Master Your Finances in 7 Simple Steps
Updated: Mar 20, 2018
Living in a world dictated by finances can feel really overwhelming, especially when you are just starting out in adulthood. There is so much to learn and so much to know that it can be paralyzing to begin planning for your future. I am no expert, but I have a set of steps that have really worked well for me and my husband, and these steps I hope will help you gain more control over your finances!
The number one thing to understand about finances is mindfulness and awareness. At any given time, if I were to ask you what your take home pay is each paycheck, when your paycheck arrives, what your regular monthly expenses are, how much your credit card statement is this month, what the balance left on loans you have is, what you spend on average on groceries per month, and how much is in your checking account right now, you should be able to tell me. If you don't, then start finding out! Understanding what the state of your finances are is the first hurdle to taking control of them. I know a lot of people who are blissfully unaware of what their credit card statements are (this is an area where my husband has to keep me accountable as well), because it feels intangible, like it's just a number you can quickly look up and it doesn't really impact your long term finances. Here is an article on why most budgets are broken (hint - it's because people aren't aware of what they're spending). Awareness also is your #1 defense against fraud. If you are aware of what you spend, it is so much easier to notice fraudulent charges that banks might not even be able to detect, which allows you to take action sooner to resolve the issue.
How do I become more aware? There are a lot of tools available today to give you insight into your finances, average spending, and what you spend most on categorically by combining your bank accounts, credit cards, loans, and investment accounts. My husband and I both started out using Mint, the original financial tracking tool. It is a great tool with good integrations and budgeting tools, as well as a fierce notification system to let you know when you're over your budget. We both stopped using this when we would get the scary "Whoa - looks like you've made a big purchase" emails every month when we would pay rent. My financial software was giving me regular heart attacks and I became desensitized to my "over budget" notifications, which defeated the purpose for me. My husband is now a huge fan of Personal Capital, an online wealth management tool that has really amazing dashboards and financial advising, with a lot of insights into investments and how they are doing. He is the one that loves thinking about where to invest, why to invest, how to invest, whereas I don't really need all that information. I personally use Clarity Money, which is, at it's core, a financial awareness app. It will figure out what your regular subscription expenses are and let you know in case you want to cancel them (this has saved me around $200 per month, just by notifying me of the things I spend regularly on that I realized I don't need to be). It also gives you simple graphs on what you're spending money on, your monthly earned vs spent graph, and quick balances on your credit cards and bank accounts. There are a bunch of apps these days that do this, Personal Capital, Clarity Money, Mint, YNAB, Wallet, for my UK people Yolt, and for my freelancer/entrepreneur people Xero. There are so many more - do your research and find one that gives you what you need to be aware of the state of your finances right now so you can start moving forward into your savings future!
2. Make a Budget
Once you are aware of your finances, figure out what you should be spending on your different categories. There are lots of schools of thought on this, the most simple one is the 50-20-30 rule. 50% of your income goes to essentials (housing, utilities, food, and transportation), 20% goes to savings, and 30% is personal. In the 50-20-30 rule, the "essentials" category is the TRULY essential things (not the "I NEED THOSE SHOES" essential) - and it is the total amount that matters, not the breakdown of percentages within the 50%. For example, someone might choose to live in a high rent area in downtown DC and walk to work, whereas someone else might choose to live in a low rent area and pay for a reliable car to get to work. So long as these amounts add up to no more than 50%, that's a good rule of thumb (optimally, though, it's lower). Your 20% savings includes things like debt payments, investment/retirement savings, rainy day funds, and anything contributed here should only be considered after your essentials, but before your personal money. This is where you can get ahead, and this is one of those categories that you will benefit from putting a higher percentage in. The last category, your personal 30%, is your non-essential, lifestyle money. This includes things like cable, Starbucks runs, gigabit internet, and new shoes. A lot of these things (like internet and cell phone bills) are more of a necessity, but it's up to you to have discretion in how much you are willing to spend on them. For example, internet, although not a basic human survival need, is necessary for me as a remote employee, so we pay for the best internet money can buy in our area, but because of the tooling available and internet calls, we save on our cell phone plan by not getting unlimited data.
If you want a little more granular control in your finances, you might be more interested in a tool that breaks down a bunch of categories in different recommended percentages. I won't go into a ton of detail here, but this is a great article that goes through each category and recommended percentage, and a tool for calculating your ideal allocation amount per category based on your take home pay. Keep in mind that all of these recommendations are just that - recommendations. Every person, family, and financial situation is different, so if you don't fit into the mold of these recommendations, that is okay! Find a budgeting tool that works for you and use it!
