How to make your money work for you

In a nutshell

Each dollar you earn has the potential to do more than sit in a checking account. These tips can help you get every bit of value possible from your hard-earned money.

• Basic budgeting and savings strategies can help you avoid overspending and prioritize important money goals.
• The right investments can ensure you earn returns, regardless of your risk tolerance.

Learn how to budget

It's difficult to make your money work for you if you don't have any to put to work. Budgeting helps ensure that you make the most of every dollar you earn, and that you don't overspend on things that don't support your larger goals.

While there are many resources available with a slightly different approach to budgeting, they all have a few basic steps in common.

1. Choose your tool

Whether you pick a budgeting app or a spreadsheet approach, document your money activities and see how they line up with your goals. Many of the best budgeting tools are free or very low cost.

2. Gather your documentation

Pull together the last three months of bills, receipts, pay stubs and other financial documents so that you have a good starting point. Many of these documents are now online, making it easy to access them from anywhere.

Credit card companies often provide annual or even quarterly summaries that group expenses by budget category. These reports make sorting through the information easier to digest.

3. Add up what you earn

Even if your income varies from month to month, you should be able to calculate a basic average of your monthly income. This would be your take-home pay, minus taxes and the cost of benefits, like health insurance. Include extra income sources like Social Security payments, child support or money from a side hustle.

4. Plan your budget

One popular method of budget planning uses the 50/20/30 method. In this system, you put aside 50% for bills and things you need. Another 30% then goes to “wants” or things you want to buy but don’t have to. The last 20% is used for savings goals, such as an emergency fund, an upcoming vacation or a down payment on a home.

These numbers are just a guideline and can be changed as needed. For example, if you want to pay off your student loans, you can shift more toward paying off debt and spend less on your wants. Then, when the loans are paid off, reallocate that money toward a vacation fund.

5. Rinse and repeat

While you don’t have to assemble documents and recreate a new budget every few months, review it at least once a month. Evaluate your progress and assess how well you did meeting your goals. Make changes as needed to get back on track (or stay there).

Get out of debt

Paying down your debts is a great way to make your money work for you. Most debtors charge a lot more interest than even the best investments will return, so it’s best to pay off debt (especially higher-interest debt) before you start investing.

The student loan example mentioned above is just the type of debt you may be struggling with. Even if you have no issues making the monthly payments, it could be stressful just having that hanging over your head.

Here are a few ways to prioritize getting out of debt:

• The debt snowflake method prioritizes putting any available money each month toward your debt, whether it’s $500, $50 or even just $5 a month.
• The debt snowball strategy uses extra cash to pay off the debts with a smaller balance first, such as a credit card with just a $2,000 balance, instead of a $45,000 car loan, for instance.
• The debt avalanche method involves tackling debt payoffs in order of highest to lowest interest rates to minimize overall interest costs.

Some consumers use a blend of these three methods to come up with a debt payoff plan that feels rewarding and encourages good repayment habits. Choose whatever strategy works best for you. Remember that consistency is key: As long as you’re paying down debt, you’re moving toward accomplishing your goal.

Open a high-yield savings account

If you have extra money you don’t need right away, and you’ve paid down your high-interest debts, it’s time to start investing.

A high-yield savings account works much like a standard savings deposit account. You put money in with the goal of keeping at least some of it for short- and long-term savings goals. In return, the bank or credit union pays you a higher annual percentage yield (APY) than you might have otherwise earned on a checking or savings account.

Highest APY

Western Alliance Bank High-Yield Savings Premier

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Highest APY

Western Alliance Bank High-Yield Savings Premier

APY

5.36%†

Min. balance to earn APY

$0.01

This interest compounds annually, meaning the interest earns its own interest.

The best high-yield savings accounts also have a low opening balance minimum, so you can get started with as little as $100. They include Sofi and Bread, which are both completely online. You can open an account from your computer or phone within minutes.

Invest in index funds

If the idea of getting into the stock market appeals to you but you don’t have a lot of confidence, index funds could be a good starting point. They represent a diverse portfolio of stocks and assets that may grow in value over time. Unlike traditional stocks, you don’t have to try to time the market, and there’s a fairly low barrier to entry. In fact, index funds work best when approached with a long-term focus and are allowed to appreciate over time.

Invest in real estate

Whether you want to buy a house, a vacant lot or a tiny home, real estate can help you build wealth in a tangible way.

Real estate investing comes with some challenges: finding an affordable property, paying taxes on it and maintaining it. Once it’s yours, however, you can live in it or rent it out to build a passive income stream.

Even if you can’t afford to buy a home now, Real Estate Investment Trusts (REITs) let you own property as part of a portfolio of real estate assets. REITs enable you to own shares of properties, which are then traded on securities exchanges. The income from the properties is paid back to trust shareholders.

Try rewards credit cards

Using credit cards responsibly can be a form of earnings for some, especially with the rise in popularity of cash-back rewards cards.

The card_name from CapitalOne is an example. There’s no annual fee and it gives users unlimited 1.25 miles per dollar spent with the card. It offers 5 miles per dollar on travel booked through the Capital One travel hub. For those who travel anyway and use their card to pay expenses, this no-fee card can help customers earn their way to lower-cost vacations or business trips, as well as other perks.

However, the best reward cards are the ones you actually use. So, if you're not a travel fan, consider one that offers straight cash-back rewards on purchases or helps you with revolving reward categories that change with your needs.

Pay attention to taxes

Tax planning shouldn’t just be a task you focus on right before April 15 each year. In fact, there are benefits to maximizing both the credits and taxes owed so that you keep more of your own money.

Start by having the right amount taken from your paychecks, which helps you avoid an expensive tax penalty at the end of the year. It also keeps you from overpaying and getting a large refund.

Why is a refund a bad thing? In some cases, it means you had too much taken from your check, and that money could’ve worked for you in a high-yield savings account or investments during the year instead of filling the IRS’ tax coffers.

To calculate your proper federal tax withholding amount, use the IRS calculator as a starting point. You may need to update your W4 with your employer to reflect the right amount.

By staying on top of available tax credits and deductions throughout the year, you’ll be a better-informed taxpayer come April 15. Keep a list of tax benefits you may qualify for, including education credits or help with childcare expenses. Whether you do taxes yourself or hire a professional, this list is a good starting point for keeping more of your hard-earned dollars.

Monitor your credit

How you use and manage credit influences your credit score — and that affects the interest rate you’ll pay on other loans. Typically, the higher your credit score, the lower your interest rate offers will be.

Your credit score affects other things, too, such as the cost of car insurance in some states. It can even affect the type of credit card offers you get in the mail. Those 0% financing offers don’t get mailed out to just anyone.

If you’re in the market for a big purchase, like a home, or you want to refinance, a high credit score can save you hundreds or even thousands a year in interest payments. Know your score and protect it. Visit AnnualCreditReport.com to get your credit report for free once a year. Check for any errors or other issues, and address them immediately.

Related: Best credit monitoring services

The AP Buyline roundup

You work hard for your money. By taking proactive steps, you can also ensure your dollars do more for you. Whether you’re more of a saver or a spender, you have many options for investing as well as earning money and budgeting wisely. A blend of the ideas mentioned above can put you on the path toward a balanced money mindset that helps you grow your wealth over time.