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Challenging economic and financial times like we are experiencing make us pause and question our decisions, especially when it comes to finances. Have we made smart investments? Have we borrowed appropriately? Have we saved enough? The bottom line is, there is always room for improvement. It’s never a bad idea to assess our financial position and determine how we can be smarter with our money, but sometimes it takes a financial challenge (or crisis) to force us to spend the time to do so. So, how can you make smarter financial decisions today to ensure you are better positioned to weather financial challenges, and set yourself up for future financial stability and success?
Start off by paying down high cost debt
The easiest way to earn money is to stop spending money. Evaluate your outstanding debt and determine which debt bears the highest interest/cost structure. In some cases, it may be advantageous to use some of your excess cash to pay down high-cost debt; you will get an immediate and known return on your investment equal to the amount of interest and fees you would have paid on that debt had you not paid it down. You’ll reduce your outstanding debt and create credit availability should you need to access such for a future need. Having less outstanding debt can improve your future credit/FICO scores, which directly correlates with the cost of future debt. Ultimately, you will pay less for future credit should the need arise.
Look for high-yield checking and savings accounts
If you are going to keep your money with a financial institution, look for accounts that offer higher-than-average interest rates (the average is around .07%). Often, you’ll find the highest annual percentage yield (APY) with smaller institutions, especially online banks. Many will also offer low deposit requirements. Don’t be afraid to look outside of the larger, well-known financial institutions. When it comes to checking accounts, make sure you pay attention to the requirements that come along with interest-bearing accounts; they often have additional stipulations. Some accounts may have a minimum balance that must be maintained in order to earn the interest. Others require the account be used for direct deposit or have a minimum amount of transactions required per month. Do your research and select the account that offers you the most value compared to the requirements. The more frequently your interest is compounded, the higher the APY and in turn, the more quickly your savings will build.
Invest in CDs and Treasurys
Certificates of Deposit (CDs) are available through most financial institutions. CDs generally offer a higher interest rate, especially with larger and longer deposits, because you are required to keep your money in the CD until you’ve reached the maturity period. If you want to access your money before the CD matures, you’ll have to pay a penalty (similar to a retirement account, though the maturity periods can be as little as six months). Treasuries, or U.S. government bills, bonds or notes, are another savings vehicle available in different maturity lengths. They can often be purchased at a discount in addition to earning interest and can be a very reliable investment. There are various maturity periods, interest rates and payouts for CDs and Treasurys, so it’s wise to do your research as you would before opening a high-yield checking or savings account.
Take advantage of tax-free savings accounts
Retirement savings accounts like 401(k) and IRA plans are one of the best long-term investments, especially if you receive a matching contribution. It’s often difficult to consider our long-term plan when a financial crisis strikes, but if possible, you should maintain your retirement savings contributions. It is very difficult to make up the interest you’ll earn now by contributing at a higher level later. A simple online calculation can show you how your retirement fund will be affected if you change (or eliminate) your contribution now. These accounts can be invested in a multitude of ways, earning interest with no taxes due until you start to take distributions out of your retirement account. Depending on your tax bracket, tax-deferred investment accounts can generate substantially greater returns than traditional investments in the after-tax market. Maximize your retirement contributions as much as you can. Every employee and/or business owner should aggressively fund the ultimate insurance policy.
During these challenging times it may seem difficult to develop a savings strategy – but taking the time to educate yourself on the different offerings allows for financial growth and future stability. Understanding the different types of debt, ways to eliminate high-cost debt and how to maximize your savings is critical to developing a plan that will pay high dividends in the future.
David Kilby is president and chief executive of FinFit, a financial wellness platform.
