Summary
- Spend less than you earn by automating your savings
- Park your cash in a high-yield savings account (HYSA) for emergencies
- Contribute to your employer’s retirement account and raise contributions on a schedule
- Use a simple, boring investment mix suited to your risk tolerance
- Build a budget you’ll actually keep
- Manage and limit your debts
- Beware of lifestyle creep
- Take small and simple steps towards improving your finances to succeed
Automating Your Finances – The Most Important Move
You’ve heard it before — spend less than you earn to avoid living paycheck to paycheck, but it’s not that easy.
It’s very common to fall into the trap of overspending when you get a paycheck. You see your cash balance rise in your checking account and are inclined to spend on some of your wants — perhaps even celebrate by spending a little too much on your wants rather than focusing first on your needs. I call this “balance-driven spending” and if this sounds like you, don’t be ashamed as nearly everybody does this to some degree.
To minimize this behavior, the solution is simple and highly effective provided you don’t overdo it. Just set up your direct deposit to always move a portion of your paycheck directly into your savings account (which going forward we’ll consider an emergency fund instead of a temporary place to park excess cash). Take care to start small if you find it difficult to afford your rent or mortgage, bills, groceries, and other needs – for example 5% may be doable for you to start with in this case. However, if you can afford it, at least 10% is ideal and 15-20% is best. Just don’t overdo it because you should never have to borrow from your emergency savings fund except for actual emergencies or otherwise unexpected large expenses. Your emergency savings fund should NOT be treated as a temporary holding place for extra funds; rather, it’s critical to think of it just as a fund for unexpected expenses such as if you lose your job, or other unexpected situations.
Set up your direct deposit to place the portion that works for you into a High-Yield savings account (HYSA) to earn as much as 10x as much on interest. Target a minimum of 3 to 6 months worth of funds to cover all your basic needs. More is better, but only to an extent. If you have more than 12 months worth of funds saved up that may be excessive and that extra cash could instead be placed in a brokerage account or better yet a tax-advantaged retirement fund so it can grow even faster.
It’s Easy to Get a HYSA and Earn 10x More on Interest
The national average savings rate is approximately 0.4% as of February 2026. High-yield savings accounts (HYSA) are currently available at rates as high as about 4.0% offering ten times as much earning potential. Most big banks offer even lower rates often around 0.1% or even less. If your nest egg is kept at a big bank, chances are you are earning next to nothing compared to a high-yield savings account.
If you are not familiar with HYSA, they might sound special or even risky to you, but as long as you get one from a bank with FDIC insurance backed by the government (and spoiler alert, about 99% of them are) then you have nothing to worry about. HYSA are a no-brainer and if you leave the bulk of your savings in a non-HYSA you’re losing out on monthly income from interest.
Additionally, if you have a HYSA with another bank you’re less likely to be tempted to borrow from your savings (your emergency fund) as you won’t see the balance when taking a look at your checking account’s balance with your main bank. You can find high-yield savings accounts online with a simple search. Bankrate and Nerdwallet are good choices as they tend to frequently update the latest top high yield savings accounts. Your local credit union is another option as well and if you want a brick-and-mortar bank or credit union you’ll want to go with a local option rather than an online-only bank. Do your research and ensure your bank is FDIC insured and supports transferring over $10,000 in a single day if you expect to eventually have the need to do so such as for a large expense (roof replacement, broken AC system, etc).
Always Take Advantage of your Employer’s Tax-Advantaged Retirement Account
Even if your employer does not offer a match you should always take advantage of the retirement account(s) your employer offers. Even if you do not earn a lot. Whether it’s a 401(k), an IRA, a 403(b), a 457(b), or similar option you get to put your money away pre-tax and therefore are placing more money in your retirement account so it can grow faster as opposed to a savings account or taxable brokerage.
Many people tend to over-rely on social security when they retire. Monthly social security payments might be able to cover your needs such as rent (or mortgage), bills, and other necessary expenses. However, surprises that come along the way such as unexpected medical expenses and long-term care (especially late in life) can catch you by the wayside and put you in debt if you are not prepared. It is often necessary to have some funds in a retirement account these days especially with rising medical care costs.
You absolutely should participate in your employer’s tax-advantaged retirement account and certainly should take advantage of any employer match, if offered. Regardless, contributing more than the minimum is nearly always a good idea as well. Some individuals only contribute the bare minimum amount to meet an employer match or only a few percent of their paychecks and never increase their contribution rates. This is where automated annual increases can be incredibly useful and important for your future financial well-being.
