15 Ways to Improve Your Financial Health

Most of us are not in the financial shape we should be in or would like to be in, and many of us are actually in financially precarious situations, with very little saved for retirement. That alone can lead to a stressful life now and a difficult future. You can improve the trajectory of your financial health, though, by taking a few steps -- or, ideally, all 15 steps -- outlined below.

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Are you carrying a lot of credit card debt? If you are, that's a big problem, in part because such debt tends to feature very steep interest rates. It's hard to get ahead and be able to invest for your future if you're making massive interest payments every month -- or not doing so and racking up bigger and bigger debts. For example, if you owe $25,000 and you're paying 22% in annual interest, that's costing you around $5,500 per year just in interest alone. If you were out of debt, that money might be parked in growing stocks instead. It's not always easy to get out of debt, but it can be done -- and it should be a priority.

ALSO READ: 5 Steps to Boosting Your Credit Score in 2021

Quick -- can you handle a sudden $1,000 expense? A $2,000 one? If your car suddenly needs a new transmission or you lose your job, will you soon find yourself out on the street or adding mountains of debt to your credit cards? Don't let that happen. Build yourself an emergency fund before jumping into investing. Make sure you can handle at least three (if not six) months' worth of essential expenses, such as housing, food, insurance, taxes, transportation, utilities, and so on.

Next: Do you have a financial plan? If you're leaving your financial future up to chance, perhaps socking some money away and hoping for the best, you're at risk of a fiscal disaster. Instead, figure out how much money you'll need in retirement and how you will arrive at that sum. It will likely involve parking lots of long-term dollars in the stock market and perhaps forgoing some luxuries. Don't be afraid to consult a financial advisor for help coming up with a good plan, too -- and once you have a plan, you'll need to stick to it, year by year.

Here's something you should start doing as soon as possible, if you want to be much better at managing your money -- and you should keep doing it for the rest of your life. (Fortunately, it can be quite interesting!) Keep reading and learning about investing, about businesses, and about great investors. You'll learn how great businesses are built and maintained -- and that can help you identify great companies in which to invest. You'll learn how great investors go about investing and about their successes and failures. You'll learn about different investment strategies that you might adopt -- such as value investing, growth investing, dividend investing, and more. (You might even combine several.)

ALSO READ: The 100 Things I've Learned in Investing

Do yourself a favor and make good use of 401(k) accounts and IRA accounts -- either the traditional or Roth variety (or both of them). Traditional IRAs and 401(k) accounts offer up-front tax breaks, reducing your taxable income. Roth IRAs and 401(k)s offer a back-end tax break, and a potentially huge one: tax-free withdrawals in retirement. You can contribute a total of $6,000 to one or more IRAs for 2021, plus an additional $1,000 for those 50 or older, and the limit for 401(k)s is $19,500, plus an extra $6,500 for those 50 or older.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It can be hard to remember or manage to make regular investments, not to mention paying all your bills on time. One easy solution is automation: Many financial transactions that you make regularly can be set on automatic. Many bills, such as for your utilities, credit cards, mortgage payments, wireless service, cable, and more, can be paid automatically through your bank account, helping you avoid late-payment charges. You can also direct a specified portion of each paycheck to be sent directly to a saving or investment account.

Ignoring the fees you pay can be a very costly mistake, because some of them might be much higher than they need to be. You'll find fees across all of your financial life -- levied by banks, brokerages, mutual funds, exchange-traded funds (ETFs), and more. A little 1.5% mutual fund fee may seem minor, but it can make a huge, negative difference to your ultimate results. Consider, for example, that average stock mutual fund annual fees dropped from about 0.99% in 2000 to 0.52% in 2019, so if you're being charged 1.5%, you'd better be getting terrific results -- otherwise you're paying 1 percentage point or more than you have to.

Here's what a difference fees can make. Imagine that you invest $10,000 every year for 25 years, and your portfolio grows by 10% annually. If you're paying an annual fee of 1.5% or 0.5%, you'll end up with net average annual gains of 8.5% or 9.5%, respectively. So how much will you end up with after 25 years, net of those fees? Well, paying 1.5% in fees, you'll end up with $853,546, but paying just 1 percentage point less, 0.5%, you'll end up with $999,143 -- that's a difference of more than $145,000!

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It's good to be socking away aggressive sums regularly, because you'll end up with more money -- for retirement, a down payment, or whatever your goal is. But you'll need to invest your money effectively, too. Bank savings accounts, certificates of deposit (CDs), and money market accounts can be great for short-term dollars, but unless interest rates rise a lot very soon, they won't grow your wealth very well at all. Having some bonds in your portfolio can offer welcome diversification, but over long periods, stocks tend to grow much more briskly than bonds.

