Six Principles to Manage Income

Number 1, when budgeting consider focusing on the big ticket items. You may have heard you’d be a millionaire if you’d just skip morning coffee, but it’s likely that you can save more by cutting costs on the expensive things like housing and transportation. According to the Kelley Blue Book in 2019 the average new car cost about $37,000. But buying the same car pre-owned could save you more than $10,000.

Number 2, when you’re planning your saving goals be specific about your plan to get there. You can say, I’m going to save $4,000 for retirement each year, but you also need to come up with a strategy to accomplish your goal. Subgoals can also help guide your savings strategy. These markers can help you assess how realistic your goal is, and help you monitor your progress.

Number 3, avoid high interest loans for items that could quickly lose value. You might of heard to avoid debt at all costs, but not all debt is created equal. One type of debt to avoid is debt with an interest rate higher than 5%, like credit card debt carried from month to month. Also try to avoid going into debt for anything that can lose value quickly, like boats, RVs, jewelry, and other luxury items. But there are times when borrowing money makes sense. For example, loans for education or starting a business are often considered healthy debt, because it may lead to more income down the road. And even using a credit card as long as you pay the balance in full every month can help improve your credit score by showing lenders you can manage debt. If you’re looking to increase your credit score only borrow money that you’re confident you’ll be able to pay back.

Number 4, reduce your taxable income. One way to do this is to receive income in tax-exempt form, meaning get compensated in a way that isn’t taxable. For example, many employers offer benefits that allow you to receive or set aside untaxed money for things like retirement, healthcare, education, transportation, and child care.

Number 5, avoid insurance for expenses that you can pay for out of pocket. Depending on your personal situation, you may need car insurance, home or renter’s insurance, and life insurance. And everyone needs health insurance. Studies suggest that more than 60% of all bankruptcies are related to medical issues, so strive to have least minimum coverage. Remember the purpose of insurance is to protect you in unfortunate scenarios.

Finally, number 6, don’t just save for retirement, invest for retirement. Realistically, just saving isn’t likely to be enough to reach your retirement goals. Remember investing can multiply your money, which can help you achieve your retirement goals faster. Over time compound interest, which means earning interest on interest can help you get exponential growth.