Most retirement account providers offer the ability to opt-in to a setting which will increase your annual contributions by a certain amount, often 1% per year. Enabling this setting is strongly recommended and setting it to 1% is typically suggested. This 1% increase is a rather small amount but it will add up over time. After 10 years your rate will increase by 10% but you should have also been receiving raises over time to keep up with inflation and in most cases 1% is easily doable for just about anyone.
If your employer does not offer a retirement account, and IRA is an option for most people. You can set up an IRA through most well-known brokerages such as Fidelity or through your certified financial planner and in some cases your bank. A traditional IRA is similar to a traditional 401(k) and other retirement accounts in that it will enable you to contribute to it before taxes are taken from your paycheck. This enables you to stash away more money into these accounts earlier on thereby increasing your earning potential.
Roth 401(k)’s and Roth IRA’s are also an option. These types of retirement accounts are contributed to after taxes are taken out of your paycheck. The advantage to these accounts is you won’t have to pay taxes on them in the future when you start receiving disbursements at the necessary retirement age for each account. Often, a traditional 401(k), IRA, or other retirement account make sense for most individuals. In some cases a Roth retirement account may make sense — such as if you expect to be in a higher tax bracket later in life. If in doubt, get with a certified financial planner and discuss with them.
99% of the Time, a Boring Investment Mix is the Way To Go
Unless you are certified financial planner or otherwise well-versed in personal finance and investing, you should pick a very simple and “boring” investment mix for your retirement account(s). Most retirement accounts offer funds targeting specific decades you plan to retire in. Picking a fund which targets approximately the time you plan to retire will often automatically reduce risk as time goes on. Typically, this is done by slowly tweaking the fund over time to buy more bonds and less stock over time as bonds are generally less risky, less volatile, and safer.
Choosing such a fund enables you to “set it and forget it” and avoids you having to manually adjust fund contributions such as to a total stock market index fund and a bond fund. Just beware of fund fees that can eat into your returns. However, most well-known funds that target a specific decade for retirement have reasonable fees. These fees are often described as “expense ratios” although other fees can apply. Beware of high fees as they can limit your returns. Generally speaking, expense ratios of 0.15% or less are ideal. Some funds charge as low as 0.5-0.7%.
Beware of over-investing in funds in your local country. Generally, it’s a good idea to have some international stock/bond exposure as well. If you live in the USA, consider an ex-US global stock market index fund, for example, as a portion of your investment mix. Especially as you get closer to retirement. If you are young, being invested mostly in the US stock market is fine as you can recover over time from bear markets when stocks are down. As you age increasing the amount of bonds you have versus stock is ideal and reducing total stock exposure in your country of origin up to 70%. In other words, of the portion of stock you invest in closer to retirement it’s generally a good idea to reduce your country’s stock to only account for about 30% of your total stocks and the remaining 70% should be an ex-US global stock market fund. This increases diversification and reduces risk as you approach retirement age.
A Budget is Great, but Sticking with it is a Must
These days it’s no longer necessary to create a budget via a complicated spreadsheet and manually plug in your income and expenses (unless you like that sort of thing). You can instead rely on a low-cost subscription-based service that can do this for you such as Rocket Money, Monarch Money, Quicken Simplifi, and more. These services will securely sync up with your various bank and brokerage accounts (including most retirement accounts) and track your spending and your net worth.
They can help you manage your budget via categories and allowances or other means. They do not prevent you from overspending in any one area but they do add visibility to your spending and can greatly improve your spending habits over time. Additionally, it’s common to be unaware of some subscriptions you might be paying for monthly or annually and these services will make sure you’re aware of such subscriptions.
Creating a budget is quite easy these days with any of these apps. Sticking to a budget, however, is the most difficult part. Check your budgeting app periodically, at least weekly, and skim thru your recent spending. Are you aware of any budget categories you’re starting to hit your limits on? Work on getting into the habit of checking the budgeting app regularly so that you are more on top of your spending and aware of where each of the dollars you earn goes.
(Note we probably should at least touch on allowing for discretionary spending and taking care not to have too strict of a budget. If you can’t stay within your spending limits either your desire to spend on wants is too great/excessive or your budget is too small and not reasonable. If you don’t have a reasonable spending budget then you’re budget won’t stick and you’ll start ignoring it and this is the last thing you want to do)
Manage and Limit Debts
Carrying too much debt can be a lot like carrying too much in your backpack while hiking. It can slow you down and even be painful if too heavy. In the realm of personal finance it can slow down the process of building wealth or even halt it. That’s why it’s important to get any credit card debt, loan debt, HELOC debt, or other personal debts under control.
