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5 Smart Money Moves
By cassidy MONEY RESEARCH COLLECTIVE
Being smart with money can mean the difference between a comfortable financial future and struggling to make ends meet. There’s a lot of uncertainty in the economy now, what with inflation soaring, the COVID-19 pandemic waxing and waning, the stock and crypto markets sinking, and manufacturers still struggling with supply chain issues. In this unsettled (and unsettling) environment, it makes sense to stick or go back to money management fundamentals. So here are five smart money moves to make now that will protect your future, regardless of what the economy does.
Table of contents
- Refinance your debt
- Build an emergency fund
- Put more money into retirement
- Revise and update your financial goals
- Check your credit score and credit report
1. Refinance your debt
When you refinance your debt, you’re essentially taking out a new loan to pay off one or more existing loans. The new loan may have different terms than the original loan, such as a new interest rate or a different repayment schedule.
There are several reasons why you might want to refinance a loan:
- Refinancing can lower your monthly payment (so you have more money each month for other financial obligations).
- It can help you secure a fixed interest rate if your loan currently has a variable rate that fluctuates month to month.
- It can get you a lower interest rate overall, which can save you money on the total cost of your loan.
There are three main types of debt you may want to refinance: your mortgage loan, auto loan, and student loans.
Mortgage loan
A mortgage refinance could be a smart money move if you want to pay off your home sooner, pay less interest, or even cash out some of your home equity.
If you think refinancing your mortgage is the right move for you, talk to your current lenders or shop around for a new one. Be sure to compare interest rates, loan terms, and closing costs before you decide on a new loan.
Interest rates — This is the biggest factor to consider when refinancing. A lower interest rate could save you hundreds of dollars over the life of your loan. For instance, lowering your interest rate by just 1% could save you $60,000 on a 30-year, $300,000 mortgage.
Loan term — A shorter loan term will have higher monthly payments, but you’ll pay less in interest over the life of the loan.
Closing costs — These are the fees associated with getting a new loan and can include things like appraisal fees, loan origination fees, and title insurance.
Home equity — If you have equity in your home, you may be able to get a cash-out refinance. This type of loan gives you the opportunity to take out a new loan for more than what you owe on your current one and pocket the difference in cash.
You generally need to meet these requirements to qualify for a mortgage refinance:
- A credit score of 620 or higher
- A loan-to-value ratio of 80% or less
- A debt-to-income ratio of 43% or less
- Stable employment and income
- Adequate home equity (if you’re doing a cash-out refinance)
Auto loan
An auto refinance could be a good idea if your credit score has gone up since purchasing your vehicle and you want to secure a lower interest rate. However, you’ll need to make sure that the overall cost of the new loan (including fees and interest) will save you money in the long run. Otherwise, it’s probably not worth it.
There are two primary ways to refinance your auto loan:
- Traditional auto refinancing — You work with your current lender (or a new one) to take out a new loan with more favorable terms. This could mean a lower interest rate, which would save you money over the life of the loan, or a shorter loan term, which would lower your monthly payments.
- Cash-out auto refinancing — You take out a new loan with a higher loan amount than what you currently owe. This gives you the opportunity to pocket the difference in cash. You can then use this money however you see fit, whether it’s to pay down high-interest debt or cover unexpected expenses. But there are risks with this option because it could put you “upside-down” on your loan.
Student loans
Over 45 million Americans have student loan debt. And many of them still carry a balance of $20,000 or more 20 years after entering school.
If you’re still chipping away at your payments, student loan refinancing could be a great way to consolidate your loans into one monthly payment, save money on interest, or adjust your repayment period to better suit your needs.
Keep in mind that refinancing comes with some risks—you may end up paying more in the long run if you choose a longer repayment period, for example. You could also end up damaging your credit score if you refinance for a shorter repayment period and can’t afford your new payments.
But if done carefully, refinancing could be a smart money move. Just be sure to shop around for the best refinance deals and compare all the terms and conditions before making a decision.
2. Build an emergency fund
Life is full of unexpected twists and turns (the coronavirus pandemic is proof of that), which is why building an emergency fund is so important.
