Getting your finances in order is a key step to advancing in society. Not only will you be able to achieve your goals more easily, you should become less worried about the uncertainties that you may face in managing your finances.
Having a solid plan of attack will help you to get off the ground and push forward. This article should help you to make that plan!
This is a worthy time to remind you that this blog post, as with all the others on this website, should not be taken financial advice. Be sure to consult a licensed professional to determine what strategy is best for you. Regardless, hopefully this can better equip you to make sound financial decisions for your future!
1. Set Your Goal
Your goal should serve as your motivation.
Do you want to achieve financial independence? Do you want to have a safety net in case something goes wrong? Do you want to buy something very specific? Whatever it is, having your goal(s) set out early will help to push you through to the end.
Make sure your goal is meaningful; a weak goal will not help you to keep pressing forward. Do not overlook this critical step!
2. Get a High-Interest Savings Account
If you don’t have one already, open a high interest savings account so that your money can make some significant interest. Even a mere 1.5% annual interest is drastically greater than the minuscule .05% that many banks offer on their savings accounts. At least your savings can keep pace (mostly) with inflation without any risk!
Ally Bank is one of the more reliable national banks offering a high interest savings account. They are an online bank, so it doesn’t work very well if you use a lot of cash. Even so, it is very quick to set up a new account and get rolling.
There are a number of other financial institutions offering high yield savings accounts. A quick Google search will lead to dozens of solid results. But be careful – the bank with the best rate might come with worse customer service or hidden fees. Make sure to fully understand the terms and if there are any fees before you open an account with anyone. Thankfully, there are plenty of free options out there, so this should not be a big issue.
Whichever option you choose, make sure it is FDIC insured and is a reputable financial institution.
3. Create an Emergency Fund
This is a great use for an online high interest savings account. This should be a savings account that has at least 3-6 months of expenses saved in it.
As the name suggests, this emergency account should only be used in emergencies. You should exhaust as many other reasonable alternatives as possible before dipping into this account.
For example, if you are in the hospital and otherwise would not have the money to pay for life saving treatment, obviously use your emergency account. But if you dinged your car’s bumper and can wait until your next paycheck to pay someone to buff it out, do not dip into your emergency account. It should be the last resort before other, more drastic alternatives like selling your home or going into a family member’s college fund.
Your emergency fund should give you peace of mind to the point of knowing that you can cover all reasonable expenses that could suddenly come up. If you get fired from your job that was your only source of income, you have your emergency fund to cover your expenses for some time while you get back on your feet.
Your emergency account should be as large as you need to feel comfortable. However, even if you are comfortable with having $0 in emergency funds, you are running the risk of getting kicked onto the streets if something goes wrong. Things do go wrong in life. Build your emergency fund.
4. Organize Long-Term Savings Accounts
Once your emergency account is created and funded, you can start focusing on long-term savings. As you make money, set aside a portion of your income for long-term savings.
One way to organize your savings, specifically using banks that offer free accounts, is to create multiple savings “buckets.” You can have a vacation bucket, big purchase bucket, or anything else that you want to save up for.
You should also have an investment savings bucket. This bucket can be used later to deploy into other investments, like for retirement!
5. Setup an IRA
An IRA, or Individual Retirement Account, is an absolute must.
An IRA is a place for you to hold your retirement investments. Your IRA holdings are given different tax treatment depending on what type you choose, and there is a limit for how much you can contribute each year. Money in your IRA cannot be withdrawn without penalty until you are 59 and a half years old.
You can choose between having a Roth IRA and a Traditional IRA. The biggest difference between the two is that you contribute post-tax money into a Roth IRA and never pay taxes again, whereas you contribute pre-tax money into a Traditional IRA and pay taxes when you withdraw. For more on the differences between Roth and Traditional retirement accounts, be sure to check out this article.
IRAs are similar but ultimately separate from 401ks. 401ks are employer-sponsored plans that behave very similarly to IRAs, but they are mostly out of your control. Even if you have a 401k with your current employer, you have complete control over your IRA and you can still make contributions to your 401k at the same time. Maxing out both each year can be a smart strategy for building a safe retirement nest egg.
Setting up your IRA is a critical step towards saving for retirement. Even if you do not have money to contribute to it yet, setting up your IRA now will prepare you for when you do have money coming in. Vanguard is a solid option for housing IRA, though there are many others. Retirement saving can be easy to forget about; do not let that happen to you!
