How to Build Wealth (or Rebuild It)

The twists and turns of the economy and stock and bond markets — plus all the other forces that buffeted your finances — hold lessons that could help you make better decisions the next time calamity strikes.

Building wealth helps you reach your goals as well as survive setbacks — stock market cor­rections and bear markets, recessions, health emergencies, and job loss. Your wealth-building refresher course should include an honest assessment of whether you allowed emotional, psychological or other behavioral miscues to nudge you to make money moves you might regret.

Investing: Keep Calm in Rough Seas

The financial markets in 2022 provide a vivid reminder of why good investing hygiene is important all the time. Investors are grappling with a host of market scourges at once — Russia’s invasion of Ukraine, a spike in inflation, rising interest rates and the remnants of a global pandemic. In late February, the broad stock market, as measured by the S&P 500 index, fell into correction territory (typically defined as a drop of 10% to 20%) for the first time since 2020, and losses could escalate. But a well-maintained portfolio should weather such storms over the long haul, especially if you remain patient while also taking advantage of the opportunities that the market offers.

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You should not change your game plan because stocks have started to wobble — and that advice applies both to exiting the market in fear and to rushing to buy every dip. Your asset allocation should be appropriate to your age and your risk tolerance in terms of what your financial situation can reasonably bear and what allows you to sleep at night. For example, a fully invested, aggressive investor with more than a decade to invest might allocate 85% to stocks and 15% to bonds. A conservative investor or one with a short time to invest might target 70% in bonds and 30% in stocks, with a preference for dividend-paying stocks.

The market has also recently reminded us that stock leadership can pivot in a heartbeat. A table of investment returns over the 20 calendar years through 2021 compiled by investing consultant Callan shows that U.S. large-company stocks logged the best returns in three of those years; U.S. small caps and real estate stocks each came in first four times; and emerging-markets stocks led in five of the 20 years. That shows that a diversified portfolio should contain multiple asset classes, and within those, several investing styles, sectors and industries. If you follow that script, when one part of your portfolio is struggling, other investments will likely pick up the slack.

What to do now. Keep the current challenges in perspective. Stocks stumbled on news of Russia’s invasion of Ukraine, but it’s worth noting that market shocks from military and terrorist activities have traditionally been short-lived, according to Sam Stovall, at investment research firm CFRA. Following 24 selected events since World War II, the stock market typically bottomed after a total decline averaging 5.5%, recouping those losses in 52 days. Tactical investors might find pockets of opportunity in defense-oriented stocks—and these days, that includes cybersecurity companies, such as Palo Alto Networks (symbol PANW, $558). The bulls at Wedbush Securities see the stock trading at $630 over the next 12 months.

Homing in on firms that can prosper in inflationary times makes sense. Nuveen chief investment officer Saira Malik is bullish on the energy sector, which is highly leveraged to economic growth and the fundamentals of tight supply and high demand. Stocks she likes include Valero Energy (VLO, $86), a refiner she says is disciplined about capital spending, reducing debt and returning cash to shareholders. Amazon.com (AMZN, $2,913) is another good choice, says Malik. “It has pricing power, a tremendous distribution and logistics system, and its web services unit is seeing strong growth.”

Many traditional inflation hedges are already expensive, but commodity prices have room to run over the long term, says John LaForge, at Wells Fargo Investment Institute. We’re in a “commodity super-cycle” that began in March 2020, he says. Such bull runs can last 10 years or more. Among changes we’re making to the Kiplinger 25, the list of our favorite no-load funds, is the addition of TCW Enhanced Commodity Strategy (TGABX).

Finally, prep your portfolio for multiple interest rate hikes from the Federal Reserve this year. Value-oriented stocks—think financials, industrials and energy, for example—typically withstand rising-rate cycles better than their growth-focused counterparts. For fixed-income investors, floating-rate funds, which hold bank loans with interest rates that adjust upward with market rates, are good bets. We’ve added T. Rowe Price Floating Rate (PRFRX) to the Kiplinger 25. Exchange-traded fund investors might like Invesco Senior Loan (BKLN, $22), a member of the Kiplinger ETF 20.

