry, which can slightly decrease your score. This will stay on your credit report for two years.

Opening new credit also decreases your average age of credit, which can drop your credit score.

8. DISPUTE ERRORS ON YOUR CREDIT REPORT

Data from the Federal Trade Commission shows that about one in five people has errors on their credit reports. This could look like a debt showing up as delinquent when it isn’t or a debt that isn’t yours at all showing up on your credit report. 

Sometimes it’s simply a mistake on the part of a lender, but it could also be something more sinister like identity theft.

Unfortunately, you have to be proactive about removing these errors from your credit report. No one else is going to do it for you. 

This is why it’s important to check your credit report at least once per year. You can spot any errors right away, and dispute them with the credit bureaus.

How long does it take to increase your credit score?

Turning your credit around isn’t an instant process. You can’t start paying your bills on time or pay off some debt and expect your score to shoot up instantly.

The good news is, however, that you can start boosting that number fairly quickly. Some things work faster than others.

If you have a low credit utilization or short credit history, having someone add you as an authorized user to their credit card can boost your credit score a lot in just a few months. Similarly, paying off a bunch of credit card debt can make a big difference quickly.

Other things will take longer to recover from. Delinquencies — aka missed payments — stay on your credit report for seven years. Bankruptcies stick around for ten years. If you have either of these, it’s just a matter of waiting for them to fall off, while making other positive changes in the process.

Final Thoughts

Your credit score is one of the most important numbers when it comes to your finances. It can be the determining factor when it comes to the loans, interest rates, and apartments you can get.

While many people struggle with a low credit score at one point or another, there are plenty of changes you can make to start improving your score.