Money Management

Cutting your budget may not always be the best way to increase your savings. 

I have some big purchases planned in the near future, so I’ve made a decision to increase my savings account balance by thousands of dollars in 2023. By saving more money, I can pay for the things I need without having to worry about going into credit card debt or taking out a loan for purchases.

When you’re looking to save more money, many financial experts will tell you to start by taking a look at your budget. Specifically, many experts advise identifying cuts you can make so you can move more of your money into your savings account instead of spending it on discretionary purchases such as dining out or clothing or entertainment.

I’m not going to cut my budget, though. In fact, I’m not even aiming to reduce my spending at all despite the fact I want to funnel a ton more cash into a savings account. And there’s a simple and important reason for that.

This is why I’m not interested in cutting my budget

While reducing spending and reallocating money to savings seems to make sense on the surface, there’s a few problems with this approach.

First, there’s a limit to how much you can actually cut out of your budget. Everyone needs to eat, get to work, buy clothing, have a place to live, and cover utility costs. As a result of these and other essential expenses, it’s really hard to get your spending below a certain minimum threshold — at least not without making drastic and often uncomfortable and unsustainable life changes.

Second, constantly trying to cut your budget to accomplish your financial goals isn’t likely to be a successful approach in the long run. You’ll end up taking everything that’s actually fun and that enables you to enjoy life out of your budget and may find yourself miserable and unable to stick to your plans. In fact, splurges are inevitable if you try to slash your budget too much by removing discretionary spending.

I don’t want to spend the next few months or longer living a life of deprivation just to squeeze a few extra pennies out of my budget so I can make a meager impact on my savings. And since I’m already not wasting money because I made my budget to align with my values and priorities, that’s exactly what I’d be doing if I cut my budget further.

Here’s what I am going to do instead

Since I don’t want to cut my budget but I want to move more money into savings, I have to make some type of change.

That change is going to be increasing my income. I’ll be focusing on making more money this year than I did in the past. I’ve chosen to devote my energies to earning more rather than spending less because there’s no upper limit on earnings, and taking steps to make more money will allow me to still enjoy life while hopefully funneling even more extra cash into savings than I would be able to if I looked for budget cuts.

The good news is, there are tons of opportunities out there to earn more money — whether that means doing a little extra work at a current job or taking on a side hustle. Devoting time to finding these opportunities can make a much bigger difference than budget cuts ever will.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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The programs that helped families get through the pandemic are no more. 

It’s only been four days since the IRS began accepting tax returns for 2022 earnings. They’re already warning that Americans might be surprised to find smaller refund checks deposited into their bank accounts.

There are four primary reasons why.

1. Stimulus checks are gone

On March 12, 2021, the IRS began sending the last of three stimulus payments. However, for various reasons, a slew of taxpayers did not receive their payment. And some of those who did get them received a check for the wrong amount.

Those folks could file a recovery rebate credit when they filed their 2021 tax return. If they were due a refund, the IRS stacked an extra $1,400 (or whatever sum was missing if they received a partial check previously) per eligible recipient on top of their refund. Those dollars would help offset the amount owed if they owed the government money.

Let’s say a family of four moved, and the IRS needed their current address, thus causing them to miss out entirely on the $1,400 stimulus checks. They were able to file a recovery rebate credit and could expect to receive $5,600 in addition to their regular refund.

Now that there is no stimulus and no recovery rebate credit, it’s back to their usual refund amount.

2. The enhanced Child Tax Credit ended

Another program intended to help families cope with the financial fallout of the pandemic was the enhanced Child Tax Credit. In a typical tax year, a parent can deduct $2,000 per child as a Child Tax Credit. It’s not much, but it is intended to help with the high cost of raising a child.

During the pandemic, that amount increased from $2,000 to $3,600 per child under age 6. And for children from 6 to 17, it was boosted to $3,000. Parents had two options: They could either wait and claim the entire credit when they filed taxes or take the first half of the credit upfront, distributed as monthly payments from July to December 2021. They were then eligible to claim the back half of the credit when they filed taxes.

While President Biden initially wanted the expanded Child Tax Credit to run through 2025, Republican legislators voted it down, and the program ended with the December 2021 payment.

Imagine a family with a 5-year-old and a 7-year-old who opted to file for the entire credit at tax time. That meant when they filed taxes in 2022 for the 2021 tax year, they received an extra $6,600.

