Money Management - How does it work?
To many people, managing your money means earning a paycheck and dispersing that income to the necessary expenses. This was the case for my parents as I was growing up, and has been the case for me for most of my life. However, there's a lot more to it than in-and-out, even if your income is meager and your expenses are high. To put it simply, living paycheck to paycheck for your entire life has two main problems:
- It sucks - it's stressful, its difficult, and it leaves little wiggle room to enjoy the finer things in life
- It can't last forever - eventually, nearly everyone is struck with an emergency expense that you can't cover, and also stops working before death ("retirement"), in which case the income stops (or decreases drastically) and the expenses don't.
I just finished Ramit Sethi's book "I Will Teach You to be Rich," (I bought the Kindle edition and read it on my phone in my spare time) which is based on his blog iwillteachyoutoberich.com. The book gives you action steps for each of six weeks to start changing your financial situation to one that will help you tackle past, present and future. The most important lesson that comes out of that book was hidden in that last sentence: action steps. It's not important to immediately invest your money, nor is it important to immediately pay off all loans. What's important is to take action to set yourself up for the smoothest ride, and to take care of everything. Doing nothing is the worst thing you can do. I'm not going to outline the steps of his book, but rather just go over some of the simple action steps that his book inspired me to take, and why you should take them too.
Open a savings account. Done? Open another one. Savings accounts are very easy to open. If you use a branch bank, like Bank One or Chase, you can probably open a savings account with little to no fees. However, you should also consider opening a savings account online, with a bank like ING Direct. I opened a savings account with ING Direct in less than an hour on the weekend without ever leaving home. The reason I advocate having two savings accounts is simple - you need to save money for multiple things, and it's impossible to truly do that having certain money earmarked for this and that, but all piled in the same account. For me, I have one account as an emergency fund, and one as savings for my wedding (which will become another savings pot after the wedding). As a bonus to having money in the online savings account - it has a much better interest rate than the account at Chase bank.
Start your emergency fund. This is a big one. Emergencies are not something like unexpected car repairs, or a surprise cost for a new computer. Emergencies are things like loss of employment or major incidents like hospital bills that run 4 or 5 figures. With the current economic status of the United States, if a person is laid off or fired, it could be months before a new job appears, but in the meantime, expenses don't stop. Emergency funds can vary - some save 3 or 4 months worth of salary, others 9-12. Personally, I think I'll feel comfortable when my emergency fund can cover at least 9 months salary (a couple years ago, my dad was laid off and was out of work for 9 months and things got very uncomfortable). I can't fill that fund immediately, but I'm putting some money into it each month so that eventually I'll have that cushion.
Save for retirement. Many companies offer 401k options for full time employees. Most of the time, these come with some kind of employer match - which is the closest thing to free money you can get. If you contribute 3-6 percent of your salary to this 401k, you'll likely not miss the money, and you can start saving for a real retirement. If you can eek out any extra money from your budget after this and all your expense and savings, you should also start an IRA. I opened one of these with Schwab (which was convenient for me because of an existing brokerage account, but you could do it directly with a company like Vanguard) in a couple of hours. I'm putting a meager $100 a month into it, but this $100 will build over time to help set me up for retirement.
Automate your savings. Of all of the automation (bills, etc) that you can do, automating your savings is the most valuable. Set up a rule on your checking account to send your monthly savings to your account immediately after your paycheck is deposited (by the way - use direct deposit, that way you don't "miss" the savings money, because you don't "see" the money before it's transferred to savings). Do the same with your IRA contribution, and your 401k contribution will come out of your paycheck before you even get it.
Read a book and a blog. There's a lot of information regarding paying off credit card debt and student loans, investing money, and saving money on fees and expenses that I can't cover here - but it's out there. The number one thing you can do to help yourself with all of this is to educate yourself. If you've made it this far into this post, congratulations. Now head over to iwillteachyoutoberich.com and keep learning - but take small steps; truly managing your money can be overwhelming.