3. Open up separate bank accounts
Most of the time when we talk about separate bank accounts, it's about marriage. A lot of people I know have a happy and healthy marriage because of separate bank accounts, a lot of people have a happy and healthy marriage because they share a bank account. This is NOT what I'm saying here - regardless of how you and your spouse (if you have one) operate, you should have separate bank accounts for your normal, everyday operating expenses, and accounts for your savings. My husband and I have a joint checking account where all of our take home income goes into and all our expenses flows out of, but we DON'T keep our savings in there. Our rule of thumb is our checking account should have enough for 2 months of operating funds (rent/mortgage x 2, bills/utilities x 2, average credit card statement x 2, etc) and a padding of about 25% of that number. Here's a fun little calculator I made to calculate what we recommend for a normal checking account. I tend to stick with about 25% padding, but the a few things might influence you to go for a higher percentage, predominantly regularity of income - if you are not salaried or a full time worker that gets paid every 2 weeks, it's likely important for you to have a little more flexibility in your balance.
There are a few benefits to making separate savings accounts outside of your checking account. First, if (for whatever reason) your debit card is stolen, there is a limited impact that draining that account has on your overall financial stability (pessimistic, yes, but as my husband (enneagram 6) would say - realist). Second, most savings accounts have a higher interest rate than checking accounts, which essentially means you make more passive income. Here are some of the banks that offer the best interest rates for savings accounts, if you use one of those banks already - great! Open up an account! If not, pick the one that matches your needs best (we use Ally because of its fully-online support) and open it anyway, or even transfer all your assets to that bank. Our rule of thumb is that any money above and beyond what is in our necessary account balance in our checking is sent to this savings account. This is where we keep our base amount of a 6-month emergency fund that is accessible with immediate transfer to our checking account. Regardless of what bank you use, it's likely a good idea to keep your emergency fund within the bounds of immediate transfer (most bank-to-bank transfers take around 3 days, which might be too long in an emergency). Once we have the base amount of 6 months of our expenses, we start transferring into investment accounts, which I will go over later.
4. Start Contributing to Retirement
This might sound like a no brainer here, but it's important to do the math on why starting to save for retirement now vs later is a great thing! There are a few hurdles to get over here. First, I know for many people my age who are starting to find their way in the corporate world don't have an employer-provided retirement account. I was in this position when I switched companies to a start up that hadn't set up any sort of retirement benefits yet. Regardless, you can always set up your own personal 401k or Roth IRA through a financial service. If you DO have a company sponsored 401k, then do the math on what amount of contribution maxes out their matching policy and contribute that. If your company doesn't match (*raises hand*) then just contribute what you can.
The second thing I hear a lot from friends is that they don't have enough income to save anything for retirement, and that it isn't a priority. The epidemic I see in financial savings is that people just aren't saving, which blows my mind since it's so simple to just start now (I was also raised with the understanding that it wasn't really an option NOT to save for retirement, so inherent bias here). MoneyRates.com did a survey in 2015 on the state of retirement savings in America, and one of the most striking findings I saw there was that women start saving later than men and often face more retirement uncertainty. Ladies -- why?? There is a wealth of information (pun intended) on this topic, specifically the HUGE returns on starting to save earlier, even if it's just $1000 a year. The earlier you start saving, the more you make sooner. The main reason I'm saving so aggressively now is because I don't want to be working at 65. I would love to be able to retire at 55 (or earlier, who knows).
So - how do you do this, especially if you work for yourself or your employer doesn't provide 401k support? My husband and I are huge advocates of Betterment - I have a 401k, Roth IRA, and other investment accounts through them. No matter what phase of life you are in, any money you can contribute into one of these long term accounts will have huge returns by the time you retire (Betterment even has projections based on your current savings and planned future savings). I typically try to max out my retirement accounts, but that's a personal decision and I'm an aggressive saver, especially when I can contribute before I ever see the money. That is my #1 mental trick for saving: if the money never comes into my checking account, it's like I don't even think about it. I force myself into living beneath my means by transferring as much as I can pre tax into an investment account without even realizing it (which can have an effect on your tax bracket as well!).
5. Set up Automatic Savings
One thing I've learned in our journey into savings is that passive savings is almost always better than active savings. This means that if there is any sort of hurdle to saving money, often our minds will talk us out of doing it. For example, if you say, "well, after I get paid I will submit a transfer from my checking account into a savings or investment account", once you see the money in your account, think about that number going down, you are far more likely to not submit the transfer and leave it in your checking account. Also, especially if you are saving in an investment account, it can become very difficult to continue to invest money at times where the market seems down, which will also deter you from setting up that transfer. Automatically savings makes it harder to overspend on your budget since the money is not in your checking account, and it helps maintain consistent investment and growth in your savings.