The good news is that the same family is looking at a $4,000 credit this year. Still, it may seem small compared to $6,600.

3. The pandemic-era charitable deduction tax break is a thing of the past

Typically, Americans can only deduct donations to charity from their taxes if they have enough deductions to itemize. Many Americans do not have enough deductions to itemize or would rather skip the work that goes into itemizing and claim the standard deduction.

When Americans filed their taxes last year, it was for the 2021 tax year. Congress created a temporary tax break for those who made donations in 2021 but did not itemize their taxes. Rather than claim nothing, a single tax filer could claim a $300 deduction, and a married couple could claim $600.

That tax break is gone as well.

4. 2022 was a wild year for investments

The stock market went for a wild ride in 2022, dropping enough to leave some investors nervous. Some of those same investors may be surprised to learn that they have a larger tax bill due to investment gains.

Here’s how it happened:

An investor held a mutual fund directly (rather than in a tax-sheltered account).The market became volatile enough that mutual funds had to sell more of their holdings than usual. This included profitable holdings.Once sold, the mutual fund distributed gains back to investors.Even though an investor’s overall portfolio looks like it lost money in 2022, there was a small pocket of gains. It’s those gains they’ll need to pay taxes on or offset with any losing stocks they sold last year.

The IRS has yet to say how much smaller they expect refunds to be this year, although the average refund for the 2020 tax year was $2,827, and for 2021, it was $3,039. It’s safe to say that the IRS expects the average return to be less than that.

While it’s bad news for many of us, knowing in advance may help us plan for a more realistic refund.

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It’s a detail you don’t want to gloss over. 

There’s a reason I like to review my checking account balance every week or so. My checking account is what I pay all of my bills out of. And so I need to make sure I have enough cash in there to cover my expenses.

Normally, this isn’t a problem, because I keep extra money in my checking account, just in case. And since I bank online and have a savings account at the same institution, I can always transfer money from one account to the other on the spot if need be.

My savings account, meanwhile, is an account I check less frequently. Since I don’t tend to dip into it unless it’s an emergency expense, I don’t have that same need.

But these days, I do make a point to check up on my savings account once a month to look at one specific detail. And you may want to do the same.

Are you earning a decent return on your savings?

For many years, savings account interest rates were horrendously low. So were CD rates, for that matter.

But over the past number of months, savings account and CD interest rates have soared. That’s very good for people with money in the bank, because it means consumers can finally earn a decent return on their cash without having to invest it and subject themselves to the risk that comes with doing that.

Because savings account rates are finally competitive, I now make a point to look at what my bank is paying once a month and make sure I’m getting a rate I’m happy with. What I’ll do is check my rate against other banks to see how it stacks up. If we’re talking about a very minor difference, I won’t do anything. But if I see that my savings account is paying a lot less than another bank, I might look at making a switch.

So for example, let’s say I see that my bank is paying 3.3% on savings accounts, and another bank is paying 3.35%. That’s really not a large enough difference in interest to get me to switch and have to deal with that hassle. But if I see that another bank starts paying 3.75% and mine holds steady at 3.3%, well, that’s a different story.

A detail worth looking at

You probably don’t need to review your savings account as often as your checking account. But one detail to pay attention to is the interest rate you’re getting on your money.

Interest rates for savings accounts aren’t locked in the way CD rates are, and they can fluctuate pretty often. Keeping tabs could help you earn a higher return on your money.

Plus, it’s always a good idea to compare your bank’s savings account interest rate to its CD rates. If the latter are a lot more generous and you have money you don’t expect to use anytime soon, putting it into a shorter-term CD could put a lot more interest income in your pocket.

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The quick answer? It depends what you’re using them for. 

For much of the second half of 2022, economists were busy warning consumers to gear up for a 2023 recession. And those dire warnings largely stem from interest rate policies on the part of the Federal Reserve.

The Fed has been on a mission to cool inflation and give cash-strapped consumers relief. To that end, the central bank implemented a series of interest rate hikes in 2022, the purpose of which was to drive up the cost of borrowing and encourage consumers to cut their spending. If consumer spending declines modestly, it could help solve the problem of inflation by bridging the current gap between supply and demand.

