12 Steps to Financial Fitness
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With all of the recent doom and gloom in the financial markets, it’s easy to get discouraged about your own financial situation. But here’s some good news for a change. While personal finance may seem complicated, it really boils down to 4 good habits that can make the difference between going broke or building up your net worth each month.
- Save money
- Avoid debt
- Invest
- Don’t lose it
Just as with achieving a balanced diet or maintaining a regular exercise regimen, getting your financial house in order is easier said than done. What’s that they say about the best laid plans? A 12 step program can get you on the road to financial recovery.
Save money
1. Know what you spend
The first step to growing your money is knowing your money. Just by seeing that you spent $432 one month dining out with your friends, or that you went to Starbucks 37 times, you’ll change your spending habits for the better.
2. Stick to a budget
Most of us really only have 1-2 “problem” areas. Maybe it’s shopping, maybe its electronics. Once you know how much you typically spend, create a budget 15-25% lower. If you try to cut too hard too fast, you’ll never be able to stick to it.
3. Find a checking account that pays interest
“Free” checking isn’t exactly free. Sure you get free checks and no account fees, but most checking accounts pay no interest – zero, nothing. Meanwhile, the banks are loaning your money out in the form of mortgages or business loans at 7-8% interest. That’s how banks work. If you don’t have a checking account that pays interest, you’re being ripped off. Consider switching your account to one of the many that allow your money to work for you such as an E*Trade Max-Rate Checking Account (2.9% APY on accounts over $5K) or an HSBC Online Payment Account (2.25% APY, open an account with as little as $1).
4. Find a savings account that pays 3%+ interest
The average US savings account only pays about 0.5% interest. With inflation at 2-3%, you’re actually losing purchasing power each year. Find a high-yield savings account, money market fund, or CD that pays more such as E*Trade Max-Rate Savings (3.3% APY, open with as little as $1).
Avoid debt
5. Know your credit score and correct your credit report
Your credit score determines the interest rate lenders will charge on your credit cards, mortgage, student loan, or car loan. That means any mistakes in your credit report can cost you tens of thousands of dollars over your lifetime. Unfortunately, 79% of all credit reports have an error, and 25% have an error serious enough to deny you access to credit. Take charge of your credit score at FreeCreditReport ($12.95/month for credit score and monitoring) or myFico (all three FICO scores and credit reports).
6. Eliminate late fees
About 35% of your credit score is determined by on-time payment. If you’re late on a credit card payment, it could cost you much, much more than the $29 late fee – if you let it go more than 60 days, it can affect your credit score and cost you thousands.
7. Don’t pay credit card finance charges
The average American carries $8,500 in credit card debt. At a minimum payment of $100 a month, it takes 6.7 years, and $4,257 in extra finance charges before you’re in the clear. If you carry a balance, one way to get some temporary relief is through a balance transfer. The best way out of this quagmire is to pay down your highest interest card first, or look for a balance transfer card such as the Citi® Diamond Preferred® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee) or the Chase Platinum Visa® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee but no more than $99).
8. Get a credit card that pays you
Visa and MasterCard typically charge retailers 2-3% of each purchase you make. As a consumer, you can get a cut of those fees in the form of cash back rewards. Don’t settle for a card that pays less than 1%. A typical household can get as much as $300 a year back just for buying what it was going to buy anyway. Examples of cash back cards include the Chase Freedom℠ Visa Signature® Card (3% cash back on gas and groceries) and Blue Cash® from American Express (up to 5% on gas, restaurants, and drugstores).
Invest
9. Contribute to an IRA or 401k
Invest $100 a month in a tax-deferred account like an IRA or 401k, and at a growth rate of 10%, in 30 years you’d have $380k. In a regular taxable account (assuming 20% annual taxes), you’d only have $229k. That’s a $151k difference. Companies such as Fidelity and E*Trade offer such accounts.
10. Start investing and keep investing
Two simple steps can put you ahead of 99% of your peers. First, have your employer automatically deduct $200-$300 a month from your paycheck to a brokerage or mutual fund account. Second, grow that money in an index fund like the S&P 500. By having the money automatically deducted, you won’t be as tempted to spend it. If $200 a month in the S&P behaves as it has in the past 20 years, two decades from now you would have around $170k in savings. Open a Scottrade Brokerage Account ($7.00 stock trades, $500 minimum deposit) or an E*Trade Financial Brokerage Account ($12.99 stock trades, $1,000 minimum deposit).
