Latest news with #Lusardi
Yahoo
02-05-2025
- Business
- Yahoo
A 401(k), IRA, or something else? How to start investing for retirement
If Annamaria Lusardi had one wish, it would be for people to understand the importance of compound interest. Lusardi, who heads Stanford's Initiative for Financial Decision-Making, and other financial experts agree that the best time to start investing for retirement was yesterday. 'I cannot overplay the importance of time. It's so essential when we plan for retirement,' Lusardi said. 'Time is on our side.' The sooner you start, the more you will earn interest on interest. For example, if you put $1,000 into a retirement account that earns 5% interest each year, you'll have $1,050 at the end of the first year and $1,102.50 the next without ever putting more money into the account. If you start early, your money has time to grow significantly. However, in reality most people don't get serious about planning for retirement until their late 20s or 30s, according to Deryck Gryne, a senior financial adviser at Ally Invest Advisors. 'If you're past that point, that's okay,' Gryne told USA TODAY. 'The most important step is to start. Whether you're 25 or 45, today is always better than tomorrow when it comes to retirement planning.' Here's what to know about saving for retirement: More: $1.5m is a retirement 'magic number.' Here's how long it lasts in every state. Financial experts agree that one of the best ways to start saving for retirement is to take advantage of your employer's 401(k) match if one is available to you. Employees who don't take full advantage of it are missing out on an average of $1,336 each year, which could add up to $42,855 over 20 years assuming an average annual return of 4.5%, according to Vanguard and a 2015 Financial Engines research report. Employer matches vary, but the average tends to hover around 4%. Find out how much you need to contribute to get the full match and increase your savings rate to capture all the free money you can. 'If you have one that offers a 401(k) with a match, there are no doubts about what you should do,' Lusardi said. 'No financial market is able to offer that benefit.' To comfortably retire, financial experts advise getting to a point where you are contributing 10% to 15% or more of your income to your 401(k) depending on when you start, when you retire, and where you live. But they say it's not bad to start small. Dr. Peter Fisher, founder and CEO of Human Investing, said contributing enough to capture an employer match is the best way to check a box when starting to save for retirement without making things more complicated than they need to be. 'Go through the math yourself. If I contribute five, my company contributes four, I get a tax deduction before I've even started investing, I'm up 100% on my money,' Fisher said. 'If I told anybody that and didn't call it retirement, they would jump at it.' Some employers' 401(k) match is tied to a vesting schedule, meaning you will need to stay with the company for a certain amount of time before you can claim their contributions. Lusardi said even if you're unsure about how long you'll stick with an employer, it never hurts to start saving. What you contribute to a retirement account is always yours to keep. You've heard the experts' advice. You go to start contributing to your company's plan, but there are two options: a traditional and a Roth 401(k). What's the difference? They're both powerful tools to help build retirement savings, but they work a little differently, Gryne said. He explained that with a traditional 401(k), you are contributing pre-tax dollars, meaning that money is taken out of your paycheck before taxes are taken out. This lowers your taxable income for the year and could reduce what you owe when tax season rolls around. So, what's the catch? With a traditional 401(k), Gryne explains, your investments will grow tax-deferred, and you'll have to pay taxes on the money when you start making withdrawals in retirement. If that doesn't sound appealing, you might consider a Roth 401(k) which works the other way. Contribute after-tax dollars and don't receive a tax benefit now, but the money will grow tax-free, and you won't need to pay taxes when you make withdrawals in retirement. The choice is a personal one. A traditional account may make sense if you don't expect to be in a larger tax bracket when you retire. Inversely, a Roth account may be the better choice if you predict your taxes will be higher when you retire. Several things can affect your tax rate, including where you live and a change in your filing status. Those who plan for their income to drop and move to a state with lower taxes, like Florida, when they retire might prefer a traditional 401(k), Lusardi said. Without access to a 401(k) account, one of the best tools available to you is an individual retirement account. An IRA is another way to grow retirement savings on a tax-free or tax-deferred basis, depending on the account you choose. You can open one through a bank, credit union, online broker, or investment company. Common places people turn when opening an IRA include Fidelity, Charles Schwab, and Vanguard. The most popular accounts are traditional IRAs and Roth IRAs. Like 401(k)s, you'll pay taxes when you withdraw money with a traditional IRA and pay taxes now when you contribute to a Roth IRA. With most IRAs and 401(k) accounts, you can generally start making withdrawals without penalties six months after you turn 59, but there are exceptions to this rule. There are several other types of IRAs, including a SEP IRA which is common for self-employed people and a SIMPLE IRA which is sometimes offered by small businesses. Contribution limits are something to keep in mind with IRAs. In 2025, savers using this method can contribute up to $7,000 – or $8,000 if they are 50 and older – per year. That's often not enough to completely fund a retirement. Still, they can be a good way to get started. Lusardi particularly recommends Roth IRAs to young people who are still in low tax brackets. 