This passive, automatic savings can be as simple as an app that rounds up to the nearest dollar on your purchases and deposits the extra change into a savings account. This seems really small at the time, but after a while the extra dollars add up. I used this feature when I had used Bank of America, where the rounded up amount was stored up and deposited into my savings account once a month. After about a year I had saved up about $600 without ever feeling the burn of hitting the "transfer" button (which might just reveal the absurd amount of coffee I bought that year). This is awesome for people who feel like they don't have the expendable income to save a certain percentage of their income. There are a bunch of new apps that help with this type of savings: BoA Keep The Change (mentioned above), Digit, and Acorn. Each has their own benefits/drawbacks, for example, BoA's program puts your money in a savings account with an interest rate, but the amount is not configurable. Digit allows you to configure how much (just the rounded up value, or a random $5 here and there), but it does not put it in an account with any sort of interest earned. Acorn is a combination in that it is configurable and invests the money in an investment account, but it costs $12 to use the service. Depending on your needs, each of these has awesome benefits and allows you to start saving little by little.
We have started doing slightly more aggressive automatic savings now that we have figured out how much money we need to have in our different accounts at any given time. One of my favorite features of Betterment (mentioned above), is their smart deposit feature. We can say, check our savings account once a month on this day, if the balance is over X amount, invest whatever is over that amount, otherwise don't. I get an email once a month that says "hey, Betterment is about to pull Y amount out of your bank account since your balance is over X for your smart deposit, if you don't want this to happen please opt out". This has revolutionized our savings, because if we have a surplus of what we determined we need in our checking or savings accounts, that money automatically gets shifted over into investments. We are very careful to plan this date after the majority of our expenses come out of our checking account so we don't get ourselves caught in a place where we dip below our desired balance (i.e. credit cards and bills are paid on the 10th of the month, smart savings happens on the 25th). We also use their base automatic deposit feature which doesn't look at your balance before depositing (not a significant amount so we don't screw ourselves over). The graph below is a screenshot of all-time performance of my portfolios, you can tell exactly when we started our automatic savings, and why I feel it is so important to have passive savings that you don't think about.
6. Prioritize Your Spending
News flash - even though saving is important, spending is a very normal part of life and you shouldn't feel bad for spending money. I am the person that, if you tell me you really want something, I will encourage you to get it. There are things in life that bring us joy, and some of those things involve spending money. The important thing to do when considering your finances, budget, savings, and goals, is which things to spend money on. Ask yourself what brings you joy, things that would impact your happiness if you didn't have them. Everyone has something like that. One of our good friends is the most frugal guy we know, and he loves cars. He has bought 4 cars over the course of adulthood and he loves them, but he is very careful about how he spends the rest of his money (and on what cars). For my husband and I, our joy and pleasure is in food and travel. We will splurge on a nice restaurant and save to go on weekend trips all over Europe, but we aggressively budget in other areas of our lives (like only having one car, and an old used one worth about $1000). Figure out what it is that brings you joy, and don't feel ashamed about spending money on that thing! If you love shoes, splurge on a pair every once and a while.
Key phrase in the above sentence is once and a while. The frequency of larger, out of the ordinary expenses makes a big impact on your savings. Like I said above, my husband and I love to try out new and different restaurants, often expensive ones. When we first got married we went a bit overboard with the expensive restaurants and were going to one a month, plus eating out at other restaurants at least once a week. This was an ABSURD amount of money - so we decided to drastically cut back the frequency of our splurges. Now, we go to a very nice dinner probably once every 6 months, and we limit our other restaurant visits to once every 2 weeks (other than cheap brunches on the weekends).
7. Earn while you spend (not to be confused with "the more you spend the more you save")
Growing up, my dad would tell me about the lie of "the more you spend the more you save". He would say, "if you're spending, you are not saving". That is 100% true. The reality though is we have things in our lives that we spend money on. It is the currency of life and how we function in the world. So - while we have to be spending, earn rewards on your spending by using a credit card. My husband and I treat our credit cards like our debit cards. We never spend more than we have in our checking account, and we use them for everything. This means that we rack up points and rewards on literally everything, including rent, utilities, and gas.
This method might not work for everyone, but if it sounds like something you want to try, figure out what credit card is best for you. We use the Chase Sapphire Reserve for almost everything because, as mentioned above, we love to travel, and the rewards for travel are off the chain (priority pass airport lounge access + free food and drink in airports, $300 yearly travel credit, lost bag insurance + daily stipend, etc). When we were still living in the states, I also had an AmEx everyday blue card for groceries and gas which got me 6% cash back. If those don't sound like something that suits you, NerdWallet has awesome resources for finding the best credit card for you.
If you have questions or comments, leave a comment or drop me a line. If anything in here has helped you at all I would love to hear about it. If not, you read this far so you can send cute puppy photos and that's just as good.
-- Erin xx
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