The average American household has an average of $8,863 in a bank account, according to Bankrate, which doesn't include retirement accounts, mutual funds, real estate, index funds, or other investment accounts. At the same time, the average household has $11,880 in revolving debt and two in ten adults roll over more than $2,500 per month in credit card debt, according to Federal Reserve data.
Let's take a look at how to reduce debt, the best way to grow savings, and how to save enough for retirement using a variety of personal finance strategies.
#1. Create a Budget
Most people are aware that they should maintain a budget, but more than 30% of people don't keep a budget, according to Debt.com's 2019 survey. Without a budget, it's easy to overspend and accrue debt, which can snowball over time. Debt makes it impossible to grow your money and ultimately achieve afford retirement or other goals.
There are many different budgeting strategies to pay yourself first:
Envelope Budgeting is a cash-based system where you fill different envelopes — representing spending categories — with cash each month. When the cash runs out, you cannot spend any more until the next month.
50/30/20 Budgeting involves allocating 50% of your income to essentials (e.g. housing and food), 30% to personal expenses (e.g. dining out or travel), and 20% to savings, which limits major expenses and encourages automatic savings.
Zero-based Budgets involve allocating income to different spending categories each month and then moving any leftovers into savings. Using this approach, every dollar has an assigned purpose and there's little guesswork.
Apps like Mint and YNAB have made it easier than ever to create and maintain a budget using these strategies. After connecting to your bank accounts, these apps import and categorize each transaction, making it easy to see spending patterns. You can use these spending insights to create accurate budgets and ensure that you're not spending beyond your means.
#2. Automate Your Saving
It's hard to save money if you wait for leftovers in a budget—there always seems to be something to spend money on rather than saving it. The best way to grow savings and avoid these tendencies is to turn savings into just another monthly expense that must be accounted for within your budget. That way, there's no temptation to spend those funds without planning ahead.
There are a few handy features to look for in a savings account:
Auto-Deposits are the best way to grow savings is to create monthly "expenses" by automatically transferring funds from checking to savings each month without having to remember to move it.
Interest Rates and Fees
Interest Rates and Fees are important considerations for realizing the best return on your savings. You should seek out zero-fee accounts with high-interest rates.
Multiple Accounts make it easy to save for different purposes. For example, Ally makes it easy to set up different savings accounts for different goals (e.g. travel).
Some online brokers and Robo-advisors also make it easy to save in money market funds rather than savings accounts. These accounts may offer higher interest rates, but they may not offer FDIC insurance. As a result, they may be ideal for some people, but it's important to speak with a financial advisor or professional before making a decision.
#3. Diversify Your Investments
Most people keep the majority of their net worth in their house and their company's 401(k) program. While these aren't necessarily bad investments, their value and growth over time are dependent on specific markets. A slowdown in the housing market or your employer's company could result in a significant reduction in your retirement savings.
The easiest way to diversify a portfolio is using so-called Target Date Retirement Funds, which invest in a diverse portfolio of stocks and bonds with an asset allocation that changes based on your target retirement. These funds can be easily purchased in any brokerage account and don't require any ongoing management or rebalancing over time.
In addition to conventional investments, cryptocurrencies have become an attractive alternative asset class that provides added diversification. They are relatively uncorrelated with stocks, bonds, and other asset classes, which makes them a potential hedge against risk in other markets. They may also offer upside potential if cryptocurrencies are widely adopted.
ZenLedger makes it easy to compute the tax liability associated with cryptocurrency investments. After aggregating transactions across exchanges, the platform auto-fills popular IRS forms to provide your accountant, including Form 1040 Schedule D and Form 8949. You can easily determine how much you owe using a defensible strategy in the event of an audit.
#4. Pay Off Your Debt
The average American household has $11,880 in revolving debt and two in ten adults roll over more than $2,500 per month in credit card debt, according to Federal Reserve data. In addition to credit cards, many families owe mortgage debt, auto loans, and student loans, which can quickly eat into monthly cash flow and make it difficult to save money.
There are several ways to pay off debt:
Consolidating Debt is a good way to combine all of your debts into a single monthly payment—potentially at a lower interest rate. You don't have to worry about remembering to make multiple payments each month.
Debt Settlement is an option for negotiating debt payoffs at discounted rates, although these options could impact your credit score, so it's important to carefully consider the pros and cons before making the choice.
High to Low Strategies
High to Low Strategies focus on paying off higher interest debts before lower interest debts. By adopting this strategy, you can minimize the amount of interest that you pay.
Small to Large Strategies
Small to Large Strategies focus on paying off small debts before larger debts. Using this strategy, you can reduce the number of loans that you're paying more quickly.
It usually makes more financial sense to pay off debts before saving since debt interest rates tend to be higher than savings or investment returns. The exceptions are low-interest debt, such as a mortgage or student loans, that may return less than the stock market average. It's also important to build emergency savings to avoid future debt costs.
The Bottom Line
The average household has a decent amount of savings, but that's outpaced by revolving debt. The best way to break the cycle is to create a budget, automate your savings, build a diversified investment portfolio, and pay off debt. These simple steps can help you reduce debt, increase savings, and build a healthy investment portfolio to support retirement.