Don’t lose it
11. Create an Emergency Fund
An emergency fund helps protect you against all of life’s ups and downs, whether they be car repairs, job loss, or a leaky roof. If you’re young, single and have no mortgage, strive for about 3 months expenses, or ballpark around $10,000. If you have a house, kids, or both, strive for 6 months expenses, or around $20,000 – $30,000 for the average family. Be sure to keep your emergency fund in a high-yield savings account so that it continues to grow.
12. Protect yourself with insurance
The right insurance depends greatly on your age and whether you have a family. If you’re in your 20’s, you need renter’s insurance – it’s typically around $150 a year and covers theft and fire. If you have a family, you need life insurance, health insurance, and disability insurance. Compare rates at InsWeb.com or Insurance.com.
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48 Comments so far
leave a commentI don’t like seeing ads for deceitful companies on the Mint blog. (Specifically FreeCreditReport.com). Nothing is free about their company, which you indentify, but their advertising practices are unethical and I hate to see Mint, a name that I trust in finance, affiliated with them. Rather than advertise on a financial advice blog, be open and truthful. At least put a disclaimer at the bottom that you are being paid for those DoubleClick links.
The steps are good, and I understand that Mint is a for profit, but there is a line between profit and unethical advertising behavior.
Inflation this year could eat your emergency fund alive.
Try investing it in a money market fund or GIC
A WaMu savings account? Really?
I agree with Eric. This blog post is full of outright deceitful and misleading links.
There is free annual credit report available for everyone in the US at http://www.annualcreditreport.com from the 3 agencies once a year, instead you and thereby mint is pushing it’s readers to signup for a annual plan.
Ugh…
Thanks for the tip as someone who is already a wamu customer i’m excited to be getting more interest now
.
Eric,
Yes FreeCreditReport is not as straight forward as they could be, but we’re not sure of any other way to get a free score. (Free report yes, FICO score no.) It is also provided by one of the big 3 bureaus. We’ve said that it is indeed $12.95, but if you cancel within 7 days, by calling 1-888-829-6560, you don’t pay anything. The Mint belief here is that getting a credit score is absolutely critical, and credit monitoring can’t hurt either, it helps prevent identity theft and keeps you appraised of any issues on your file. It’s up to you to decide whether or not it’s worth $13/mo. I personally have had issues before with bills being lost during moves, etc. and having access to my report saved me from a downward spiral on my credit score.
If you have any other ideas, we at Mint, as well as the community would love to hear them.
Thanks,
Jason
Interesting tips here but I’m bit disappointed to see Mint integrating so many affiliate links within the post and not informing readers about the sponsored links. I do understand you are helping them find best deal, but links like Free Credit Report only confuses them when they have to pay to use the service.
I appreciate the quality of posts Mint carries but on the other hand such practice should be ignored or at least information at end of the post should inform users about sponsored links in post.
Just my two cents..!
Thanks @Eric, @Amit C and @Grove Pension Releae for your concerns. The disclaimer regarding affiliate links is a good idea and we will consider it.
It also seems pretty repetitive from what is out there. You guys ever consider have guest people writing posts on here? Or submitting posts to the mint blog community?
@Amit Again, it’s very important to understand the difference between a FICO score, and a credit report. The score is crucial in certain applications such as applying for loans. Annualcreditreport.com is great, I use it, but it does not provide the score.
@doctor S, we do indeed run guest posts and I’d be happy to hear from you with your ideas for posts. My email is lee@mint.com.
Ug. I was monitoring this blog, because I was interested in Mint and thinking about signing up. The unethical paid links to unethical services mean I won’t be signing up, and this website is off my rss feed.
After careful consideration of your comments, we have decided to remove the affiliate links from this post. In the future we will make sure to clearly distinguish between affiliate links and editorial content.
I’m glad to see you guys took down the affiliate links. I assume that since you’re still linking Fidelity and E-trade, that you’re not being paid by them?
Either way, an IRA is certainly a good idea…I opened a Roth IRA last year, and TradeKing is the only broker I found that offered no minimum and no fees–it will save you around $30 bucks a year or so over the other options.
Mint seems like a terrific product, but can it really be trusted? Giving all my usernames and passwords is a frightening idea.
Hi Dave,
We appreciate your concern and it’s certainly an important issue. For an in-depth look at Mint security and some practices you can follow to increase your financial security online please visit:
http://www.mint.com/privacy/
http://www.mint.com/privacy/faq/
http://www.mint.com/privacy/security-tech/
Regards,
Stephen
Dear Stephen , i read your mint security and practice .