'The sooner we start, the more our money will grow,' Lusardi said. 'I tell my students to open a Roth IRA during their college years and invest the money they get during their summers.' Opening an IRA can also be an option for someone who has already maxed out their 401(k) contributions or wants to diversify their retirement investments. When it comes to preparing for retirement, the most important thing is to have a plan. The reality is that many don't. Some 20% of adults 50 and over have no retirement savings, a new AARP survey found. If you don't have a 401(k) or an IRA, Fisher hopes you have a different strategy in mind. He said for most people, it's not an inheritance, and that he heard some creative ideas while interviewing people for his research. For example, Fisher admired the resilience of one person he met who had lost a significant amount in the stock market, pulled out his remaining money, and shifted focus to investing in real estate. Another person he met wasn't contributing to his 401(k) but gave a detailed explanation about his investments in cryptocurrency. Fisher liked that he was at least thinking about retirement. 'My concern tends to rise when someone lacks a plan and has no history of saving. I'm less worried when someone is saving — even if it's not in the optimal way — because they're at least building the right habit," Fisher said. "Over time, many people learn from their financial missteps and self-correct. The key is starting the discipline early.' Gryne said while alternative investments like real estate and cryptocurrency can diversify a portfolio, be wary that they also introduce higher risk and volatility. He advises each person to make a plan that is best in line with their risk tolerance and goals. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_ This article originally appeared on USA TODAY: How to start investing for retirement today: Tips for beginners Sign in to access your portfolio
Yahoo
01-05-2025
- Business
- Yahoo
What is the average credit score and how is it measured? Expert tips on how to raise yours
Credit scores don't matter unless you're trying to get a loan, rent an apartment, secure insurance, buy a home, avoid paying a deposit to utility companies, or even land some jobs. OK. Unless you're living off the grid, they really do matter. The average credit score in the U.S. is 717, according to FICO, the data analytics company whose scoring model is used in most lending decisions. That's considered a good score. But millions of Americans still struggle to raise theirs, and low credit scores can make achieving common life goals much more difficult. Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said having a good credit score will save you money because it allows you to secure lower insurance premiums and lower interest rates on loans. 'Just one percentage point difference on a mortgage, even on our auto loans, it's enormous savings,' Lusardi said. 'If we don't have a good score, we're actually not going to have any credit. We are shut down from borrowing. That's why I say the financial system is not forgiving.' Here's what to know about credit scores and how to raise yours: More: Credit report errors are more common than you think. Here's how to dispute one A credit score is a three-digit number that indicates how likely you are to pay back money when you borrow it, based on your credit history and data from major credit bureaus. 'I always describe the credit score to my students as their financial GPA,' Lusardi said. 'We need to have the best grade available to signal to everybody who wants to work with us that we are a good borrower. That we are a good person with good credit.' FICO scores, used in 90% of lending decisions, are calculated using five criteria, but the weight of each category can sometimes vary by person. FICO notes, for example, that scores for people with short credit histories could be calculated differently than for those who have been using credit longer. The first and most important thing that affects your score is payment history. Whether and how you paid back past credit generally accounts for 35% of your FICO score. How much you currently owe is the second most important thing, generally making up 30% of your score. While the amount matters, your credit utilization is also important. If a person has used all credit available to them, it can indicate that they are overextended and more likely to miss payments, FICO notes. The third aspect, the length of your credit history, generally accounts for 15% of your score. The age of your oldest account, newest account, and the average age of all your accounts will play into your score. The fourth and fifth categories generally each make up 10% of your score. They are the amount of new credit you have and your credit mix. Opening multiple new credit lines in a short amount of time can drop your score, particularly if you don't have a long credit history. Your credit mix reflects the different kinds of credit you manage. It can include credit cards, mortgages, car payments, and more. If you have several types of credit and routinely make payments on them, it can boost your score. The highest FICO score possible to achieve is 850. That's a perfect score and it's not always necessary to get the best terms and rates