6. Setup Investment Accounts
In order to advance, you should invest! Investing allows you to take advantage of compound interest and much larger returns than a typical savings account.
For very low-cost mutual funds and ETFs, which are funds filled with many different types of stocks, Vanguard and Fidelity are great options. Setup a taxable brokerage account with a comparable company and pick funds based on your risk profile.
For commission-free stock trading, Robinhood is a decent option. Even if you do not want to use Robinhood for your investments, you can get a free stock by signing up with this link. In response to Robinhood’s competitive pricing, larger brokerages like Charles Schwab and TD Ameritrade have started offering commission-free stock trades as well. Explore your options thoroughly and consult with a licensed financial professional if you are unsure on which one to use!
Your investment accounts should be focused on the long-run. Investing for short-term gains is often very risky compared to a long-term buy-and-hold approach. If financial freedom is your ultimate goal, you should focus on building a portfolio with multiple streams of income. Set up the accounts that will house many of these streams right away!
Remember, there is always a risk that investments will not perform as you wanted them to. That said, if you are younger, you have more time to makeup losses before your inevitable retirement, so you can probably afford more risky investments or allocations. But investing is not a one size fits all thing; every person has different goals, tolerance for risk, and other circumstances. Be careful and diligent in your investment strategy no matter which approach you take.
7. Automate Your Savings & Investing
If you can, setup direct deposit from your employer to split up your paycheck and send a fraction to your savings account automatically.
The more you can save, the faster you can get to your goals! Try to save as much as you possibly can. If you find that you are not saving enough, it might be time to cut expenses. Alternatively, you might consider finding a job that pays based on performance rather than your time to try and boost your income. That said, there is always something that can be cut.
You can also setup recurring investments from there. It’s a great idea to automate your retirement savings by setting up an automatic weekly, bi-weekly, or monthly investment into your IRA holdings. You can also automatically deduct pay from your paycheck to invest in your 401k holdings as well, assuming that is an option for you.
Make investment mindless! Without investing, it is hard to advance economically. But it can be hard to say goodbye to your hard-earned dollars when you throw them into a mutual fund instead of buying a new car. For your future’s sake, take the decision out of your hands and automate at least a portion of your investments to make sure you are moving towards your goals.
8. Track All of Your Spending
Saving money is entirely dependent on your grasp of your current personal financial picture. You must know how much you are bringing in and how much you are required to spend on necessary expenses. It is imperative to get on top of your personal finances so you can reach your financial goals!
Once you know what money is coming in and what money is flowing out, you can identify problem areas to fix. Maybe you are spending an exorbitant amount on weekend trips to bars. Perhaps you are paying for a car that is too expensive for your ideal budget. Or maybe you eat out every day for lunch rather than taking advantage of drastically cheaper, homemade meals. Are you taking an Uber when you could just walk or ride a much cheaper bus? Always look for sensible cuts to your budget, especially as you look to advance economically. Reckless spending can be catastrophic to your goals, so your expenditures must be carefully evaluated.
Those problem areas are not going to fix themselves. Once you identify them, you must act to fix them. Certain habits may take months to break. Once you get the hang of things, however, your savings will continue to build. Discipline is the key to racking up your savings rate.
Remember, cutting expenses is a way to create instant savings! And you will not know what to cut if you do not track your spending.
9. Start Building Credit (or Pay Down Bad Debt!)
Once you have your own finances in order, it’s time to start building credit so that you can use other peoples’ money.
If you already have bad debt, like high-interest credit card debt, pay that down immediately. That should become your number one priority. Paying off bad debt is like making a guaranteed return in an investment; it is like automatically “earning” the interest back that you would have paid to your creditor! Once the debt is paid off, you will have more income freed up to use towards your other goals.
If you want to finance a car, you will need an auto loan. If you want to buy some real estate, you will almost certainly need a mortgage loan. If you want to start a business and don’t have the capital, you might go to the bank for a business loan.
To achieve any of these, you will need solid credit. It can take a little while to build it up, especially if you are brand new to credit or have had trouble in the past.
Typically, the best way to start building credit is to take out a basic, no-annual fee credit card. In time, your credit score will increase as long as you always make your payments on time. For a detailed breakdown on how your credit score works, check out this article!
Getting your finances in order is an extremely important step towards achieving your other goals. When your finances are in good shape, you can focus on the things you want most in life!
Having a concrete plan ahead of time helps for understanding why each step matters as you do it. Having a motivating goal is just as important, as that will help to keep you disciplined as you grind forward.
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