Turbocharge Your Retirement Savings

Jack Towarnicky, an employee benefits consultant, has changed jobs 13 times over the past 30 years, but one aspect of his career has remained consistent: If an employer offered a 401(k) plan, he enrolled and contributed the maximum allowed. His wife, Debbie, a retired teacher, also contributed to her retirement plan. Thanks to their disciplined savings habits, “we have a lifetime of savings in 401(k) and 403(b) plans, and this son of a firefighter is certain to become part of a middle-class millionaire household someday,” Towarnicky says. Towarnicky is one of the winners of the 2022 401(k) Champion Competition, a program designed to promote financial literacy and savings.

The millionaire club is growing. More than 440,000 participants in 401(k) plans managed by Fidelity Investments had balances of more than $1 million in the fourth quarter of 2021. A total of 112,880 participants in the federal government’s Thrift Savings Plan had more than $1 million in their savings plans as of December 31.

Saving $1 million for retirement may seem out of reach, particularly if you have competing demands on your money, such as student loans and credit card debt. Inflation presents another hurdle. An analysis by Moody’s Analytics found that the average American household is spending an additional $276 a month on goods and services because of higher prices.

With that in mind, it’s important to take advantage of all the savings incentives available to you. Perhaps the most generous incentive comes in the form of a matching contribution from your employer. Employers that offer this benefit typically match 3% to 6% of your pay, but you usually must contribute to qualify. So even if funds are tight, try to contribute at least enough to get the match—otherwise, you’re leaving free money on the table.

Uncle Sam offers plenty of incentives, too. One of the most lucrative — and often overlooked — is the Saver’s Credit. If you fall within the income limits, you can claim a tax credit of up to $1,000 for singles or $2,000 for joint filers. The credit is based on 10%, 20% or 50% of the first $2,000 ($4,000 for joint filers) you contribute to a 401(k), traditional IRAs or a Roth IRA. For 2022, single filers with adjusted gross income of $34,000 or less may be eligible. Married taxpayers who file a joint return must have an AGI of $68,000 or less. Here's how to determine whether you’re eligible.

As your income rises, you should be able to stash more in retirement plans. In 2022, you can invest up to $20,500 in your 401(k) plan, or $27,000 if you’re 50 or older. Contributions are tax-deferred if you invest in a traditional 401(k). If your employer offers a Roth 401(k), contributions are after-tax but tax-free when you take withdrawals in retirement.

Boost your saving. If you can afford to invest even more money — by saving more, reducing your spending or a combination of both — there are other steps you can take to feather your retirement nest egg.

• Take advantage of retirement plans for self-employed workers. In 2022, you can contribute 20% of your self-employed net income, up to a maximum of $61,000, in a SEP IRA. SEP IRAs are widely available at financial institutions that offer IRAs. If you have a side gig, you can contribute the maximum to your employer’s 401(k) and contribute to a SEP based on your self-employment income.
• Another option for self-employed savers is a solo 401(k) plan. In 2022, you can contribute up to $61,000 in one of these plans, or $67,500 if you’re 50 or older (you can’t make catch-up contributions to a SEP IRA). You can stash that much money in your plan because you’re making contributions as an employer and an employee.
• Make after-tax contributions to your retirement plan. Some employers allow workers who have maxed out on tax-advantaged contributions to make additional after-tax contributions to the plan, up to a maximum of $61,000. While the contributions won’t reduce your taxable income, earnings on your investments are tax-deferred until you take withdrawals. Some plan providers will allow you to convert that money to a Roth 401(k) through what’s known as an in-plan conversion.
• Invest in taxable accounts. While it’s nice to get a tax break, taxable accounts play an important role in saving for retirement, too. Taxes on long-term capital gains range from 0% to 20%, and these accounts offer more liquidity than retirement plans—you won’t be penalized if you take withdrawals before age 59½.

Lower Your Taxes

You don’t need to be a billionaire with a stable of accountants to come up with strategies to reduce the amount of income and savings consumed by federal and state taxes.

Let’s start with the amount you have withheld from your paycheck (assuming you’re an employee). Tax refunds are on the rise, and while it’s nice to get a check from the IRS every year, there are more-effective uses for your money that will help you build wealth.

If you received a big refund, give yourself a raise by adjusting your withholding. The IRS offers a tool you can use to figure out how much to adjust your withholding and submit a new Form W-4 to your employer. Once you’ve decreased the amount withheld for taxes, use the extra money to pay off high-interest debt, build up your emergency fund or increase contributions to your retirement savings.