when borrowing. FICO scores are divided into five ranges: poor, fair, good, very good and exceptional. According to data from Experian, 71% of Americans have a good score or better. Some 13% have a score between 300 and 579, which is in the 'poor' range. Another 16% have a score between 580 and 669, falling in the 'fair' range. The next 21% are in the 'good' range, meaning they have a score between 670 and 739. At 28%, the highest percentage of people, fall within the 'very good' range and have a score between 740 and 799. In the 'exceptional' range are 22% of Americans, who have a score between 800 and 850. According to other data from Experian, credit scores tend to increase over time. It found the average FICO scores in 2024 by generation were: Generation Z: 681 Millennials: 691 Generation X: 709 Baby boomers: 746 Silent generation: 760 A common misconception about credit scores is that checking yours will make it drop. That's not true. However, lenders checking your credit score, like when you go to buy a car or open a credit card, can make it decrease for a short time, Lusardi said. You can view your own often through your bank or credit union, and online at If you're trying to raise your score, the best thing you can do is pay off debt, Lusardi said. She also recommends using only about 70% of the credit available to you to avoid indicating that you are overspending. In terms of improving your credit mix, Lusardi said it's important to manage the different types of credit you currently have well. If you don't have student loans, a mortgage, or another loan, but have one credit card, she doesn't recommend opening a new line of credit just to raise your FICO score. 'In this case, I actually wouldn't worry too much about it,' Lusardi said. 'I don't think that it is worth opening a new line of credit both because it is only 10% and because if you don't have other sources of debt there is really no reason.' To maximize the length of your credit history, don't close old credit card accounts, Lusardi said. She also warns against opening multiple new lines of credit at once because that could signal that you are in financial trouble. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_ This article originally appeared on USA TODAY: What is a good credit score? Expert tips on how to raise yours Sign in to access your portfolio
USA Today
29-04-2025
- Business
- USA Today
What is the average credit score and how is it measured? Expert tips on how to raise yours
What is the average credit score and how is it measured? Expert tips on how to raise yours Show Caption Hide Caption What is a good credit score? Here's what your score means. What makes a good credit score? Here's how they work and which factors can impact your score. Credit scores don't matter unless you're trying to get a loan, rent an apartment, secure insurance, buy a home, avoid paying a deposit to utility companies, or even land some jobs. OK. Unless you're living off the grid, they really do matter. The average credit score in the U.S. is 717, according to FICO, the data analytics company whose scoring model is used in most lending decisions. That's considered a good score. But millions of Americans still struggle to raise theirs, and low credit scores can make achieving common life goals much more difficult. Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said having a good credit score will save you money because it allows you to secure lower insurance premiums and lower interest rates on loans. 'Just one percentage point difference on a mortgage, even on our auto loans, it's enormous savings,' Lusardi said. 'If we don't have a good score, we're actually not going to have any credit. We are shut down from borrowing. That's why I say the financial system is not forgiving.' Here's what to know about credit scores and how to raise yours: More: Credit report errors are more common than you think. Here's how to dispute one What is a credit score? A credit score is a three-digit number that indicates how likely you are to pay back money when you borrow it, based on your credit history and data from major credit bureaus. 'I always describe the credit score to my students as their financial GPA,' Lusardi said. 'We need to have the best grade available to signal to everybody who wants to work with us that we are a good borrower. That we are a good person with good credit.' FICO scores, used in 90% of lending decisions, are calculated using five criteria, but the weight of each category can sometimes vary by person. FICO notes, for example, that scores for people with short credit histories could be calculated differently than for those who have been using credit longer. How is a credit score measured? The first and most important thing that affects your score is payment history. Whether and how you paid back past credit generally accounts for 35% of your FICO score. How much you currently owe is the second most important thing, generally making up 30% of your score. While the amount matters, your credit utilization is also important. If a person has used all credit available to them, it can indicate that they are overextended and more likely to miss payments, FICO notes. The third aspect, the length of your credit history, generally accounts for 15% of your score. The age of your oldest account, newest account, and the average age of all your accounts will play into your score. The fourth and fifth categories generally each make up 10% of your score. They are the amount of new credit you have and your credit mix. Opening multiple new credit lines in a short amount of time can drop your score, particularly if you don't have a long credit history. Your credit