Here's how to manage your money better in 14 easy steps — Learn how to get in tip-top financial shape and reach your money goals in 2020.
Your financial life comprises two main components — income and expenses.
If you’re going to manage your money better it's important you follow some easy steps to help you get there. The goal is to come up with a smart financial plan and work towards it to help you have a better future.
How to Manage Your Money in 14 Simple Steps
If you are looking to manage your money better, just know that you must make a budget, set smart and attainable financial goals, and make sure you are saving money for retirement.
1. Take Inventory of Your Finances
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Your first step in managing your money is figuring out where you stand. Knowing how much debt you're in, what your net worth is, and how much you're spending each month on expenses, and what your bringing in is important.
You can manually do all of this or simply track your money using free personal finance tools like Mint or Personal Capital.
In the end, you're going to want to track your income, how much money you are bringing from your job, dividends, real estate, other misc. earnings, and online side hustles.
Next, you will want to keep track of your monthly fixed expenses, like rent, car payments, and utility bills. The next step is budget for your variable expenses like gas and groceries.
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2. Evaluate the Way You Think about Money
Once you get a sense of your net worth, do you like what you see?
It can be easy to think the worst when you see how much in debt you are in (cough, student loans).
But there is always a way to get out of even the worst possible financial situations.
Try and stay positive no matter how dire your financial situation is, or isn't.
3. Set Financial Goals
If you don't set any goals, you won't be able to know how to track how well you are managing your money.
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Most common goals are paying off student loans (or other debts), saving up for a home downpayment, or building an emergency fund.
Consider your short and long term goals and write them down and focus on them. Do one thing every day to get closer to these goals. If you've come this far, you're so much closer to managing your money better.
4. Make a Financial Plan
Now that you've considered your goals, it's time to take action.
The most common recommendation for most Americans is to first pay off high-interest debt. This would include your credit card debt, student loans, auto loans.
If you're already debt-free, then you can focus on saving up for retirement or a downpayment in your first home.
5. Create a Budget
Next, you'll want to set up a budget. Old school methods to creating a budget include using spreadsheets, but we won't go over that.
In the modern era, we readily use budget apps to help us stay on par with our money goals. Take a look at some of the best budgeting apps here, and go from there.
6. Track Your Spending
Mint styles itself as your personal finance consigliere. By linking your major financial institutions and ATM cards, Mint delivers a top-down view of your entire financial life. You can build and fine-tune a budget, create an emergency fund and look over your credit score — all for free.
The best part? They are so easy to use and if you aren't using them then it's no wonder you aren't managing your money better.
7. Build an Emergency Fund
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Having an emergency fund is crucial so you don't fall in a debt trap.
If you don't have an emergency fund then what happens if you face an injury, a car breaks down, or any other type of unexpected expense?
Having an emergency fund stashed away can help in these situations.
Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months' worth of living expenses.
Once you have this money stashed away, just leave it alone for emergencies.
8. Continue Saving Money
As you develop into becoming a saver, you'll want to build good savings habits. As you continue to develop your money management skills, keep finding new ways to save or using money-saving apps. This will serve you well in your later years. As your career grows, so will your income.
Make sure you are able to make extra income, budget your money well, and save it in a savings account or investment account.
9. Start Saving for the Future
Take advantage of your employer's 401(k) plan. Most experts recommend saving at least 10 percent of your pay, including any employer match, in a tax-advantaged retirement account, such as a 401(k).
You can also start investing yourself in a broker account, but make sure you do your research beforehand.
10. Don’t Neglect Your Credit Report
Your credit history determines what loans you will qualify for and the interest rate you will pay. Lenders get your credit history by obtaining your credit score.
You’ll most likely need to borrow funds from a lender at some point. This is why your credit score is such an important component of the student loan refinancing process.
A credit score provides an easy way for lenders to numerically judge your credit at a point in time. It gauges how likely you are to repay your loan in a timely manner.
The better your history appears, the more attractive you become as a loan customer.
How to check your credit score for free
If you don’t know your credit score, you can use free services like Credit Sesame that gives you your score for free. You can find out your score in under a minute!
Your credit history determines what loans you will qualify for and the interest rate you will pay. Lenders get your credit history by obtaining your credit score.
If you wanted more information about getting your score for free you can check out CreditSesame.com.
