6 Simple Tips for Managing Your Money

Looking for a simple, straightforward — even fun way to learn the most important things you need to know about your dough? 

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As a young person (let’s say between 25 to 40-ish), when it comes to saving and deploying resources you’re often faced with competing goals. Do you save for retirement or accelerate student loan payments? Should you save for a down payment or the baby’s college fund? Add to your emergency fund or Roth IRA? Managing your money can be confusing and often leaves people avoiding the whole mess of it. 

Each person’s situation has different goals and timelines, but there are some general rules about managing money to guide you. In part one of the Young Professionals Blog Series, How to Read Your Paycheck, we discussed assessing your savings resource: income. Now we get to organize and deploy that resource…

Establish Your Checking Account

Your checking account (what I refer to as your Grand Central Station) is the pot from which you: pay your credit card, receive income, set up auto-savings, connect your Venmo/Cash apps, pay rent, etc. All expenses come from here. Besides conveniently running your life through one account, it serves as accountability for your month-to-month expenses. Money in, money out! We typically advise to hold one month’s worth of spending in your checking account. 

(A good tip to figure out what your life costs is annualizing your spending. You may not spend $400/mo on travel, but on an annual basis you spend $4,800/year on travel. Same goes for auto insurance and charitable giving. Those figures should be included in your monthly spending. It’ll all even out over the year.)

Action Item: Consolidate to one checking account. From there, update your direct deposit, bill pay, and Venmo so everything is connected to one account. This can help simplify managing your money.

Check Your Debt

Are you carrying a credit card balance? If so, paying that down to a zero balance should be Priority #1. Paying interest on your credit cards can sabotage your financial future. Do not pass GO – get rid of that credit card debt ASAP. 

Action Item: Create a debt pay-down plan for your credit cards. This will help keep you organized when managing your accounts and stay motivated to pay off the money you owe towards your debt.

Cap that Savings Account

The role of a savings account is to support short-term goals or unexpected costs. First up is your emergency fund. A general rule is to have 3 to 6 months of spending (not income) put away in a high yield savings account. Your emergency fund is there to help in a number of situations: job loss, tax bill, unexpected medical expense, first and last month rent. It’s to float you during times your expenses are greater than your income. Once you’ve decided on what amount feels best (3, 6, or 9 months worth of spending), cap your emergency fund at that number. No need to be a cash hoarder! If you do tap into this account, remember to reimburse yourself. 

How do you decide how much emergency cash to keep? There are a few factors that determine this amount. What would you do in an emergency? Do you have a partner you can lean on? Family? Is your job super secure and you don’t worry about job loss? These questions will help you figure out the amount in your emergency fund.

We find sometimes this account lives at the same place your checking account lives and sometimes it’s a different institution. We recommend Ally and CapitalOne accounts for High Yield Savings Accounts. They’re super easy to set up and you can connect them to your day-to-day checking account for easy transfers (but you may be limited to a certain amount of transfers each month).

Perhaps just as important to building an emergency fund, is having an emergency plan. Once you’ve capped your savings, take time to assess your finances and create a plan for navigating an emergency. Having appropriate insurances and safety nets in place should the unexpected happen are key elements to an emergency plan.  

Action Item: If you do not have a separate savings account, open one! If you don’t have emergency savings built up, start saving money into this account. Once you’ve hit that figure – STOP.

What About Retirement?

‘Save for retirement’ can sound like a cliche. What does it even mean?

Saving to retirement means putting away money today so that at some future point you don’t have to continue earning money and can draw an income from your investments. There are many ways to save: company retirement plans (401(k), 403(b), 401(a), 457), individual retirement accounts (IRAs, Roth IRAs, SEP IRAs, Solo 401(k)s), and social security taxes (this is automatically taken from your paychecks). 

The general rule for this goal is to save at least 10 to 15% of gross income (before tax) to a retirement account. This means after you’ve completed your emergency savings goal and paid off credit card debt, this is the next savings goal you should start and not stop. Think of this as a non-negotiable expense that is protecting and caring for your future self. 

We know there will be periods of time that saving this amount may not be feasible. That’s okay as long as the goal is to get to this point soon.

If your company offers a 401(k) match, we recommend contributing at least that much so you’re not leaving money on the table. A company match is when your company offers to contribute into your retirement account on your behalf (it’s a tremendous benefit). They will either “match” what you put in up to a certain percentage or they will contribute a flat percentage whether you contribute or not. Ask your HR for specific details. If you’re not hitting 10% savings to retirement, it’s a good opportunity to review your expenses and see where you can make some changes. 

Start Saving for Retirement Early

It’s crazy important for young people to save for retirement as soon as they’re able. What young people have on their side is time: time for investments to grow and compound (more on this in Part 3) so that when they’re in our sixties, they’’ll have a much bigger nest egg, savings bucket, retirement portfolio – however you want to call it! And what this gives you are options. The option to stop working, to travel, support your grandkids, move, whatever it is you want to do. Not having enough in retirement savings means you’ll need to work longer or reduce your spending at a time when you likely don’t want to (or it’s very difficult to – hello, medical expenses).

There is little safety net for retirees who do not have enough money. Social Security, on average, does not offer the full income retirees need; if you do not have savings then you’ll be dependent on your children (if that’s even an option) or living in fear of not having enough money. 

Don’t let the mindset of, “I’ll save for retirement when my job is more secure, or when I have more income, or after I’ve bought a house.” The longer you wait to save, the more you’ll be required to save and the longer you may have to work. Give your future self options. Start saving now!

The difference between saving in our 20s and 30s versus starting to save in our 40s is drastic. Use a  retirement calculator to compare. 

Action Item: Figure out what retirement benefits are available to you. Contact your HR department and contribute to your company plan. If you’re self-employed, explore a Roth IRA, Traditional IRA, SEP IRA, or Solo401(k) (also a good time to contact a financial advisor!). 

Other Goals

In the same way you set up an emergency fund, we recommend setting up a separate savings account for other specific goals (i.e. new car, baby, house down payment, travel, college saving, etc). That way you’re assigning a goal to these specific dollars. Remember, the priority is always to save for retirement first (even if it’s just 3%!), then you can take on these other savings buckets. 

Action Item: Open up additional savings accounts where you hold your emergency fund or a separate college savings plan. It’s super easy to open multiple accounts and label them for specific goals. Keeping your savings organized can help when managing your money.

Still Have Excess Funds?

Well, you’ve reached a place that’s rare for young people – you’ve paid off your credit card debt, established an emergency savings account, committed to saving 15% to your retirement account, and are putting money towards specific, short-term goals. Below are a few ideas how to spend your extra funds: 

  • Accelerate student loan payments
  • Increase retirement savings 
  • Increase lifestyle spending (See?!?! We’re not all about saving!)
  • Open a non-retirement investment account and start investing

These are guidelines for managing your money, not hard and fast rules. Use them as a litmus test to see where you’re out of balance or where to focus your resources. At any point during these steps, a financial advisor can guide you through these decisions. We love guiding young people through the financial game of LIFE! Sign up for our Beginner Finance Workshop starting October 15, 2020 or reach out to an advisor today!

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