Unless you filed for an extension, you’ve probably finished your taxes by now. Don’t stash your Form 1040 in the back of a file cabinet or file it somewhere in the cloud that you don’t plan to visit soon, because this document can also provide a roadmap for reducing your taxes in the future. It will show you, for example, how much the contributions to your 401(k), deductible IRA or health savings account lowered your taxable income, which could motivate you to save more in those accounts. Or, if your return shows that you paid taxes on a large capital gains distribution from mutual funds in your taxable account, you may want to shift to more tax-efficient investments.

The majority of taxpayers claim the standard deduction, but even non-itemizers are eligible for a long list of credits and deductions. As mentioned, saving for retirement is one of the most-effective ways to lower your taxes—either now, as is the case with pretax contributions, or in the future, as is the case with contributions to a Roth IRA or Roth 401(k). But if you’re a parent of a child or college-bound student, there are lots of tax breaks available to you, too, even if you don’t itemize.

Do you have a child starting college this year? Save those tuition receipts, because there’s a good chance you’ll be eligible for the American Opportunity credit. This tax credit is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. For more tax breaks for non-itemizers, see 13 Tax Breaks for the Middle Class.

Polish and Protect Your Credit

Good credit is key to getting the lowest possible interest rate on loans. A strong credit profile can also help you rent a home, lower your auto insurance premiums and even land a job.

To judge whether to grant you credit and what rate to offer, lenders often peek at your credit score, a three-digit number derived from your credit history. Many versions of your credit score exist, and you may not have access to the one a lender plans to view. But you can get a good idea of where you stand by using a free site such as CreditKarma, which provides VantageScore credit scores from credit bureaus Equifax and TransUnion, and FreeCreditScore, which provides a FICO score from credit bureau Experian. Your bank or credit card issuer may offer free score updates to customers, too.

Standard credit scores run from 300 to 850, and a score of about 750 typically qualifies you for the best loan terms. The most important move you can make to boost your score toward the top of the scale is to pay all your bills on time. Another sizable factor is your credit-utilization ratio — a percentage that reflects the balance on your credit cards as a proportion of your card limits. (The ratio is calculated both on individual cards and in the aggregate across all your card accounts.) The lower the ratio, the better for your score; aim to keep it at 20% to 30% or less.

Finally, avoid opening several new credit card accounts at once. Each card application creates a hard inquiry on your credit report, and the presence of several card inquiries in a short time signals to lenders that you may be a risky prospect as a borrower, lowering your score.

Review your credit reports. The credit bureaus compile information about how you’ve managed credit in your credit reports. At annualcreditreport.com, you can view your report from each of the major bureaus once per week through the end of 2022 (typically, the reports are free only once every 12 months, but the bureaus have increased access in response to financial hardships during the pandemic). Regularly review your reports for errors or signs that an identity thief is at work, such as a new credit account that you never opened or a collection account for a debt you don’t owe. You can also use services that regularly scan your reports and alert you to significant changes — Credit Karma and FreeCreditScore both offer free credit monitoring as well as access to your reports. If you find a problem, contact the lender or other company that furnished the inaccurate information and file disputes with the credit bureaus reporting it.

A credit freeze is the best way to thwart identity thieves who try to open accounts in your name. A freeze blocks lenders from viewing your credit report in response to an application for new credit, and it’s free to place one on each of your reports. Before you apply for a loan or credit card, you can temporarily lift the freeze.

Pay Off Debt

High-rate debt holds you back from your full wealth-building potential. In the fourth quarter of 2021, total household debt reached $15.6 trillion, and credit card balances alone grew by $52 billion, according to the Federal Reserve Bank of New York.

Credit card debt can be particularly onerous because rates are often in the double digits, recently averaging about 16%. Most credit cards have a variable interest rate, so when the Federal Reserve raises short-term rates, card interest rates follow suit. If you’re carrying credit card debt, investigate ways to lower the rate. Some cards offer an introductory 0% rate on balance transfers. The U.S. Bank Visa Platinum card, for example, has a 0% rate the first 20 months on balances transferred within 60 days of opening the card. The transfer fee is the greater of $5 or 3% of the amount transferred.

Examine your other debts, too. Since March 2020, borrowers of most federal student loans have benefited from a pandemic-induced suspension of payments. But the moratorium was scheduled to end May 1. If you don’t think you’ll be able to afford your payments, look into options such as income-driven repayment plans.

Some private student loans have variable rates, so you may consider refinancing any such loans before rates rise significantly—perhaps switching to a loan with a fixed rate.

Auto loans typically have a fixed rate. For a prime borrower (who is likely to make payments on time), rates average 3.51% for new cars and 5.38% for used cars, according to Experian.