Its look cool and will be continue stay updated on your blog.
It’s a difficult time to engage in investing, but the rest of the list is solid.
Though Mint has users of all ages, I believe the primary users are folks who are just getting started. That’s why it’s crucial in your discussion of IRAs to mention the two key advantages of a Roth IRA compared to a Traditional IRA, something I noticed was missing in your glossary.
First, assuming you will be in a higher tax bracket when you retire, you will save money by paying taxes on your contributions now rather than when you retire. Second, in a Roth IRA, you can withdraw your contributions (but not your earnings!) at any point without incurring the early withdrawal fine assessed to users of Traditional IRAs. Otherwise good discussion.
well… i visit your website first time and found this site very usefull and intresting !
well… you guys doing nice work and i just want to say that keep rocking and keep it up !!!!
Regards
Sireena
NC4:
One comment on the Roth IRA’s. I believe you are taxed in a different, lower bracket as a retiree, so paying the taxes now may not be the cheaper option. Can you (or anyone else on here) confirm/ explain this?
Thanks,
A
@Smalls
As I understand it, you contribute to a Roth after paying taxes and you contribute to a traditional before paying taxes.
The benefit of a Roth is that all of the money, when you withdraw it, it tax free. That includes the interest earned. So if you put in $5k now and it grows to $300k, you’ve still only had to pay the taxes on the initial $5k. The down-side is that you will probably be at a higher tax bracket when you make the initial $5k contribution.
In a traditional, you don’t have to pay taxes on the initial $5k, but you do pay taxes on the entire $300k when you withdraw it. The benefit, though, is that you should be at a (much) lower tax bracket when you do withdraw your money.
With that knowledge, you can see that the longer you plan to have your money in the account, the more benefit you will get from a Roth. As you get closer to retirement and each individual contribution has less time to earn interest, the more appealing the traditional becomes.
I agree with NC4, I am still in college and I looked to Mint to begin to keep track of all of my money. While I don’t have much money now, it is important to me to be able to know exactly where I should be keeping my money so that I don’t miss out on anything I can gain when saving for the future.
(This also means that Mint has to survive for a long time too!)
I already have a savings account, but no it’s not high-yield like this post says, which I wish I had looked into before putting my money somewhere.
Maybe Mint can take a focus to “newbies” like me, offer up some ways someone with little cash can begin to make good financial decisions. Thanks, great product so far!
I think the discussions going on here are great. Thank you, Mint, for reading our suggestions and taking action. I’ve been using Mint for a few months and find it to be a great service.
I think Mint should be a trusted source when it comes to helping people with tracking their finance. Not only that but to also give advices that will better people even when it means making harsh and truthful suggestions. You guys should be associated with the really good guys.
Dave Ramsey, is a financial expert that you should definitely have association with. There’s a HUGE community that follows his teaching and advices, including myself.
Minters, there is a great alternative for a FREE credit score. Credit Karma. I wrote about it on my blog here: http://www.narrowbridgeadventures.com/2008/10/how-to-pull-your-credit-score-for-free.html
I have been trying to budget better for years and mint has totally helped. I love you guys.
Eric – thanks for that free link to my credit score. I’ll check it out, currently I have a fraud alert on my account casue apparantly when you open up a checking account at Wells Fargo, they pull your credit even if you don’t ask them to to offer you overdraft protection. Be careful. They pulled mine 3 times in a period of 3 months.
Which makes me think about Suze Orman. She’s a trusted financial celebrity and I watch her. However, she’s totally promoting myfico.com and making money off of her kits. She’s already made enough money. If she wants to help people, she should encourage myfico to give scores for free or make her consumers aware of creditkarma.
I’ve always felt like the free credit report and myfico was a total scam. Yeah, you can see your credit report by law but hopefully you know mostly what’s on there. What you owe, which accounts you have,etc. It’s helpful to identify fraud, but useless if you want to know your fico score. I think consumers should have FREE ACCESS to their FICO score, since that’s what we are judged on. My fico is actually a for profit company based out of San Diego.
My credit union pays 5.1 % interest on the checking acct up to 25K with the only requirements to go paperless and use the debit card 12 times a month. Best rate out there.
This is in FL.