mix reflects the different kinds of credit you manage. It can include credit cards, mortgages, car payments, and more. If you have several types of credit and routinely make payments on them, it can boost your score. What's the highest credit score you can get? The highest FICO score possible to achieve is 850. That's a perfect score and it's not always necessary to get the best terms and rates when borrowing. FICO scores are divided into five ranges: poor, fair, good, very good and exceptional. According to data from Experian, 71% of Americans have a good score or better. Some 13% have a score between 300 and 579, which is in the 'poor' range. Another 16% have a score between 580 and 669, falling in the 'fair' range. The next 21% are in the 'good' range, meaning they have a score between 670 and 739. At 28%, the highest percentage of people, fall within the 'very good' range and have a score between 740 and 799. In the 'exceptional' range are 22% of Americans, who have a score between 800 and 850. What's the average credit score by generation? According to other data from Experian, credit scores tend to increase over time. It found the average FICO scores in 2024 by generation were: Generation Z: 681 Millennials: 691 Generation X: 709 Baby boomers: 746 Silent generation: 760 How do you raise your credit score? A common misconception about credit scores is that checking yours will make it drop. That's not true. However, lenders checking your credit score, like when you go to buy a car or open a credit card, can make it decrease for a short time, Lusardi said. You can view your own often through your bank or credit union, and online at If you're trying to raise your score, the best thing you can do is pay off debt, Lusardi said. She also recommends using only about 70% of the credit available to you to avoid indicating that you are overspending. In terms of improving your credit mix, Lusardi said it's important to manage the different types of credit you currently have well. If you don't have student loans, a mortgage, or another loan, but have one credit card, she doesn't recommend opening a new line of credit just to raise your FICO score. 'In this case, I actually wouldn't worry too much about it,' Lusardi said. 'I don't think that it is worth opening a new line of credit both because it is only 10% and because if you don't have other sources of debt there is really no reason.' To maximize the length of your credit history, don't close old credit card accounts, Lusardi said. She also warns against opening multiple new lines of credit at once because that could signal that you are in financial trouble. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_
USA Today
23-04-2025
- Business
- USA Today
How much savings should be in an emergency fund? Tips on how to build one
How much savings should be in an emergency fund? Tips on how to build one Show Caption Hide Caption Online calculators to help with saving, budgeting Online calculators can help you set a budget to help you save money and pay off debts. Problem Solved Between car breakdowns, medical emergencies, and home repairs, no one is immune to life's costly curveballs. Though 60% said they needed to cover an unexpected expense last year, two in five Americans don't have an emergency savings fund and couldn't afford a $1,000 emergency expense, according to a U.S. News survey. For those without savings, the most popular way to cover an unexpected expense is to use a credit card, according to a Bankrate report. That strategy comes with high interest rates that can make paying it off over time difficult and leave you in a worse position the next time an unexpected expense pops up. Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said people often think they will find a way to work more hours if an emergency arises. She points out, however, that sometimes an emergency like getting sick, a global pandemic, or recession can make that plan impossible. 'I cannot emphasize enough how important it is to have a buffer stock of savings,' Lusardi said. 'I think of a buffer as a shield against shock, so I always tell people don't go against shock with no shield. Protect yourself.' Financial experts advise having an emergency fund with three to six months' worth of expenses set aside for a rainy day. That idea can seem daunting to Americans who can't even afford a $1,000 unexpected expense. But building an emergency fund is possible. It starts with figuring out where you are and setting a goal. Here's what to know: More: What to prioritize when making a budget? Tips on creating and sticking to one Ensure you've taken care of your most important financial priorities Experts agree that most people's first financial priorities are paying their bills and making minimum debt payments on time. Once you've got that covered and are making more than you spend, you can start to pay down toxic debt, like credit cards, and build a starter emergency fund. Even a few hundred dollars stowed away can help save you from more credit card debt when your washing machine needs repairs. Next, you should continue building up your emergency fund. If your employer offers a 401(k) match, financial experts advise this is also a good time to take advantage of it to avoid leaving free money on the table. Set a savings goal Conventional wisdom suggests having at least three months' worth of expenses set aside, though financial experts are increasingly recommending people have closer to six in a shaky economy and job market. Take a look at your budget, and make a realistic estimate of how much you would need to get by before you could reasonably land another job in case you were fired or laid off. That's a number you can aim for. More than half of people who used their emergency savings last year pulled $1,000 or more, including 15% who pulled $5,000 or more, according to the Bankrate report. An additional 22% pulled between $500 and $999 and 18% pulled less than $500. However, Ray Charles "Chuck" Howard, an associate professor of business administration at the University of Virginia, notes that everyone's circumstances are different and there isn't a hard and fast rule. 