Generally, it’s best to focus first on paying off debts with the highest interest rates. That usually puts a mortgage toward the bottom of the list, given that many have rates below 4%. And even after you clear your other debts, you may want to put any extra money toward getting your savings and investments on track before tackling your mortgage in earnest.

Check Your Insurance Coverage

Insurance is a critical tool to shelter you from crushing expenses if assets such as your home or car are damaged or if you are responsible for harm to someone else or their property. Given rising construction costs, it’s especially important to make sure that the dwelling coverage in your homeowners policy is adequate to rebuild your home in case it’s destroyed, says Jill Roth, executive vice president of insurance agency Ahart, Frinzi & Smith, in Alexandria, Va. “Just to replace a window these days is so much more expensive than it was five years ago,” she says. Make sure you update your coverage to reflect renovations that increase the value of your home, too. To calculate your home’s replacement cost, multiply local building costs per square foot (check with homebuilders in your area for an estimate) by your home’s total square footage.

If you live in an area susceptible to wildfires, hurricanes or other disasters, take special care that your home and possessions are covered for damage from increasingly intense events. Standard homeowners policies don’t cover flood damage, and people in areas at high risk of flooding may have to purchase a separate policy (for more, go to floodsmart.gov). Many insurers are backing out of California because of heightened wildfire risk, says Roth. An independent agent — who works with several insurance carriers rather than just one — can help you find a policy. Search for an agent at trustedchoice.com.

You need at least enough auto coverage to meet the minimum insurance amounts your state requires for injuries or damage that you cause to other people and vehicles. But you’ll need higher coverage levels to have sufficient protection. It’s often recommended that a policy should cover up to $100,000 for the medical bills of each person that you injure in an accident, up to $300,000 per accident in liability for bodily injuries and up to $100,000 to repair other drivers’ cars and property that you damage, says John McCormick, editorial director of Insurance.com. To fine-tune your own liability coverage amounts, consider your life stage, says Roth. She would typically recommend higher coverage limits for someone who is well established than a young adult who is just starting out with few assets.

Umbrella insurance provides extra liability coverage in case your homeowners or auto insurance claims exceed the limits of your existing policies. It even protects you if you’re sued for slander or libel. If you have significant assets or an above-average likelihood of being sued, or you are otherwise vulnerable to exhausting your regular coverage — say, because you own a swimming pool or have a teen driver in the family — an umbrella policy is worthwhile. You’ll pay about $150 to $350 a year for $1 million in coverage.

Educate the Next Generation

As your children start their own wealth-building journeys, teaching them to be good stewards of their money will pay off in spades. A record 47% of parents are having money conversations with their kids at least once a week, according to the 2021 Parents, Kids & Money survey from T. Rowe Price. Those conversations can start earlier than you may expect. While grocery shopping with young kids, for example, you can discuss how the price of food affects what you buy and whether you choose to eat at home or dine out, says Roger Young, a CFP with T. Rowe Price. “Many decisions we make every day involve money,” he says. As the kids get older, you can introduce topics such as saving for college and compounding interest.

The T. Rowe Price survey also shows that three-fourths of parents provide their kids an allowance, with 59% requiring children to earn it. Offering kids a chance to make decisions about money can give them real-life practice with money management while the stakes are low, says Young. Cash is generally a better tool than, say, funds accessed via a debit card.

Using tax-friendly financial accounts for your kids can get them off to a strong start, too. Money that you put into a 529 college-savings plan grows tax-deferred, and withdrawals that you make for qualified higher-education expenses are not taxed. Once your child starts earning money from work, such as a part-time job in high school, you can open a custodial Roth IRA for him or her. Contributions (including any of your own funds that you add on behalf of your child) can’t exceed the amount the child earns and are subject to the standard annual limit on IRA contributions, which in 2022 is $6,000.

Plan Your Estate (and Share the Wealth)

You’ve saved enough for a comfortable retirement, with something left over for your heirs and favorite charities. Are you finished? No way. Unless you take steps to protect your estate, your legacy could be decimated by taxes, probate costs and family dissension.

Start by making sure you have the basics covered. You need a will, and you should designate a power of attorney for your finances and a health care proxy. These individuals will be empowered to manage your money and make decisions on your behalf should you become incapacitated.