An emergency fund is a savings account that’s used to cover unexpected expenses, such as medical bills, car repairs, or job loss. The key to an effective emergency fund is to have enough money saved up to cover at least three to six months of living expenses. That way you have the financial resources you need to weather the storms that come your way.
Of course, this is a general rule of thumb — and you may want more or less in your emergency fund, depending on your situation.
For instance, you may want to save more if you have young kids, a mortgage, and live in a one-income household. You may need less if you’re debt-free, kid-free, and have multiple sources of income.
Regardless of the amount you choose, there are several benefits to having an emergency fund.
- It can give you peace of mind and reduce your worry and stress around money.
- It can help you avoid going into debt if an unexpected expense arises.
- It can help you weather periods of unemployment or reduced income.
Ideally, you’ll want to keep your emergency savings in a separate savings account so you’re not tempted to dip into it. Compare the best high-yield savings accounts to find the right one for you.
3. Put more money into retirement
Another way to be smart with money is to invest more in your retirement accounts. Not only can this help lower your tax bill for the year, but it also gives compound interest more time to work its magic, leading to a larger nest egg when you eventually retire.
For instance, say you’re 35 and currently saving $500 a month for retirement. Assuming an 8% average return, you’d have $745,000 in retirement by age 65. Of this amount, $180,000 would be your total contributions, and the other $565,000 would be pure interest.
Now let’s say you upped your savings by $200, so now you’re contributing $700 a month. You’d add an extra $72,000 to your retirement account by age 65. But thanks to compound interest, your nest egg would be a whopping $1.04 million!
This year, the IRS will let you contribute up to $20,500 in an employer-sponsored account, such as a 401(k) or 403b. If you’re at least age 50, you can contribute an additional $6,500, for a total of $27,000.
For traditional and Roth IRAs, you can contribute up to $6,000 (or $7,000 if you’re at least age 50).
4. Revise and update your financial goals
Contrary to popular belief, you don’t have to wait for the new year to set new financial goals. People change and plans change, so reviewing your goals and doing a little financial planning throughout the year is always a smart money move.
Follow these steps to review and update your goals:
- Take stock of your current financial situation. How much debt do you currently have? How much savings? How have your financial obligations changed? For instance, maybe you got a raise, are caring for elderly parents, or have a new baby on the way. Answering these questions will give you a good starting point for setting new goals.
- Take a look at your life goals. Have any of your desires or priorities changed since you last set your financial goals? Perhaps you initially set a goal of saving for a down payment on a house, but now you’re not sure if buying a home is still what you want. Or maybe we want to retire earlier than you originally planned. Now is the time to write down your new life goals, so you can adjust your finances accordingly.
- Connect the dots and make a plan! Once you’ve nailed down your life goals, it’s time to write down everything you need to do to make them a reality. Do you need to set new savings goals? Pay off credit card debt? Adjust your investment portfolio? Buy life insurance? Make changes to your budget? Write down your action steps.
5. Check your credit score and credit report
Your credit score is one of the most important numbers in your financial life. Not only does it help you qualify for the best loan rates and credit card offers, but some companies also use your score to approve you for an apartment, hire you for a job, or calculate your insurance policy premiums, among other things.
So even if you never plan on taking out a loan, having good credit and understanding how your credit report works are essential. It makes managing your personal finances so much easier.
The good news is that checking your credit score is easy. You can get a free credit report online each week from the three major credit bureaus — Equifax, Experian, and TransUnion.
You can also download an app like Credit Karma or Credit Sesame to learn which factors are impacting your credit score the most and to get tips on how to improve it.
While you’re at it, get into the habit of reviewing your credit card statements and bank account statements at least once a month so you can spot any fraudulent activity that could damage your future.
Summary
Completing these smart money moves can help you make significant progress toward a brighter financial future. If you’re not sure where to start, consider finding a financial planner or financial advisor in your area. They can offer unbiased advice and even help you create a budget, invest for your future, and make smart decisions with your finances.