'If you have great health insurance, and you earn a good salary, and you have access to low interest debt, you need less of an emergency fund than somebody who doesn't have those things,' Howard said. Set a budget based around savings Once you've set a goal that makes sense for you, it's time to save. While Lusardi acknowledged that can be difficult if you are one of the many Americans living paycheck to paycheck, she said it's important to remember it's not impossible. 'We can adjust our income. We can adjust our expenses. That's the reality,' Lusardi said. 'Let's not say, 'I cannot and therefore I cannot do it.' There are many things we can do. The question is what are our priorities?' The most obvious yet tiresome advice is to cut back on spending and increase earnings. Tim Rupert, a professor of accounting at Northeastern University, suggested cutting out two coffee runs and saving $10 a week to start. Howard said it's 'easier today than it ever has been' to do some gig work on the weekends. Experts also suggest taking advantage of one-time savings opportunities, like moving your IRS tax refund into an emergency savings account. Lusardi recommended taking a look at your insurance plans and maybe opting for one that costs less but has a higher deductible. 'People buy insurance with a zero deductible that is super expensive, and they do that because they know they don't have any liquidity,' Lusardi said. 'Well, it's better to have some liquidity and not pay this high cost. Having precautionary savings is basically an insurance that we build for ourselves.' If you do earn enough to save, but struggle to restrain from spending it, automating savings may be a good option. You can do so by setting up a split deposit with your employer or an automatic transfer from your checking to savings accounts with your bank. Decide where to store it and when to use it Emergency funds should be accessible. That means not in a retirement account, the stock market, or a risky investment. Ideally, the experts said, it should be some place safe that is earning interest, like a high-yield savings account. Currently, the national average annual percentage yield (APY) for savings accounts is 0.59%, according to another Bankrate survey. But some banks offer high-yield accounts with APYs as high as between 4 and 5%. 'Just make sure that the bank is insured,' Howard said. Once you've built up your emergency fund, leave it. But when an emergency arises, don't feel uncomfortable using it. That's what it is there for. Just remember to replenish it when you get back on your feet. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_
Yahoo
22-04-2025
- Business
- Yahoo
What to prioritize when making a budget? Tips on creating and sticking to one
Budgets. You know you should have one, but if checking your bank account stresses you out, the idea of tracking your spending can seem like the worst way to spend an afternoon. But, one of the biggest financial mistakes you can make is not monitoring your money, according to Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making. 'This is not an unbiased world that we face. Firms spend millions of dollars to make people spend,' Lusardi said. 'I tell my students, by the time you leave this classroom, and you go back to your dorm, you'll have five opportunities to spend. There is nothing, no sign, no advertisement, that says 'Please stay within your budget.'' You may think you have a budget. You might have an idea of how much you think you make, spend, and where you should cut back. But financial experts told USA TODAY people generally overestimate their earnings and underestimate their spending. Taking the time to determine your exact financial situation and set goals can be an enlightening experience. Yet while 'how do I budget' seems like a simple question, knowing exactly where to start can be complicated. Here is a guide to help: More: 4 easy ways to save money on your monthly bills First, you need to know how much money you make. Look for your take home pay after taxes and deductions for things like a 401(k). If you don't have a stable income, freelance, or do gig work, take the average of your last several few months of income, and make a reasonable prediction about what you will make knowing what jobs you have lined up. If you're self-employed, this might also be a good time to think about the amount you're setting aside for taxes. 'Nobody is withholding money for you, and suddenly it comes to the end of the year and you're going to owe taxes,' said Tim Rupert, a professor of accounting at Northeastern University. 