How to manage your money in 2023

Start here: Understand your current financial situation

The first step is a bit like pulling off a bandage — you just have to do it no matter how painful you think it will be. You need a clear picture of your finances before you can start managing your money well. Answer the following:

• How much money is hitting my bank account each month?
• How much debt do I owe?
• How much are my must-pay bills each month (e.g., rent/mortgage, utilities)?
• How much am I spending each month in each category (e.g., groceries, car, entertainment)?
• How much do I have in savings or investments?

It is helpful to look at your past spending habits to get a better idea if you are adding to your debt problem or are on track for savings goals. Remember, no matter how hopeless you feel about your current financial situation, you can fix it.

Know your financial goals

Now for the less painful part. Write down your financial goals for the next year, three years and five years. Here are a few examples you can use:

• One-year financial goals: pay off $15,000 in debt; buy a new car; find a better place to live
• Three-year financial goals: have enough money saved for a down payment; take a two-week trip to Italy
• Five-year financial goals: pay off my student loans; save enough money to start my dream business

Add a why and action steps to each of your goals so they become more than wishful thinking.

For example, maybe I want to find a better place to live so I feel safer in my neighborhood. In order to do that, I need to afford $1,000 more in rent. The action steps to accomplish this goal would be to find room in the current budget and start thinking about how to earn more money.

» MORE: How to save money for a house

Set a budget

The dreaded “b-word” — budget. Stop thinking of your budget as a jail sentence and more as a purposeful way to spend your hard-earned money so you can accomplish your financial goals. Sticking with a budget is not always fun and requires a lot of self-discipline, but it will be worth it.

Many financial experts like the 50-30-20 budget rule. With this budget, you spend:

• 50% of your take-home pay on needs
• 30% on wants
• 20% on savings and debt

This is a good starting point for creating a budget, but it is not ideal for everyone, especially those who live in higher-priced cities. Change the percentages so they work for your lifestyle while still helping you repay debt and set aside savings.

Your budget should be split into four main categories.

1. Your needs: This includes your housing, transportation, groceries, pet food, utility bills and insurance. Needs like your rent or mortgage payment are fixed and can’t easily be negotiated. Your grocery costs are more flexible and can be decreased with conservative spending or shopping sales.
2. Your wants: Some of your spending might feel like it’s for needs — but maybe you can live without them. Wants include gym memberships, eating out, coffee runs, movies/streaming, subscription boxes, cleaning services, grooming/beauty and new clothes.
3. Debts: List out all of your debts and required monthly payments. If your monthly debt repayment takes up more than 20% of your paycheck, you will need to cut back on your wants to get out of debt. The closer you are to becoming debt-free, the more room you will have in your budget.
4. Savings: If you are currently not saving each month, write down how much you would like to save each month. When you are first making your budget, you might not have enough leftover money to save. Becoming more mindful of your spending and paying down debt will help free up funds for monthly saving goals.

Cut unnecessary spending

There’s no easy way to say this: You need to stop wasting your money on things that keep you from your financial goals. Budgeting is all about finding the right balance between spending on what you need and spending on things that make life enjoyable. If you are struggling to repay debt, you will need to cut back on fun spending.

However, if you cut back your fun spending cold turkey, you will be miserable and less likely to stick to your budget. Instead, try cutting back gradually. If you buy lunch five days a week, skip one day in favor of bringing lunch from home. Instead of drinking at the bar with friends Friday after work, invite them over and ask them to bring their favorite bottle of wine to share.

Saving $5 and $20 here and there won’t seem significant in the moment, but it can add up quickly throughout the month.

Have an emergency fund

You can’t plan for emergencies, but you can be financially prepared when they happen. Start by setting $500 to $1,000 in a separate account as your emergency fund. If your budget is tight, you can save $20 per week and have over $1,000 in your fund within a year.

Having a separate emergency fund can help you stay on budget and out of debt if your car breaks down, you have an unexpected urgent care visit or your pet needs an emergency vet visit.

Ideally, you will want to grow this emergency fund in the future so it can cover you for several months if you were to lose your job.

Pay off debt

Most budgets will have some level of good debt in them. A mortgage payment is an example of good debt, as it is something to help you achieve your financial goals (in this case, owning a home rather than renting).

If you are paying off student loans, a car loan or a mortgage, these debts shouldn’t be your first priority. Instead, focus on not adding any new debt to your budget and getting rid of revolving debt, such as credit card debt.

Once you have your credit card debt managed, you can focus on paying more toward your personal loans, student loans, medical bills and car loan to pay them off faster. Look into refinancing loans to a better rate to save money on interest, or inquire about federal-level repayment plans for your student loans if needed.

» MORE: Is debt management a good idea?

Save smarter

Setting aside money in a savings account is good, but not all saving accounts are created equal.

“If you aren’t putting your savings in a high-yield online savings account, you’re leaving money on the table,” said Andrea Woroch, a consumer and money saving expert. “High-yield online savings accounts can pay as much as 5% interest right now.”

You can typically expect high-yield online savings accounts to have an annual percentage yield (APY)  that is 10 to 15 times greater than the national average.

“When opening a high-yield online savings account, there are a few things you wanna watch out for,” Woroch said. “First of all, make sure it is FDIC-insured, and only deposit up to the amount that is covered.”

Woroch recommends shopping for the highest APY and knowing what the minimum deposit is before choosing.

» MORE: CDs vs. savings accounts: Which is right for you?

Invest in your future

You don’t need to be a stockbroker to get into investing. Investing can be as simple as contributing 3% of your paycheck to your 401(k) — you get a deferment, and many companies match your contribution.

Financial advisors can help you figure out where you should invest, as well as how to best manage lump sums of money, such as an inheritance.

Bottom line

Managing your money is a personal thing — no two people will have the same spending priorities or financial goals. By using these steps, you can figure out what you want to spend, how to reduce your debt and save for what truly matters to you.

And remember that money management is not a one-and-done activity; you will need to reevaluate your budget and spending continually to maintain and stay in a financially healthy position.