This is my problem with CreditKarma and most web-based services: it’s easy as pie to sign up, but it’s hell to cancel. For starters, I won’t even sign up for a service that makes you cancel by phone unless it’s the absolute best of it’s kind. If I can’t cancel directly through my account tools or by email quickly, forget it. Look what CreditKarma makes you do to cancel:
Your notice should be sent, in writing, to Credit Karma address at 577 Howard Street, 4th Floor, San Francisco, California 94105 and include your name, date of birth, and email address for your Credit Karma account.
WTH, what decade do we live in? You have to snail mail your cancel request?!
CrazyLegs, that does seem like jumping through hoops to cancel, but it is the best, and only no strings attached, free Credit Score site on the internet. To get your report, go to annualcreditreport.com.
Read more about a credit report step by step on my blog: http://www.narrowbridgeadventures.com/2009/03/my-annual-credit-report-experian.html
yes annual credit report you can get the free report, which is helpful. However, what is really important is your FICO score. You should be able to review your credit report for any necessary corrections, etc. but most likey you already know what is on it (hopefully). I like credit karma cause I feel consumers have the right to know their credit score, every day since it pertains to them and we cannot control it. You should not have to pay for it.
As for credit karma, they make money off of advertising, so your credit report is free. They are also TRUSTe certified, so they do not sell any of your information. They are also still in beta, so they are most likely making improvements.
Ideally, it would be convenient if they had opt-out online, but there may be security reasons why you can’t.
What is not clear is this article is how one should approach these various tasks over time. Say I have credit card debt, a no-interest-paying checking account, no savings going on, no IRA/401k, no mutual funds. Whilst it seems obvious that I should immediately monitor what I spend, figure out a sensible budget and change my bank to get an interest bearing checking account, the rest is unclear.
Should I immediately start trying to contribute to an IRA/401k? What about mutual funds? What about my emergency funds? Should I try and build them first? Then pay of my CC debt? Or should I pay off my CC debt before trying to save anything?
Re: 12 steps in what order? (Jon A)
The 12 tasks are not in order. Many of them can be done simultaneously (reduce spending = save money, as an obvious example.) Such items should all be commenced at once.
A huge prioroty for anyone just getting their hou$e in order is BUILD YOUR CASH-ON-HAND. Your cash account is like the springs on your car: it keeps you from breaking an axle, and it keeps the rubber on the road.
Have to raid your little brokerage account? Not only have you had to make an untimely sale, but you also blew the fees and commissions out the window. No cash in the kitty? Then how are you going to buy that half-price Camry at the estate sale? That lost opportunity will cost you years to recoup. Money is more than math! Practical concerns can blow away technical gains. (When you are a zillionaire, you’ll have to worry less about this, but remember Warren Buffett keeps huge amounts of cash reserves for these same reasons.)
We are brutal on this point that our clients must have 3 months gross pay on hand before funding brokerage, and 6 months before IRA’s. Do we care that they earn no interest on that money (or that we earn no commissions?) NO!
A car without springs is headed for a breakdown, and a household without cash is in that same peril. I know we feel like we are in a hurry to make gains, but haste just means that more likely than not you’ll find yourself back at the starting line over and over, wondering what went wrong. And the answer is: cash flow!
@Jon Archer
If you wouldn’t mind my opinion, I was in that exact scenario you are describing. And the conclusion that I drew, and what I’d read for years as well, is that paying off high interest credit cards is the best investment you can make. None of the returns on your investments will out-earn high interest charges. I say pay debt off first. My 2 cents. I wish you good luck and resolve, if you’re like I was — struggling to establish a sound financial base after years of bad financial habits. Mind you, I am no expert, just a common Joe, but if I would deviate from that all-for-debt plan, it would be for tax-free 401k contributions. But I wouldn’t go big at this stage, so you can still focus on debt. Please take my comments with a grain of salt, but I have a feeling others may echo similar advice. Good luck.
@Eric
I’m pretty practical when it comes to business and life. There’s no two ways around it, for an internet based company, who obviously has the technology and ability to receive correspondence by email, and (sigh) phone at the very least, there is no excuse to put your customers through the hassle of snail mail to cancel.
I prefer less small print myself.
I have just started using Mint.com and after reading this article (that was published close to a year ago), I went to the E*Trade Max-Rate Savings website mentioned in “Step 4″. The rate advertised as of 6.2.09 was .95%. Do savings accounts that meet the “Step 4″ guidelines (a minimum yield of 3%) still exist and if so, is Mint.com’s “savings” link in “my account” the best way to find these accounts?
