Hack Your Finances in One Day: a Newbie’s Guide to Money Management
You know it’s important to keep your money in check if you ever want to get out of debt, go on a great vacation, or ever retire. The problem is that a lot of people don’t know where to start or feel like they don’t have time. If you only have a day, we will help you.
A huge part of personal finance is behavioral, so we won’t pretend that this guide will give you complete guidance on your finances in one day. Anyone who has worked hard to achieve financial security will tell you that it takes time to learn better habits. However, you can achieve great success in a day. If you’re new to personal finance, here’s what you can do to get started.
Create a realistic budget and start saving for an emergency
Most of us don’t know how to budget because we think about it the wrong way. We think of this as a strict set of rules that prevent us from spending money on what we love. Forget it. Let’s start with an important question that many financial planners ask their clients: why?
Why do you want to tidy up your finances? It could be travel, family support, savings for a career change, whatever. Your answer will form the basis of your budget. Instead of a strict set of rules, your budget becomes a spending plan that supports what really matters to you, even if it’s just saving up for a new laptop. It is much easier to stick to this plan when it works for you, rather than the other way around.
After that, it’s time to choose a budgeting method. Here are some examples:
- 50/20/30 Method : With this classic method, 50 percent of your income goes towards fixed costs such as rent or cell phone bill. 30 percent goes to flexible expenses like food or restaurants, and 20 percent goes to financial purposes like paying off a student loan.
- Subtraction Method : It’s very simple. Add up all your monthly bills. From there, take your monthly income and subtract from your total bills, then subtract more for savings. The only thing that remains is how much you can spend in a particular month.
- Ramit Sethi’s Expenditure Plan : Personal finance writer Ramit Sethi offers a 50/20/30 variation of the 50/20/30 method with little detail. 50-60 percent of the wages you receive should go to fixed costs, 10 percent to retirement savings, 5-10 percent to savings for other purposes, and 20-35 percent to money that does not cause feelings of guilt.
Once you have chosen a method, budgeting comes down to a few basic steps :
- List all of your expenses. (don’t forget the non-standard ones!)
- Determine the monthly salary you receive.
- Divide your expenses into categories using the method of your choice.
- Come up with a tracking system. We’re fans of the budgeting tools Mint and You Need a Budget . They make it easy to get started, but you will need your bank account credentials. You can always use Excel .
Be realistic when deciding how much to spend in each category. For example, if you spend $ 600 a month on restaurants, don’t expect to drop from $ 600 to $ 50 in one month. Chances are, you’ll go back to your old restaurant habits, ruin your budget, and ditch it entirely. Leave room for reality. If you need to cut your expenses, by all means, cut them, but you will probably do better if you take a little of it . As the money site Femme Frugality writes, be liberal with your budget and conservative with your spending. In other words, it’s best to be careful and overestimate your costs.
This is also important: you need an emergency fund . This is a savings account that you can use in the event of a breakdown in your car, when your dog needs surgery or some kind of emergency. Without it, too many people resort to desperate decisions when they hit a tricky spot.
Most money experts say that you should have 3 to 6 months of savings in an emergency fund, but that probably seems like a heck of an impossibility when you’re just starting out. So start small: save $ 100, then a few hundred, then a thousand, and then think about what your emergency fund should look like . For now, it should be a small pot that will help you in the worst case. If you don’t already have one, set aside a budget for that savings goal.
Save money on every possible account
As a money nerd, auditing accounts is one of my favorite things to do. I go through every bill and look for ways to save money. We did some research for you in our billing guide to save on your monthly expenses . It is worth trying to save money on everything from cell phone bills to electricity and streaming services. Here are some common bills people pay too much for and ways to save them:
- Mobile phone rates : There are so many discount options available these days that it’s worth checking out what’s available if you haven’t bought a new rate in a while. Best of all, many major carriers are trying to keep up with the savings by offering their own low-cost options. Use a tool like WhistleOut to help you search.
- Credit card interest. Surprisingly, 78% of customers who call to ask for a higher credit card rate get what they want. Interest is growing, so the call is worth it. Here’s a script to help you do this.
- Car insurance: Many of them offer discounts if you combine policies. If you have separate company renter or homeowner insurance, call your insurance company to find out what your package rate will be.
Start with these three – you might be surprised how much you save. Then check all the other monthly bills and see if there are additional ways to cut costs. The best part of this exercise is that you do the job once, but keep saving money month after month.
Come up with a debt plan
If you have debts and don’t have a plan on how to get rid of them, it’s time to make one .
First step: make a list of all your debts. Track them in a spreadsheet or just write them down. Create a column for the following: balances, interest rates, and minimum payments. From there, review your budget and find out how much money you have to pay off the entire debt. Set an overall goal to pay X the amount you owe each month.
