Finance Tips: The Essential Guide to Managing Your Money
This article was featured on Mavryk’s blog
Disclaimer: The following information is for informational purposes only, and should not be considered legal or financial advice. Please consult a financial professional for financial advice for your situation.
Many people go through years of education, go to college, and graduate into the "real world" without ever learning how to do something that is so essential: setting themselves up for financial success.
Millions of people struggle with student loan debt, credit card debt, and living paycheck to paycheck (78% of Americans actually do). A lack of financial literacy can keep you in the cycle of living paycheck-to-paycheck, and keep you in debt longer- sometimes your entire life.
Being financially well is just as important as your physical and mental health, and entails many of the same principles as physical and emotional well-being. I took an interest in personal finance towards the end of college when I came across the popular subreddit, r/personalfinance. A few months after college ended, I lucked out on a job as a product designer on a financial education software product, for which I designed tools to teach the very financial principles we're about to discuss.
Let's go over the basics of getting your finances in order, along with actionable tips, tools, and apps to help you out.
Budgeting
The first step to getting a hold of your finances is to get a good idea of where your money is going:
What are your sources of income?
What are you spending your money on?
What are you spending too much money on?
Where can you cut back?
These questions can be answered by creating a budget.
A 50/30/20 budget is a good place to start. After taxes, you can allocate:
50% of your budget to needs. So essentials like housing, transportation, groceries, insurance, utilities, and debt repayment.
30% of your budget goes to wants. Which includes non-essentials like entertainment, eating out, and vacations.
20% of your budget goes to savings like your emergency fund, retirement accounts like an IRA or 401(k), and other investments.
You can use this as a starting point, but can also change it to fit your needs if you want to pay debt faster or put more into savings.
What to do right now: Download a budgeting app like Mint and make an account. Then link your bank accounts and credit cards to get an understanding of your spending. Once you get comfortable you can add your investment accounts and any other loans you have (student, car, etc) to get your full financial picture.
Emergency Fund
Once you have an idea of your spending, you want to see how much you spend in a month on your living expenses. Your goal is to eventually have 6 months worth of living expenses in a high-interest savings account. Having an emergency fund gives you peace of mind in case you lose your job, have an unexpected medical expense, or your car breaks down.
Though in the meantime, work up to one month's living expenses. For example, let's say all your essential spending totals to $1,800. This is the 50% section of needs in the 50/30/20 budget, which includes rent, groceries, insurance, utilities, transportation, and the minimum payment on any debts you have.
What to do right now: Once you've worked out the math on how much you need to save monthly for an emergency fund, open a high-interest savings account (2% or more) and set up automatic withdrawals from your checking account or set up your direct deposit to send that money directly from your paycheck. If it’s not automatic, you likely won’t do it yourself!
Online-only banks like Ally typically have higher interest rates, but you can use anything as long as they have a high interest rate and don’t have any fees.
Paying off Debt
Debt is one of the biggest financial stressors for people, and gets in the way of your financial success. Letting high-interest debt like credit cards accumulate will only further prevent you from improving your financial wellness. You can use the debt snowball method (outlined below)to help you approach paying off your debt. The debt snowball method is a debt repayment strategy where you focus on your smallest debts first, and help you get some quick wins to keep the momentum going.
What to do right now:
List out all your debts from in order of smallest to greatest balance.
Pay down your smallest debt as aggressively as you can. This means cutting down on other expenses, and freeing up any money you can to pay off the debt (Use your budget to help plan for this). If you're able to, find extra sources of income to accelerate your debt payoff.
While working on the smallest debt, make sure you're still making the minimum payments on your other debts. A missed payment can very negatively impact your credit score.
Once you finish the smallest debt, continue on to attack the next smallest debt balance by applying the payments from the previous paid-off debt into the next one.
Repeat until all your debt is paid off!
If you’re looking for other ways to pay off your debt, check out this blog post from Dave Ramsey, one of the household names in the personal finance space.
Investing
A good sign of financial wellness is that you're not only doing well now, but that you’re financially set up for the future during retirement. And in many cases, the money you invest for retirement can also be tax-deductible, meaning you won't pay taxes on the contributions to your investment account. The best thing that works in your favor for retirement investing is time, so the earlier you start, the better. Compound interest is magical, as $100/month invested for 40 years, from age 25 to 65, at a 9% rate of return will mean a future balance of $441,000
Types of retirement investment accounts to consider:
401(k): As of 2019, can contribute up to $19,000 annually, tax-free, and usually only available through your employer.
IRA: An Individual Retirement Account is available to anyone, and as of 2019, you can contribute up to $6,000 annually, tax-free.
Roth IRA: Like the IRA, but you contribute after-tax money instead. With the other accounts you’ll pay taxes on the money when you withdraw during retirement.
With a 401(k) you usually pick from a list of funds to invest in, with an IRA you're usually on your own. In either case, look for target-date funds are they're the easiest and most hands-off. They contain a mix of stocks (ownership of a company) and bonds (loan to a company or government with a fixed rate of return).
As a rule of thumb, set aside 15% of your income for retirement investing, as that ensures you will be able to sustain the same lifestyle and expenses during retirement that you you have right now.
What to do right now:
Make an account with a service like Wealthfront, Wealthsimple, or Betterment to kick-off your retirement investing. Start to contribute small amounts. If you're able, $50/month is a great start, and make sure that contribution is automated. As you reach your general savings and debt payoff goals, you can contribute more towards your retirement goals.
If you've exhausted all your retirement investing options, you can get into general investing with a service like Robinhood.
Next Steps:
While overall financial wellness and success can seem difficult, your first tool is to in this journey is to become educated. Once you have the knowledge, you can take action, even in small, incremental steps. Small financial wins over time will bring much bigger wins down the line. Check out some of the following resources to learn more about managing your money:
Book: The Total Money Makeover
Book: I Will Teach You To Be Rich (Website: https://www.iwillteachyoutoberich.com/)
YouTube: Graham Stephan
Reddit: r/personalfinance