Personal finance is simply personal. Very few people have identical spending, spending habits and financial inclinations.
But the good news is that regardless of your financial situation, the basics of wealth building never change: Spend less than you earn and save and invest what you have left.
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Below are some guidelines you can use to get started. Remember that these are general measures and what works for one person may not work for another.
Here’s how to manage your money:
Examine your financial flows
The first step to good money management is knowing how much you have. You’d be surprised how many people have no idea what’s coming in and going out of their account each month.
You must aim for a positive cash flow, that is to say that you bring in more money than you spend. List your fixed monthly expenses, such as housing costs (rent, mortgage, utilities, etc.), insurance premiums, and debt repayments.
Contribute a portion of your pre-tax pay to your 401(k) plan
If you have access to a 401(k) or other defined contribution retirement plan at work, enroll and set a contribution rate immediately. If your company offers a match for your contributions, set a deferral rate high enough to benefit from this free money. Whether you contribute 2% of your salary or 10%, something is better than nothing.
Since the money is taken from your pre-tax salary, which reduces your taxable income, you will quickly learn to live without it.
Send the rest to your current account
Once your 401(k) insurance contribution, health insurance premium, and any other pre-tax benefits you pay are taken out of your paycheck, the rest should go directly to your checking account.
It’s like an electronic mailbox for your money: Everything goes through it before it gets filtered to the right place, writes financial expert and best-selling author Ramit Sethi.
Set up bill payment for recurring monthly expenses
Then set up automatic transfers from your checking account to pay the fixed monthly fee, Sethi says. It could be rent, utilities, tenant insurance, car insurance, credit card payments, student loan payments, gym membership, in short, anything that has a due date.
If you can pay one of these bills with a rewards credit card without incurring additional fees, it might be a better option than withdrawing from your checking account. In this case, arrange for the companies to charge your credit card when the invoice is due, and for your credit card to charge your checking account when the invoice is due. Paying your credit card in full, on time, is one of the biggest factors influencing your credit score.
Prioritize paying off high-interest debt
Most financial experts recommend paying off high-interest debt before aggressively saving or investing. Indeed, a credit card or car loan with an interest rate above 7% will generally cost you more in interest than an investment in the stock market, even on its best days.
If you have consumer debt, pay at least the minimum each month, but ideally as much as you can afford. Classify this payment as an expense and automatically set up the transfer from your checking account once a month.
Automatically transfer your savings to a separate account
Then, set up automatic transfers from your checking account (or even directly from your paycheck if you prefer) to a high-yield savings account. It’s “money for a specific purpose”: think of your emergency fund, money for vacations, weddings, or down payments for a house.
Think of saving, at least for your priority goals, as an expense, even if it’s just $10 a month while you struggle to pay off your high-interest debt.
“By spreading the money across different accounts or in different buckets, you can track it better than pooling it,” Luis Rosa, a certified financial planner, told Business Insider.
These accounts can be held at the same Ally bank makes it easy to open new accounts and label them with different savings goals or even separate banks, to keep the temptation to spend to a minimum.
Spend, or save, what’s left in your checking account.
At this point, your spending, goal-specific savings, and retirement savings are all automated.
Since we haven’t considered things like groceries or incidentals to be fixed monthly expenses, use the remaining funds in your checking account to cover these costs. If you find that you are short of money, lower your contribution to savings or reduce your housing expenses.
Invest in an IRA
If you find that you have more money than you need in your checking account to cover day-to-day expenses, consider opening an IRA to put more money aside for your retirement.
An IRA is a type of tax-efficient investment account that you can open at almost any financial institution. The money is paid after tax up to the federal limit of $6,000 in 2019 and placed in a deposit account, where you can buy the investments of your choice, be it stocks, bonds or mutual funds.
The two types of IRA differ only in their tax treatment. Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not. Each year, you contribute money to an IRA and you can deduct that amount on your tax return, reducing your overall tax bill. However, when you withdraw the funds after age 59.5, they are taxed as ordinary income.
Meet a financial advisor
Although many people are perfectly capable of managing their money on their own, you may want to consider hiring a financial advisor if you are too overwhelmed or confused by your money to make important financial decisions, such as how to balance several financial goals, running a business, getting out of crippling debt or building a retirement savings plan. If the alternative to meeting with a financial advisor is decision paralysis, it is best to seek outside advice.
A good Certified Financial Planner can help you organize your entire financial picture, including setting up a retirement savings and investment strategy, planning major expenses, such as buying a home or the birth of children, budgeting and day-to-day expenses, as well as tax and estate planning.
With Business Insider.
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