But the Fed’s interest rate hikes have the potential to drive a major pullback in consumer spending. And if that happens, we could end up with a recession on our hands at some point over the next 12 months.

If a recession hits, it could also lead to a period of widespread job loss. And at that point, some consumers might become heavily reliant on their credit cards to cover expenses.

But is using credit cards during a recession a good idea? Well, it depends on your situation.

The danger of credit card debt

If a recession hits and you lose your job, you might have to use your credit cards to pay your bills in the absence of your regular paycheck. And in that case, you should really do your very best to limit your credit card charges to essential expenses only.

But if you can avoid using your credit cards during a period of unemployment, that may be a better option. That way, you won’t have to worry about accruing debt and getting stuck with a world of interest charges.

Also, too much credit card debt can damage your credit score. So can falling behind on your monthly payments. If you find yourself out of a job, and you have money in a savings account to fall back on, you should attempt to go easy on your credit card usage until you’re gainfully employed again.

Now if a recession hits but your income isn’t impacted in any way, then you can probably continue using credit cards as you normally would. But be careful to avoid racking up balances you can’t pay in full.

As mentioned earlier, the Fed is intent on cooling inflation, and we could see more interest rate hikes come down the pike in 2023. Those could make credit card balances more expensive.

Don’t put yourself in a position where you have to rely on credit cards

If you lose your job during a recession and can’t pay your bills out of savings, then continuously swiping a credit card may be your only choice. But it’s better to not put yourself in that position. Instead, work on building yourself an emergency fund while you’re still employed so you have cash reserves to fall back on.

Even if you’re only able to save up a few thousand dollars before losing your job, that, combined with unemployment benefits, could keep you afloat until you’re hired elsewhere. And that could help you avoid credit card debt and the consequences that come with it.

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If you can afford to pay extra on a loan principal, you’ll come out ahead. 

While conditions certainly haven’t been ideal for buyers over the last couple of years, with competition and elevated home prices (and rising mortgage rates over the course of 2022), some people have managed to buy a home recently. If the stars aligned for you and you’re now staring at 30 long years of mortgage payments, you might be wondering how to get out from under it sooner. While you could refinance into a 15-year mortgage, your payments will be a lot more expensive if you go this route, perhaps unaffordably so.

You may also have bought with a down payment under 20%, meaning you’re now paying for mortgage insurance. Once you’ve got more than 20% equity in the home, you can have your lender cancel your PMI, so it’s worth it to pay extra to get there faster if you can. With a little math and some extra funds, here’s how you can accomplish it.

The 10/15 rule

Sean Pan on TikTok (@seanlovesrealestate) recently outlined his 10/15 rule in one of his videos. If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.

The first several mortgage payments you’ll make on a home cover just the interest charged by your lender. Paying extra money (in any amount) toward your principal means that you will end up paying less interest, as you’ll pay off that principal sooner. This process can be applied to any type of loan; finance expert Tori Dunlap advocates for it too.

The example Pan uses is a $3,000 mortgage payment, so an extra $300 per week. This is a lot of money, and it’s likely more than many people could comfortably afford to pay in addition to their regular mortgage payment and other bills. However, any extra money that you can send to your mortgage lender to be applied to the principal (and make sure your lender isn’t just tacking it onto your next payment, as this will not save you money on interest) will help you pay off your mortgage faster.

Could it work for you?

There are a few circumstances where the 10/15 rule might work for you. If you live below your means and can comfortably afford your monthly mortgage payments, you could try it out. And if you live in a part of the country that hasn’t seen such elevated home prices thanks to the wild market of the last few years, you might be able to afford those extra payments. Ditto if you’ve recently increased your income thanks to a raise at work or a side hustle.

Unfortunately, many people did have to stretch financially in order to afford to buy a home recently, and may be sitting with very large monthly payments, both as a result of higher home prices and higher mortgage rates. So while they may have the option to pay extra, they may lack the ability. Run the numbers and see if you can swing any extra amount of money to send to your loan principal. You could also earmark future windfalls (like a tax refund or a work bonus) to go to your mortgage.

Don’t feel bad if you can’t manage to pay off a 30-year mortgage loan in just 15 years. The nice thing about the 30-year mortgage loan is that it gives us the ability to stretch those payments out, and it has made homeownership possible for many people who otherwise wouldn’t have been able to buy.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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