By using the “savings” link, Ally offered a savings account with a rate of around 2.5% while they also offer a 1-year cd at 2.8%. I like the idea of being able to access that money (say I put in $4k) in case of an emergency with only having to give up $12 in earnings. Where as if I went for the higher interest rate in the CD, I’d not only have to pay a fee if I needed some or all of that money in the next year but at the same time, I couldn’t add to my funds if I run across a little extra cash flow…thoughts?
Thanks,
ED
I contacted my homeowners insurance co. and learned that a rider is offered for identity theft protection that is far less than the monthly fees offered by the credit report services and credit card co’s.
@CrazyLegs – thanks, and that makes sense. Nice to hear someone else confirm what I suspected though.
Cheers,
Jon
Mint is the best thing ever. I have used it since May 2008 and love to be able to track every cent! Just remember that companies are paying to advertise on the site and don’t follow all suggestions and you will be fine. It has really disciplined my spending and helped me to save thousands!
If you are truly serious about getting your financial house in order I strongly reccommend the book “The total Money Makeover, Revised” by Dave Ramsey. I read it, implemented the plan, and am debt free.
Great 12 Steps to Financial Fitness!! give a thumbs up on su
I was reading the above comments about finding savings/checking accounts with 3%+ interest.
I’m a member of a credit union based out of Palo Alto called Addison Avenue. It was originally set up for employees of Hewlett-Packard, but I believe is now open to the public even if you don’t have an affiliation (call them to confirm).
Anyway, they have a great account called “Dividends Rewards Checking” that can be used as both a combined checking/savings account. You have to make 12 debit card purchases a month and receive email statement but the interest rate is amazing!! 3.51% APY.
https://addisonavenue.com/checking/
Mint team,
Just joined and have to say: really great product all round. Finally a simple but effective way of keeping track of my accounts.
One suggestion that I think would be effective in helping financial noobs like myself get excited about personal financial responsibility: have a more flexible budget setting system. A fun solution would be a daily goal tacker, similar to the monthly goal target-tracker you already provide. Broken down at this level, it would allow one to more clearly visualize and eliminate costly daily habits (buying coffee, etc).
Best wishes!
The APYs on the Checking and Savings accounts advertised in the article seem completely wrong.
For example the article states that you can get a E*Trade Max-Rate Checking Account at 2.9% APY, HSBC Online Payment Account at 2.25% APY, and E*Trade Max-Rate Savings at 3.3% APY.
Directly from each of the companies’ websites, the actual APYs are listed as… E*Trade Max-Rate Checking Account at .40% APY, HSBC Online Payment Account at 0.85% APY , and .60% APY for the E*Trade “Complete Savings Account” (I couldn’t find anything called the Max-Rate Savings account on the E*Trade website).
Am I missing something or is the APY information in the article completely incorrect for the items listed above?
The rates listed above are from when the article was published, about 1 year ago in Sept 2009. Since then the Fed has held the Fed Funds rate very low, which in effect brings down the rate that banks offer on checking and savings balances in your accounts. For comparison, the Fed Funds Target Rate was 2.0% in September 2008, it is currently between 0.0% and 0.25%, so you can expect to see a similar decline in the rates offered to consumers by banks.
Typo, first line should read: The rates listed above are from when the article was published, about 1 year ago in Sept 2008.
I would love to see Mint show me the best way to pay down my credit card debt – i.e. credit card with the highest interest rate should be shown as a priority liability. If you could take some of the functionality of the software called Debtinator and integrate it into Mint it would be a huge help to me and I’m sure many people. Thank you. Also maybe some software called Junior Mint (haha) for my daughter to learn about interest and banking would be cool!
Why do people keep repeating that “you will be in a lower tax bracket” when withdrawing funds from your qualified accounts (IRA’s etc.) ??
This is seldom true for people who have consistently contributed to these accounts. In our practice we are continually seeing people who have too much of their assets in qualified accounts. The result: they cannot retire before age 59.5 without paying penalties, and they get murdered by taxes when RMD’s kick in at age 70.5. And our clients are not uber-rich, about half have household incomes of under $100,000 (in current dollars.)
Take the time to seek the advice of a professional who actually understands the rules and math of cash-flow management before you put your money in the penalty-box with an investment advisor, or start dumping 20% or your cash in to qualified accounts!
great article and good advise. even if the rates are outdated and the links to the credit report is not the most popular its still good advise and has gotten me thinking about the points mentioned here and researching different options.
so far the best step i have taken towards financial fitness is joining mint. great job!