Managing Your 4 Biggest Expenses
Here are some more advanced methods for managing your 4 biggest expenses.
There are three approaches to help manage how much gets paid to the tax man. You need one or more of the following items in order to build wealth by reducing your single largest expense, taxes.
A Home with a Mortgage
You can deduct the interest of the mortgage on your taxes.
For example, if you pay $3,000 per month in rent or $3,000 per month in a mortgage payment, both cost $36,000 per year.
But the home mortgage gets you roughly a $36k deduction on your tax bill (the portion of your mortgage payment that goes to mortgage interest).
That can be about a $16,000 per year better deal than rent.
That means after 10 years, you have approximately $160k more in wealth than if you just stuck to renting.
This example illustrates the power of saving taxes through the mortgage interest deduction.
There is nothing quite as sweet as a business. You can deduct so many business expenses.
If you’re employed, you have income and then pay taxes. After you have paid taxes, then you pay your expenses.
If you have your own business, you get your income and then pay for your expenses, then you pay taxes.
Which one do you think is better?
It’s a big deal.
Plus, you can pay 15% less in income taxes on income that is a shareholder distribution because you don’t have to pay Social Security taxes on shareholder distributions.
In addition, you can have SEP/Simple IRA plans that help you stockpile pre-tax money and create investment assets.
There are many more benefits of owning your own business, but these are a few that help you manage your tax expense. There is nothing as good as owning a good business, especially if you want to work for yourself.
Annuities (a form of insurance)
Insurance is a form of commerce that has been happening for millennia.
That’s part of the reason why the law treats insurance so well. Annuities allow you to invest pre-tax money and defer the payment of the taxes.
They have an accumulation phase and then a distribution (annuity) phase. The distribution phase is when the lump sum amount is converted to income payments for life. The distribution phase also allows you to take out money, in the form of loans, to make income payments for the rest of your life. Moreover, loans are not taxed.
Annuities can be great tax shelters if you make a lot of money and you don’t yet own a home or business.
There are good annuities and bad annuities.
There is a time and a place for annuities. It can help you create tens of thousands of extra dollars per year, that over a course of a decade, start really impacting your wealth.
You need all three of these vehicles to manage the tax man, but for sure you need at least one. If you own a home, you’ve got some good tax shelter. If you own an annuity, especially when you’ve got a high income and no other home or business, you’ve got a good tax shelter.
If you own a business, you’ve got probably the best tax shelter of all three.
All of these can help you reduce and minimize how much tax you ultimately have to pay.
12. Shelter — The Rent (or Mortgage)
Your second biggest expense, after taxes, is typically your shelter (rent or mortgage).
We’ve talked about the benefits of a mortgage over renting, so the first step is to consider buying a home.
There are many circumstances where that might not make the most sense, but the important thing is to bring in all the data into an equation that will help you evaluate and optimize.
One of the other considerations is to determine how much you are willing to spend on shelter? Oftentimes, many of us end up buying more home than we probably can afford.
The general rule of thumb is not to spend more than 25% of your gross income on shelter. In my opinion, that’s a pretty high number.
That means if you make $10,000 per month, per tax, then you don’t want to spend more than $2,500 on rent or a mortgage payment.
Many of us in California and New York must spend more than 25% per month, so you’ll have to factor your own circumstance into that equation. Ask yourself, “could you live in a smaller place?”
Could you drastically reduce your transportation cost if you lived closer to public transportation or you didn’t need to commute each day? Could you find a job or stream of income where you could live anywhere? Any of these alternatives would give you the ultimate flexibility in managing how much you spend on shelter.
Remember, where you live will determine how much you pay for almost everything. The cost of a haircut to the weekly cost of groceries, will be affected by what zip code you choose to live in, so remember that, and factor it into your optimization plan.
13. Debt Payments
Debt is probably the most important expense to handle early on. It is such a factor in how much we’re able to save later, that it is critical to pay off all bad debt as soon as possible.
This means it is more important to eliminate debt than it is to save for an emergency account, save for investing, or to start a retirement account outside free money provided in a 401k through the employer match.
Now, it’s important to distinguish between good debt and bad debt. Good debt usually goes towards helping improve your production capacity.
Student loan debt can be considered good debt because once you get the degree, you’ll be able to earn more than you could before. Student loan debt is also tax deductible (under a certain amount of annual income), which is the tell-tale sign between good debt and bad debt.
