How to Make Your Money Work for You

Four ways to manage and use your money more effectively

Money is a tool that can help you to achieve your goals. It can provide comfort and stability for your family, make it easier to plan for the future, and allow you to save towards important milestones. But to achieve these things, you need to know how to make your money work for you.

What Does It Mean to Make Your Money Work For You?

Making your money work for you means taking control of your finances, then using that control to continuously improve your financial stability and security.

You may eventually be able to gain financial independence or build wealth through investing. But neither of those things can happen without first understanding where your money is going and learning better ways to use it.

Learn to Budget

A budget is a vital tool for changing the way you handle your money.

When you are budgeting, you understand where your money is coming from and are purposeful about where you spend it. You are making your money do what you want it to do, rather than spending without a plan.

The goal of budgeting is to always spend less than you earn.

When you create a budget, you assign every dollar you earn to a spending category. You can use a budget to:

  • Reduce your spending
  • Understand where your money is going
  • Identify bad financial habits
  • Pay off debt
  • Avoid creating new debt
  • Prioritize spending on things that are important to you
  • Save for the future

Budgeting is not a one-time action. It should be something you actively engage in every day. You may need to adjust your budget from month to month to account for large expenses or your own spending habits.

When you know how much income you have, you can decide where to put it. When you are deliberate about where you spend it, you are in control of your money. This is the first step towards making it work the way you want to, rather than feeling controlled by your finances.

Get Out of Debt

When you are in debt, you pay more than the cost of the original purchase. You also have to make interest payments that can substantially cut into your income.

Debt means your money isn't working for you, it's going towards paying that interest. It creates a financial burden and limits the choices that you can make.

Paying off debt, by contrast, allows you to take that money and redirect it toward the things that are important to you. You can put it toward other financial goals, such as saving for education, creating a retirement fund, traveling, or improving your living situation. You can start a business. You can begin investing it, allowing you to grow your wealth and create more financial stability and independence.

If you have a lot of debt and are feeling overwhelmed, you can use the snowball method to control the debt repayment process.

  1. Pay only the minimum payment on all your debts except the smallest one.
  2. Put whatever extra money you have toward paying off the smallest debt.
  3. Once it's paid off, move onto the next smallest.

As you pay off your smaller debts, you'll have more money available to pay off your larger debts. This momentum helps you focus your efforts and get out of debt more quickly. 

Create an Emergency Fund

Surprises are scary when you do not have control of your finances. An unexpected car repair, a medical procedure, a job loss, or any other financial emergency can quickly send you spiraling into new or more debt, wiping out any progress you've made towards taking control of your money.

Creating an emergency fund is another way to make your money work for you because it means you have planned for surprises. If an emergency does come up, you can put the money in your fund to work and regain control of the situation.

Building an emergency fund can take time. Ideally, you should save the equivalent of three to six months' worth of income. But every little bit you can set aside will help. If you are still paying off debt or don't have much wiggle room in your budget, set aside whatever you can in a "surprise expenses" category in your budget. At the end of the month, transfer whatever is in this category to a separate savings account.

Put your emergency savings in a high-yield savings account, which will earn more interest than a regular saving or checking account. This means that the money you save will make money while it's sitting in your bank account. If your bank doesn't offer high-yield accounts or you live in a rural area without a bank, look for online banking options to open an account.

Once you are out of debt or have more money free money in your budget, you can set up larger recurring contributions to grow your emergency fund even faster.

Save and Invest Your Money

Once you have freed up all that extra money from paying off your debt, you can put your money to work through savings and investments. What you save for will depend on your age, lifestyle, and goals.

In addition to an emergency fund, you will also need retirement accounts. You should also consider whether you need:

  1. Education savings, for yourself or your children
  2. Travel savings
  3. A down payment fund for a house
  4. Savings to start a business
  5. A car fund, for repairs or a new vehicle
  6. Extracurricular fund for dependents
  7. Long-term care savings, for yourself or dependents

By creating designated savings funds, you can track your progress toward specific goals. You can also put those savings in a high-interest account, money market account or CD (certificate of deposit) in order to earn interest on your money.

Remember, when you pay interest, you are losing money. But when you earn interest, your money is making more money all by itself.

If you won't need your savings for several years or decades, one of the best ways to make your money work for you is to invest.

When you put your money into investments, it grows all on its own through interest or the increased value of the thing you invested in. Some investments also pay dividends, which you can either take as extra income or reinvest to help your portfolio grow.

Investing is a long-term strategy for building wealth. The most successful investors invest early, then allow their money to grow for years or decades before using it as income. Constantly buying and selling investments is likely to make less money than a buy-and-hold strategy in the long run.

As you start investing, it is important to diversify your portfolio. Having all your money in just one type of investment increases your risk. If that single investment fails, all your money could be gone. Instead, spread that risk out by investing in a mix of:

Many mutual funds or brokerage firms have a minimum amount for first-time investors. You may need to save up that minimum amount before you start investing. In the meantime, you can start small with investing apps that allow you to purchase fractional shares by investing amounts as small as $1 at a time.

No matter how you are saving or investing, have a specific set of goals. Know what you are working towards, like paying for your child's education, purchasing a home, or early retirement. This will help focus your spending and give you motivation, as well as helping you decide what types of investment are the best for you.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

Article Sources

  1. Consumer.gov. "Making a Budget." Accessed June 6, 2020.

  2. Consumer Financial Protection Bureau. "How to Reduce Your Debt." Accessed June 6, 2020.

  3. Consumer Financial Protection Bureau. "An Essential Guide to Building an Emergency Fund." Accessed June 6, 2020.

  4. USA.gov. "Saving and Investment Options." Accessed June 6, 2020.