You should also periodically review beneficiaries for your life insurance policies, bank accounts and retirement savings plans. If you haven’t reviewed these designations for a while, they may not reflect life changes, such as the death of a spouse or a remarriage.

Next, consider whether you need a revocable living trust. A trust will let you avoid probate and ensure that your money goes to the people you choose (for guidance on what types of assets belong in a trust, see The Lowdown on Living Trusts).

You don’t need to wait until you’re gone to share your wealth with your favorite charities, and contributions made while you’re alive could lower your taxes. If you’re 70½ or older, you can donate up to $100,000 a year from your IRAs to charity via a qualified charitable distribution, and after you turn 72, the QCD will count toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income, which along with lowering your federal and state tax bill could reduce taxes on items tied to your AGI, such as Social Security benefits and Medicare premiums.

Donor-advised funds provide a tax-advantaged way to donate money and securities in your taxable account. These funds, offered by most major financial services firms, allow you to contribute cash or securities, claim the deduction, and decide later how you want to distribute the money to charity. If you donate securities, you can your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income, which besides lowering your federal and state tax bill can also lower taxes on items tied to your AGI, such as Social Security benefits and Medicare premiums.

Finally, take advantage of a provision in the tax code that permits you to help family (and friends) while reducing the size of your estate. In 2022, you can give away up to $16,000 per person to as many people as you’d like without having to file a gift tax return. Estates valued at up to $12.06 million ($24.12 million for a married couple) are exempt from federal estate taxes. But unless Congress acts, the exemption will drop to $5.5 million in 2025. In addition, 12 states and the District of Columbia impose an estate tax, and some have much lower exemptions than the federal level.

Hire a Pro

A financial adviser can alert you to opportunities as you build wealth — for example, notifying you if it’s a good time to convert your traditional IRA to a Roth or to shift your investment portfolio’s asset mix. An adviser can also guide you through decisions such as how much to save for retirement compared with other goals, how to minimize taxes on your investments or how to make a debt-payoff plan. Even if you don’t use a financial adviser on a regular basis, getting occasional help may be useful—especially if you’re going through a transition such as getting married or divorced, having a child, or preparing to retire.

A certified financial planner can create a holistic financial plan for you. CFPs must act as fiduciaries when providing financial advice, putting their clients’ best interest first. You can look for one at letsmakeaplan. If you need tax help, a certified public accountant (CPA) may prepare your tax return or assist with tax strategies. At aicpa.org, you can search for a CPA who has the personal financial specialist (PFS) credential. A chartered financial analyst (CFA) specializes in investments; look for one at cfainstitute. An adviser with any of those credentials must undergo rigorous education and testing.

You may be charged a percentage of assets managed, through a subscription or retainer, or on an hourly basis. A fee-only financial planner does not collect commissions by selling financial products to clients and may be less subject to conflicts of interest. At napfa.org, you can search for a fee-only adviser in your area. If you prefer a fee-only planner who doesn’t require asset minimums, you can look for one who charges by the hour at garrettplanningnetwork or who provides monthly retainer services at xyplanningnetwork.

Regain Your Balance

When markets get choppy, stay disciplined. “Stick to the plan you established before things got uncomfortable,” says Shaun Williams, a Denver-based certified financial planner. For instance, many advisers say now is a good time to check your portfolio to see if it’s still in line with your overall asset-allocation targets — the overall percentage of assets held in stocks, bonds and cash.

A moderate investor, for instance, might hold 60% of assets in stocks and 40% in bonds. If those broad assets have fallen five to 10 percentage points beyond your target — in this case, the stock allocation would now be now closer to 70% or have fallen to 50% — the pros advise rebalancing your portfolio back to its targets by skimming the best performers and putting the profits into the worst performers, even during a choppy market. “Markets like this are an excellent time to rebalance,” says Eric Walters, a CFP in Greenwood Village, Colo.

Just make sure that any moves you make now are incremental. Volatile markets are made for dollar-cost averaging — a strategy of investing set amounts at regular intervals. That ensures that you’ll buy more shares when prices are low and fewer when they’re high. (It doesn’t work in reverse, for selling shares.)

For example, Williams suggests investing 20% of the total amount you’ve earmarked for the market on a particular day — the second Tuesday of each month, say — for the next five months. And don’t lose sight of the fact that you are investing for the long term, he adds.