If you currently find yourself carrying significant and overwhelming debt that you cannot pay down fast enough you should consider debt consolidation to obtain a lower interest rate and balance due each month. This way your debt is more manageable and easier to pay off over time. Just beware of potential fees when consolidating loans and credit card or HELOC debt. After doing this, focus on better spending habits and avoid the use of credit cards and loans as best you can. The FTC also has advice and resources that can assist.
If you currently are carrying significant debt, but that is relatively manageable, consider one of the following options. You could consolidate your debt into a lower interest rate to make your monthly payments go further in paying down the debt. You could also leave your debt as-is and consider paying down your debt in one of two ways:
The Snowball Method
The Avalanche Method
The Snowball Method of paying down debt can be psychologically rewarding. It involves paying off the card or loan with the smallest balance first, and then moving on to the next card or loan with the smallest amount (and so on). Some find this improves a sense of accomplishment overtime and that it makes them feel like they are making progress faster in paying down their debt.
The Avalanche Method of paying down debt takes longer, but you’ll get out of debt paying less interest overall compared to the Snowball Method. With the Avalanche Method, you first focus on the card or loan that has the highest interest rate and paying that down first, and then moving on to the next card or loan with the next largest interest rate (and so on). While this method is economically the best choice both are reasonable options.
During and after paying down your debt, however, it is critical to obtain better spending habits and keep your debt under control. Find a reasonable discretionary spending budget and stick to it. Avoid extreme sacrifices so you don’t burn out and bust your budget. If you find you have difficulty using credit cards and other forms of debt in a responsible way try to avoid using them completely if possible.
If you have your debt under control and pay off your credit card(s) balance in full before the next billing cycle each month then you are in a good place provided you are staying within a reasonable discretionary spending budget. Credit cards used right can offer valuable rewards and save you money but they are a double-edged sword as it’s tempting to rack up a balance or otherwise overspend. Use them responsibly.
If you have a mortgage with a high interest rate and lower rates are available, you can also consider refinancing it. Just take your time and do your research to ensure it’s worth the fees to do so. In some cases the costs to refinance are not worth refinancing, especially if you are closer to the end of paying off your mortgage or if you don’t plan to own your property long-term.
Beware of Lifestyle Creep
Lifestyle creep is also known as lifestyle inflation. When an individual increases their spending as their income rises this is lifestyle creep. You finally got that raise you deserved but now that you have a little extra coming into your checking account you’ll be inclined to spend it. There’s nothing wrong with a little celebration or even a small gift to yourself to reward yourself for a job well done, but regularly spending that extra cash on non-essentials is generally a bad idea long term.
Instead, you should increase your contributions to your retirement account(s) and/or your savings rate. Or you can compromise by slightly increasing your allowed discretionary spending and also increasing your retirement contributions / savings. Whichever way you decide to go, just ensure that you at least contribute a reasonable portion of the additional cash towards your future.
Take Small Steps at First…
All in all, the most important thing is to not be too hard on yourself as you work towards improving your spending habits and investing in your future. Often, those who work on establishing a budget do not stick with it as they either find it too restrictive or they do not establish the habit of sticking to it and checking on it regularly. Set up a reasonable budget and allow yourself a discretionary budget. Live life and go on vacation if you can afford it. Budgeting and managing your finances should not prevent you from getting out of the house and living life. A budget should be a guide and help you save for your future while allowing you to (reasonably) spend on things you want or places you wish to go.
Be forgiving to yourself when making mistakes or overspending occasionally, just don’t make it a regular habit and be willing to adjust and update your budget as life goes on. Your budget should evolve over time as you live your life and circumstances change. Treat your budget like an ally that has your best interests in mind.
And finally, if you find any of this to be overwhelming don’t be afraid to do some research and find a good qualified financial advisor. Most of them are worth their cost and you may be surprised how affordable they can be. Or, if you wish to handle your finances yourself and are overwhelmed just take things one step at a time. Start with a budget or with automating your savings. Pick somewhere to start in this blog post and come back to it when ready. Just stay committed — if necessary add a calendar reminder to check back here every few months and also to reevaluate your budget. Focus on small improvements over time.
Welcome to Build Wealthy Habits!
Any information provided here is provided as generalized advice and not intended for any single individual. Talk with your certified financial advisor for personal financial advice.