1. Sink your money.
You have known expenses every year, like charges for insurance and streaming services, and that’s not money you want to have at risk when bills show up in your inbox. A traditional large savings account is a great idea, but you can take that one step further by setting up individual mini savings accounts, called sinking funds, that set aside money for a singular, specific savings purpose.
This is a useful method for big expenses, like the plane ticket you’ll need to buy to fly home for the holidays, as well as the things you don’t want to forget, like the Christmas gifts you’ll buy in a panic the week before your trip. Drop a scheduled amount from every paycheck into a sinking fund within your savings account and let the money earn interest while it waits for you. It’s like stealing from yourself now to pay for purchases later. Bonus points if you set up the withdrawal to take place automatically.
2. Understand your credit score.
Although relying on a wallet full of credit cards is treacherous territory, striving for zero credit isn’t the goal either. Having a healthy credit score (generally 700 and above) can save you money in several ways, including more competitive rates on certain types of insurance and lower interest rates and better chances for approval on mortgage loans.
The key to using credit cards is to see them as a strategic tool that should be used only after you are living faithfully on a budget. Any benefits of building good credit will be significantly overshadowed by the negative impacts of credit card debt, so a debit card will serve as convenient training wheels in the meantime while you master the budget-based life.
Once you’ve figured out how to stick to your savings and spending goals for at least six months, then choose a credit card with no annual fee, commit to never charging anything you haven’t already budgeted for and pay off the entire balance every single month.
3. Compound interest can be your best friend.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Simply put, compound interest is the interest applied to interest. Compound interest in a savings environment means your money is working for you, and it works best when it is given plenty of time to do that work.
In fact, compound interest is so powerful, that if you spent only one decade of life, from ages 18 to 28, investing money each month into an interest-earning account, and then stopped contributing savings after that, you would have more money by retirement age than someone who invested the exact same amount each month for the rest of their working years, but didn’t get started until age 28. The longer money has time to work, the more it can do.
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