Second, choose a method for writing off debts. Some people prefer the stack method , in which you pay the balance at the highest interest rate first and then focus on your lower interest rates. However, if you have a few small debts, you may prefer the snowball method , which focuses on paying off your debts first with the smallest balances. Research shows that when you’re stranded, snowballing is a more effective method. People tend to stick to goals when they see progress. Since the snowball method is focused on faster wins, many are motivated by this.
Whichever method you choose, the next step is to prioritize your debts appropriately. Make a list of debts in the order you focus on first. Of course, you will still pay the minimum on other debts (you don’t want to increase late fees). When your priority debt is paid off, add that amount to your next debt over and above the minimum. Then move on to the next debt and then the next until you have solved them all. Easier said than done, yes, but you need a plan before you can make any progress.
Check your credit report
Your credit matters, especially because bad credit can make your life difficult. Not only is it harder to get a credit card and apply for a loan with bad credit, it can also be difficult for you to rent an apartment or find a job. Account providers also have the right to charge you for bad credit. It’s important to know where you are , which means checking your credit score and more importantly, your credit report.
What does your grade mean
There are several places where you can see your credit score for free : CreditKarma and Quizzle , for example , and Mint also offers free recurring credit ratings . Discover that credit card holders also receive their points for free on their monthly reports. Once you know your score, you will want to know where you stand. Here is the range of credit ratings, according to NerdWallet:
- 300-629: Poor creditworthiness
- 630-689: Fair Credit, also called “GPA”.
- 690-719: Good reputation
- 720 and up: excellent grade
If your rating is poor to fair, you have a job, and that job starts with checking your credit report. However, even if you have excellent results, you still need to check your credit from time to time. If there are any issues, such as late payments or billing fraud, you can nip them in the bud.
How to read your report
Annualcreditreport.com is the best site to get a free copy of your report. You are eligible to receive a free copy every year from each of the three credit rating agencies (Equifax, Experian, TransUnion). Once you receive a copy of your report, you will see several general sections:
- Personal information: your name, address, etc.
- Publicly Available Information : Any liens, wage deductions or bankruptcy.
- Lender Information : The main part of your report, where you will see detailed information about each credit account that you have opened.
Your accounts are divided into two main categories: reputable accounts and potentially negative ones. For example, if you paid your bills late or they went into fees, you will probably see them in the negative items section.
You will want to review these items and make sure they are all valid. If there are errors, you can dispute them (the FTC has sample dispute letters here ). Otherwise, if there are too many negative elements in your report, you just need to boost your credit .
Paying off your debt in full and on time is the best way to fix your credit, but FICO offers more information on how your credit is calculated, which is helpful. According to the FICO , your credit rating is based on five categories:
- Payment History (35% ): Your payment history is a history of past invoice payments on time. The better you make your payments on time, the higher your credit score will be. According to the site: “Multiple late payments are not an automatic spectacle killer. The overall good credit picture can outweigh one or two cases of late credit card payments. ”
- Amounts Due (30%): Lenders need to know how much outstanding debt you owe. If you are close to hitting your account’s credit limit (“overshoot”), it could negatively impact your credit rating, the website says.
- Credit history length (15%) : Longer credit history will increase your score according to FICO. FICO also takes into account how long you have been actively using these accounts.
- Loan types (10%) : Your score also takes into account how diverse your loan portfolio is, including credit cards, installment loans, retail accounts, mortgage loans, and financial company accounts. The number of accounts you have opened is also taken into account. And FICO adds that closing an account does not make it disappear; it will still show up in your report.
- New Credit (10%) : Requests for new lines of credit can lower your rating, says FICO.
Aside from paying your debt bills on time, you want all reputable accounts to be open and try to use as little credit as possible. Fixing credit takes time, but reviewing your report is a critical first step.
Sign up your 401 (k) job
401 (k) is a retirement savings account offered by your employer. You save a certain amount of money from your salary every month and use it to invest money from this account. Your money grows over time, and ideally, when you retire, you will have a big stack of money that has grown over the years. You can fulfill your dream of retiring on a houseboat or buying a mobile home and travel the country.
Many employers offering 401 (k) also offer so-called 401 (k) compliance. To a certain extent, they correspond to a portion of your own savings in the account. As our own Melanie Pinola explained :
A common matching scheme is to match 50% of your contribution to 6% of your gross salary. Thus, for every dollar you invest, the company will invest 50 cents. The maximum that the company would set for a person with a salary of $ 50,000 in this scenario, with the 6% per year cap, is $ 1,500 per year.
The Calcxml 401 Matching Calculator can help you figure out the numbers to see how much you can squeeze out of your employer. (It’s also worth noting that many companies have vesting schedules, which means you can only get the “free” money they give you if you stay with the company for a certain amount of time).
If your employer offers a 401 (k) match, you definitely want to sign up, otherwise you’re leaving money on the table . Once you have the forms to sign up for a plan, you will need to decide how much of your salary you want to spend on your savings. Most experts agree: at least you need to put enough to get a match. However, if it stretches your budget too much and you end up accumulating late fees and overdraft fees, it might not be worth it. Review your budget and decide how much you can afford to save.