Bad debt typically comes from spending too much on consumption. New car payments and credit card debt are forms of bad debt. They get no beneficial tax treatment. They do not help you produce more income.
Bad debt is merely a symptom of too much spending. This is the debt we need to address early on in our objective to win financial freedom.
Eliminating this monthly expense early on, in the first two to six years of your new financial plan, will open all sorts of possibilities later.
So, the goal is to completely eliminate this expense from your monthly expenses. It may take some time, but you can eliminate debt payments from your budget.
14. Recurring Expenses
Recurring monthly expenses can be the most insidious of the four large expense categories.
Their power isn’t in the monthly amount you spend on each recurring expense, it is the duration of payments.
- If you spend $125/month on a cell phone, each and every month until the end of time, that’s a lot of money.
- If you spend $150/month on cable/internet, each and every month until the end of time, that’s a lot of money.
These types of expenses are critical to pay the absolute minimum for the level of service desired.
Cutting these expenses in half is typically doable.
And, if you have internet, do you really need to pay for cable? These are all personal decisions, but it’s important to fully understand the impact of recurring monthly expenses. They lead to a lot of constraint on the monthly budget that could be going towards your freedom.
The biggest of the monthly recurring expenses is typically a car payment. I personally have never bought a new car and probably never will.
Paying $30,000+ for a new car is crazy when you drive it off the lot and it is worth 20% less than it was five minutes ago.
Paying a substantial car payment each month doesn’t make a lot of sense if you’re truly committed to financial freedom.
The important point is to weigh the true importance of transportation within your overall plan.
Do you want to be a slave to your car or have your car make you money?
Consider buying a car that’s two to 10 years old and keeping it for 10 years. If you do have a car payment, plan to have a majority of the time you own the car to be without payment.
I bought a fancy car, but I bought it two years old. I paid a loan for five years and now I’ve had it “payment free” for the last four years.
I plan to keep it another five years.
Minimizing a large car expense will go a long way to optimizing your consumption expense and get you that much closer towards your goal of financial freedom.
Managing Your Money Doesn’t Have to Be Complicated
If you had a business and you were able to control how and when you paid taxes, even if it were on the same level of income, how much more could you save or invest?
For example, do you know about Acorns? Acorns is a simple savings and investment app that rounds your credit or debit card purchases up to the nearest dollar and invests the digital change.
If you owned a home and put all the money you saved from the mortgage interest deduction plus the depreciation expense, how much more could you save or invest?
What if you ensured you only spent 25% of your budget on shelter? If you eliminated your debt, how much more could you save or invest? If you reduced monthly expenses and you didn’t have a car payment, how much more could you have to save or invest?
I bet it’s a lot. That’s why handling these consumption-related aspects of your Opening Moves are so important to tackle early on in the game to win financial freedom.
The important thing is to envision a long-term plan for managing your expenses. If you can minimize tax payments each year through using some of the tax planning vehicles, if you can reduce your shelter expense, if you can eliminate your debt payments by some time in the future and if you can minimize your recurring expenses, especially eliminating a monthly car payment, that’s when the magic truly starts to happen.
It worked for me. I started a business and I was able to move from a full-time employee to self-employed. That gave me a whole lot more control over my time. I had a legal entity, the business, that allowed me more control over my income and expenses. I was able to use a SEP IRA as a tax shelter during the times when I didn't own real estate.
I bought a car but it was 2 years old. I've kept it over 10 years which has allowed me not to have a car payment for the last 5 years. I bought a house with a little “granny flat” in the back and rented it out where that rent would cover 30% of the mortgage. I was able to write off the mortgage interest. That allowed me to spend less overall of my total gross income on shelter.
And with those savings, I tackled all my debt in 2 years. I had eliminated all my “bad debt”. Finally, I was able to start investing more. I sold the house several years back and I'm working another part of my financial game, but it really helped me at the time. Following these expense-reduction strategies helped me get ahead financially.
You’ll notice you have money left over each month. You’ll be able to start a savings account. You’ll be able to save and invest for retirement. You’ll be able to start an investment account. And, you’ll be able to buy a house if you decide to include home ownership in your financial plan.
Having an optimization plan for managing your money will go along way towards winning the game of financial freedom.