One of the easiest and most effective ways to invest in stocks is to just stick with a simple, low-fee, broad-market index fund -- or a few of them. Index funds invest in the same holdings as the specific index they track (such as the S&P 500), offering close to the same return. Those low fees help index funds outperform the vast majority of actively managed mutual funds over long periods. For example, as of the middle of 2020, the S&P 500 outperformed 87% of large-cap stock funds over the past 15 years.

Here are a few index funds to consider:

• SPDR S&P 500 ETF (NYSEMKT: SPY)
• Vanguard Total Stock Market ETF (NYSEMKT: VTI)
• Vanguard Total World Stock ETF (NYSEMKT: VT)

Respectively, each of those funds will instantly invest you in 80% of the U.S. stock market, the entire U.S. market, or nearly all of the world's stock market.

It's also important to not trade too frequently, because it can be costly. For one thing, if you're paying trading commissions, you'll rack up a lot of them. (Many good brokerages these days are charging $0 for trades.) Also, your gains will likely be short-term ones, taxed at a (typically) higher rate than long-term gains. And perhaps most importantly, you'll be exiting many great companies without giving them a chance to really perform for you. Even if you sell after a great company's stock has doubled, you may miss out on it doubling and doubling and doubling again.

The most extreme kind of trading is day trading, and it can be very hazardous to your wealth.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

If you want to build wealth over time, you'll want to avoid getting caught in penny stock traps. A penny stock is one that's trading for less than about $5 per share, and it's very often a tiny, unproven, unprofitable company -- one that can be easily manipulated by ne'er-do-wells, because of its low share count. Many beginning investors are attracted to penny stocks because it can seem more powerful to own, say, 3,000 shares of a $2 stock (total value: $6,000) versus 50 shares of a $120 stock (total value: $6,000). But a $2 stock is not more likely to soar over time than a $120 stock -- and a $2 stock can easily become a $1 stock or a $0.25 stock. A low price does not mean it's a bargain.

ALSO READ: About to Buy Penny Stocks? Look at These 3 Companies First

Market timing is another blunder many investors make. It's when they act on their own guesses about whether the stock market is heading up or down in the near future, or on the prognostication of some guru in the media. The problem is that no one, not even gurus, knows where the market is headed. They can only guess. And if you've pulled your money out of the market in fear of an impending plunge, you may well be sitting on the sidelines while the market keeps rising.

Consider the words of index fund pioneer John Bogle: "Sure, it'd be great to get out of stocks at the high and jump back in at the low, [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I've never met anybody who had met anybody who knew how to do it."

Trading on margin is another danger to your financial well-being. It's when you invest with money borrowed from your brokerage. It's perfectly legal and many people invest on margin -- because it can amplify your gains. For example, imagine that you invest $10,000 in a stock and it gains 50%, becoming worth $15,000. That's terrific. But hold on -- what if you'd borrowed $10,000 and invested a total of $20,000 in the stock? Then you'd have $30,000! Instead of gaining $5,000, you'd gain $10,000! (That's after you repay the $10,000 you borrowed.) That's enticing, but know that losses are amplified, too, with margin. You can end up losing all your money, and many people have. Remember, also, that margin isn't free. You'll be charged interest regularly on whatever funds you've borrowed.

This way to get rich might seem like fluffy filler, but it's really critical. You need to have determination to stick to your saving and investing plan -- for years -- if you want to build meaningful wealth and achieve your big financial goals.

Think about all the times you've resolved to start a good habit or stop a bad one -- perhaps by exercising more or quitting smoking or junk food or by volunteering. There's a good chance that the treadmill you bought is covered in clothes you hung on it, or that the wok you bought to prepare vegetables with is covered in dust in the basement. It's easy to quit -- you need to find ways to keep going -- perhaps by making a game of investing and trading notes with friends, or by automating much of your saving and investing.

ALSO READ: Investors Looking for the Next Big Thing Might Be Overlooking the Obvious

Finally, don't think you have to do all this on your own. There's no shame in consulting a financial advisor to help you draft a long-term saving and investing plan. Yes, it will cost you a little, but that cost will likely be more than offset by what you get out of the experience. Financial advisors and planners have spent years studying personal finance and investing, and they have years of experience helping people get their financial ducks in a row. They can advise you how to make the most of retirement accounts available to you, what to invest in, and what changes to make over time. Think about lining up one or a few free initial consultations, to see if you find an advisor you click with. You might find a nearby fee-only advisor at NAPFA.org.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Don't put off tending to your financial health, because it's vitally important. Having an emergency fund and getting out of debt can help you live more securely, and building a war chest for retirement can give you a comfortable and less stressful future.

Review these 15 ways to improve your financial health and see how many you can act on, and do so sooner rather than later.

Selena Maranjian 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.