'That can be a real surprise for people. Oftentimes people think, 'Oh, I don't earn that much money,' so they overestimate what they're going to get to keep.' Second, you need to know how much money you have to spend. Identify your fixed expenses. These are going to be costs like utility bills or payments for rent, a mortgage, a car, and insurance. Third, you should look at where else your money is going and identify your variable expenses. Although groceries are a necessity, for instance, there are ways you can lower those bills. Variable spending also includes things like eating out, shopping, and travel. Subtract your fixed and variable expenses from your income. Are you spending less or more than you earn? Once you have a firm grasp on where you are, you can figure out where you want to go. Your goals will depend on your current financial situation. Experts agree that covering bills and making the minimum payment on debts on time are most people's first priorities. If you're not doing that, although you may be tired of hearing it, experts suggest looking at ways to increase your income like getting a second job or decreasing your expenses by canceling subscriptions or not getting takeout. Once you've got your bills and minimum payments taken care of, you'll want to tackle high-interest debt, like credit cards, and build a starter emergency fund of a few hundred dollars. Ray Charles "Chuck" Howard, an associate professor of business administration at the University of Virginia, said people should focus on the goal that they are personally most motivated to reach. 'The rational response is almost certainly to pay down the debt,' Howard said. 'But you can imagine a circumstance in which you encounter some emergency expense that throws you into even more debt and makes you even more demotivated to improve your financial well-being, so it depends on the person.' If your employer offers a 401(k) match, this is also the time to start thinking about getting some free money. Consider contributing enough to an employer-sponsored retirement account to fully capture the match so you're not leaving money on the table. Once you've paid down toxic debt and have your employer's 401(k) match, you should continue to build up that starter emergency fund. Conventional wisdom suggests saving three to six months of expenses to prepare for a rainy day and avoid more bad debt. Next, it's time to pay off debt with lower interest rates like student loans or a mortgage and contribute more to retirement accounts. Then, feel free to invest in yourself. Set savings goals for a new home, car, or a vacation. Experts agreed that although this timeline of goals can work for a lot of people, everyone's circumstances are different. 'It has a lot to do with priorities,' Lusardi said. 'If you live in an area where you know you need a car to go to work, or you're building a family and need the car to bring your child to school... you have to make it a priority.' While making a budget, you may choose to use a time-tested budgeting strategy that works for you. Popular methods include 50/30/20, paying yourself first, and envelope budgets. The 50/30/20 strategy involves putting 50% of your money toward needs, 20% toward savings, and 30% toward wants. The pay yourself method means that the first "bill" you pay when you get your paycheck is a contribution to your savings account. With an envelope budget, you put set amounts of money into different categories like entertainment or shopping, and once it runs out, you can no longer spend in that category. Rupert said the biggest mistake people make with budgets is not sticking to it once they've made one. 'People oftentimes have really good intentions to start,' he said. 'For most of us, it's not fun sticking to a budget.' But to be successful, you must track your progress, and there are a lot of tools out there to help. You can automate your savings by setting up a split deposit, which is when a portion of your direct deposit goes directly to a savings account before the rest ends up in checking. Another option is to set up automatic transfers from your checking to savings account. The Federal Trade Commission also offers a free monthly budget worksheet online and Google Sheets has free monthly and annual budget templates anyone with a Google account can use. Additionally, there are several apps people can download and use on their phones that help track spending including Quicken Simplifi, PocketGuard, or Goodbudget. Howard said he uses a 'good, old-fashioned" Excel spreadsheet. 'The ease of using an app is a benefit for a lot of people so I don't want to undersell that,' he said. 'But for me personally, if I invest some time and effort into a spreadsheet, I don't want that to go to waste. So, I end up using it.' In terms of savings goals, Howard determined through his research, that it is sometimes helpful to set optimistic budgets rather than realistic ones. He imagined a scenario in which someone currently spends $1,000 a month at restaurants and sets a goal to spend only $200 the next month. Because that is a 'really aggressive' behavior change, he said, most people won't only spend $200, but they may spend $500 because they set an optimistic goal. 'A lot of personal finance folks will look at that outcome and say well this is no good, this person overspent their budget,' Howard said. 'That's absolutely a wrong frame of mind to be in. I think that person is a success story because they're spending $500 less than they used to.' It's important to celebrate wins while budgeting, and those will look different for each person. Howard imagines another scenario where someone has $10,000 in credit card debt with a 25% interest rate and a $1,000 loan from the bank with a 9% interest rate. He said although rationally, that person should be paying down the credit card debt, a lot of people would feel more motivated if they first took the $1,000 loan off the books. 'Financially, it's not necessarily the optimal thing to do, but if it makes you happy and then subsequently more motivated to tackle the $10,000 debt with 25% interest. More power to you.' Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_ This article originally appeared on USA TODAY: How to create a budget and stick to it Sign in to access your portfolio