From there, you have to choose several investment options. Your employer usually works with a broker to come up with a list of options to choose from. This means that you are stuck on the list they offer and sometimes not so much. Investor Place lists five main types of funds that you may have to choose from:
- Stock Funds : As the name suggests, this type of fund encompasses various stocks in which you can invest a percentage of your account. According to Investor Place, “Most 401ks only offer a few stock funds to choose from, so go for funds. it shouldn’t be difficult in this category – just look at the costs (the lower the better) and the long-term profit (the higher the better) to find the best option. “
- Fixed Date Funds : These funds are fairly simple and basic. You choose your retirement date and then you choose the appropriate fund. Because they are so simple, they do not require much maintenance as the fund adjusts the allocation of your assets over time. Fundraising with a set date may be higher.
- Investment in mixed funds: These funds have a fixed ratio of stocks and bonds. You can choose the one that suits your situation. This means that you will have to consider your risk tolerance and the number of years before retirement.
- Bonds / Managed Income : These funds are designed to protect your money, but your money will not grow much with these funds.
- Money Market Funds : Investor Place refers to the money market fund as a “glorified CD”. There is zero growth here, and, in fact, these funds are barely keeping pace with inflation. They recommend avoiding money market funds if you want your money to grow.
We have a set-and-forget investing guide to help you figure out which funds to start investing in, but 401 (k) documents can give you a general idea of how to get started. It mainly depends on your age, level of risk, and how much time you have left until retirement.
Once you’ve opened 401 (k), there are a few things to keep in mind. Sometimes, when you open a 401 (k), you are presented with the default investment option, and this is often a “money market fund”. With a money market fund, you get almost no growth. By default, 401 (k) is not configured for your needs and risk level, so be sure to select some investments after opening an account. If you ever quit your job, don’t quit 401 (k) either. You will have to transfer it to a new retirement account. When the time is right , read our guide on how to do this.
And then there are 401 (k) fees. Many 401 (k) plans are expensive to maintain, but you can use online calculators to determine and compare how much those fees will cost you over time. It’s still worth it, but if your 401 (k) fees are high, you probably want to invest something else elsewhere.
Open an individual retirement account
Don’t have an employer offering 401 (k)? You still want to save for retirement, and an IRA can help you save. Even if you have a 401 (k), an IRA is a great way to save extra money or just invest with more flexibility and control.
What if you’re in debt? Is it still worth saving up for retirement? Not all experts agree on which priority is debt or retirement, but you can learn more about it here and then decide if you’re ready.
Like a 401 (k), an IRA is the account in which you save money for your future retirement. There are two main types of IRAs: traditional and Roth. They both offer different tax benefits.
Traditional IRAs Offer Tax Deferred Growth
With a traditional IRA, the proceeds from your savings in the account are tax-free. This means that you pay taxes on your savings and earnings when you withdraw money (perhaps when you retire), but your contributions (savings) remain tax-free. Come tax time, if you qualify, you can deduct the amount you save in a traditional IRA from your income. In other words, now you pay less taxes .
Roth IRAs Offer Tax-Free Growth
With Roth, you cannot deduct your savings from your income like you would with a traditional one. However, when you retire, you will not be taxed on any money when you withdraw funds. Your savings in the account after taxes; this means that you will pay income tax on the money you deposit. In other words, you are paying taxes now. But this money will grow without taxes, which is great. Not everyone is eligible for Roth, but you cancheck your eligibility here.
As a general rule of thumb, if you find yourself in a higher tax bracket after retirement, you should choose Rota. If you are currently in the higher tax bracket, you should go for the traditional ones. However, this is a really simple answer, so read our IRA guide to help you make the best decision for your situation. There are even more types of IRAs. If you are self-employed, you can also, for example, open a SEP-IRA. But for the most part, Basic Traditional or Roth IRA is the best way.
The IRA also has fee limits, so keep those in mind when deciding how much you want to save in one. Here are the contributory limits for 2017:
Again, you’ll want to revisit your budget to see what your own savings are. Many experts say that you should invest at least 10 percent of your income to retire. This number may seem high to many people, and that’s okay – every little part helps . If you’d like more information on how much you should save, we’ve written a detailed guide here . The basics boil down to:
- Determine when you want to retire.
- Estimate how many years to include in your plan (i.e. how long you are likely to live).
- Estimate what your pension costs will be.
- Take an inventory of your current assets and savings.
From there, you will actually open an IRA with a firm like Vanguard (the popular ultra-low commission option). You can easily do this online. It takes time to link your bank accounts to the IRA before you can start making contributions. Until then, do a little research and figure out what kind of investment you want to buy. We recommend some really simple mutual funds that you can get started with here.
Learning to be good with money takes time , and it mostly has to do with developing better habits and behaviors. However, you could start with the practical things. In addition to these steps, make it a goal to learn a little about money every day. You are more likely to stick to budget and debt goals if you think about financial literacy every day, even if it’s only fifteen minutes.