Create an Emergency Fund

A rainy-day fund keeps you from turning to credit cards or other high-cost avenues to cover a large, unexpected expense or a prolonged loss of income. Generally, you should have at least three to six months’ worth of living expenses stashed away. But if you’re the sole wage earner in your household or work in an industry prone to disruption from economic swings (say, travel and hospitality), you may need to set aside up to 12 months’ worth of expenses.

Put the funds in an easily accessible savings account or money market deposit account — preferably one that offers a high yield and no monthly fee (or minimal requirements to avoid a fee). Internet banks commonly offer accounts that fit the bill. Ally Bank recently provided a 0.5% yield with no monthly fee or minimum balance requirement on both its savings and money market accounts. With the money market account, you receive checks and a debit card — handy for withdrawing money quickly in a pinch. To search for other high-yielding accounts, visit depositaccounts.

Buy a Home

Purchasing a home is a tried-and-true way to build wealth. As you pay off the mortgage, your equity in the property grows. And over the long term, home values have risen. Lately, the increase has been dramatic, spurred by pandemic-driven demand for homes. In 2021, home prices nationwide skyrocketed by 18.8%, according to the S&P CoreLogic Case-Shiller National Home Price Index.

Stephen Krall, 42, and his wife, Kelly, 41, are seeing the benefits of investing in their home. After five years of watching for a suitable property to come on the market at an affordable price, they sold their small townhome in spring 2019 and directed $40,000 in sale proceeds toward the down payment on a larger house that better accommodates their family of five. Since they bought the house in the Philadelphia area for $395,000, price appreciation has boosted its value to about $516,000. Although the Kralls expect to stay in their home for the long term, they suspect they could fetch even more in a sale now thanks to about $80,000 in improvements they’ve made, including a new kitchen and master bathroom. “We’ve really done a lot to improve the value of the home,” says Kelly.

Getting a foot in the door. Rising home prices present an obstacle for buyers struggling to come up with enough cash. But rents are shooting up, too, with an average 19.8% increase in the U.S. median rental price in January 2022 compared with a year earlier, according to a Realtor.com report. The monthly cost of buying a starter home was less than renting a similar-size unit in 26 of the 50 largest metro areas, and rent increases are expected to outpace growth in home prices throughout 2022. Kiplinger expects home prices to increase by 3% this year.

Mortgage rates are ticking up, which tamps down home-price appreciation but exacerbates the affordability challenge for buyers. Still, the average rate for a 30-year, fixed-rate loan was 3.76% in early March, according to Freddie Mac. Shop for the best rate by calling several lenders, comparing rates on websites such as Bankrate.com and LendingTree.com, or enlisting the help of a mortgage broker (find one at findamortgagebroker.com). After you’ve purchased a home, watch for opportunities to refinance if interest rates fall. The Kralls have refinanced the mortgage on their current home twice, lowering the rate to 2.5%.

A 20% down payment on a home purchase is desirable because it’s the minimum required to avoid private mortgage insurance on conventional loans. And the more you put down, the smaller the loan and the less you’ll pay in interest. But 20% can be a big ask, especially for first-time buyers. The median sale price for existing homes was $350,300 in January, according to the National Association of Realtors; a 20% down payment would be just over $70,000. In the past few years, the typical down payment for first-time buyers has been 6% to 7%, according to the NAR. With some mortgage programs, down payments can be as low as 3%.

Whatever you choose to put down, consider how your mortgage payment fits into your overall budget. Don’t forget to account for the cost of property taxes and homeowners insurance, too. Keeping your housing expenses below about 30% of your gross income frees up more room to save for retirement and other goals.

At tax time, those who itemize can deduct interest paid on up to $750,000 of mortgage debt, or $375,000 if married filing separately (if you bought your home before December 16, 2017, the limit is $1 million, or $500,000 for those married filing separately).

Know Where Your Money Goes

By tracking your spending, you can get a better idea of where your cash flows and how you can more efficiently put it to work to meet your goals. Even if you don’t feel financially strapped, a budget can give you a sense of control over your money and free up more for savings or debt payments. Break down how much goes toward essential expenses (such as housing costs and groceries) and discretionary spending (such as entertainment and dining out), and make adjustments to ensure that you’re dedicating enough to saving and debt payoff. One rule of thumb suggests allotting 50% of your paycheck to essentials, 20% to savings and debt payments, and 30% to nonessentials.

Pay yourself first: Set up automatic contributions to your retirement and savings accounts to help guarantee that your savings reach the target. By connecting your financial accounts to an app such as Mint or Personal Capital, you can keep tabs on your spending and net worth.