Managing your money better comes down to two things: knowing where it goes, and spending less than you make.
Everything else is detail. A budget, an emergency fund, paying off debt, saving for retirement. They all follow from those two.
Here are 14 steps to get there. The first 10 are the basics. The last four go after your biggest expenses, which is where the real money is.
How to Manage Your Money in 14 Simple Steps
You don’t have to do these all at once. Start with step 1 this week and work down the list.
1. Take Inventory of Your Finances
Your first step is figuring out where you stand. That means how much debt you have, what your net worth is, what you bring in each month and what you spend.
Write down your income first: your job, side hustles, dividends, rental income, anything else. Then your fixed expenses like rent, car payments and utility bills. Then the variable ones like gas and groceries.
You can do this by hand or let a tool do it. Empower (it used to be called Personal Capital) has a free dashboard that pulls your accounts together and shows your net worth, cash flow and spending. So we would recommend starting there.
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’s a way out of even a really bad financial situation, and it starts with looking at the numbers instead of avoiding them. Try to stay positive, however dire things look.
3. Set Financial Goals
If you don’t set goals, you have no way to tell how well you’re managing your money.
The most common ones are paying off student loans (or other debts), saving for a down payment on a home, and building an emergency fund.
Write down your short-term and long-term goals and put a dollar amount and a date on each one. “Save $5,000 by next June” is a goal. “Save more” isn’t.
4. Make a Financial Plan
Now that you have goals, it’s time to put them in order.
For most people, high-interest debt comes first. That means credit cards before anything else, then auto loans and student loans. If you need more room in the budget to do it, here are some creative ways to pay off debt.
Already debt-free? Then you can focus on saving for retirement or a down payment on your first home.
5. Create a Budget
A budget is a plan for where each dollar goes before you spend it.
You can use a spreadsheet, an app or cash in envelopes. The method matters a lot less than whether you’ll stick with it. If you’ve never budgeted before, start simple: list your fixed bills, decide how much goes to savings and debt, and what’s left is your spending money for the month.
6. Track Your Spending
A budget only works if you check it against what you really spent.
The same dashboard from step 1 does this for you by sorting your transactions into categories. Look at it once a week. It takes five minutes, and it’s how you catch a problem in week two instead of at the end of the month.
The best part? Once your accounts are linked, there’s almost nothing to keep up.
7. Build an Emergency Fund
An emergency fund keeps one bad week from turning into credit card debt.
What happens if you get hurt, your car breaks down or you lose your job? Without savings, it goes on a card.
A common rule of thumb is three to six months of living expenses. That’s a lot, so start with a smaller target like $1,000 and build from there. Once it’s in place, leave it alone unless it’s a real emergency.
8. Continue Saving Money
Saving is a habit, and it gets easier the longer you do it. As your career grows, so will your income. The trick is to raise your savings when your pay goes up instead of your spending.
Set up an automatic transfer to savings on payday so it happens without you thinking about it.
9. Start Saving for the Future
Take advantage of your employer’s 401(k) plan, especially if there’s a match. A common rule of thumb is to save at least 10 percent of your pay for retirement, counting the match.
You can also invest in a brokerage account or an IRA yourself. Do your research first, and remember that investments can lose value, so money you’ll need soon doesn’t belong there.
10. Don’t Neglect Your Credit Report
Your credit history decides which loans you qualify for and what interest rate you pay. Lenders look at your credit score to judge how likely you are to pay them back on time.
You’ll most likely need to borrow at some point, for a car or a home. The better your history looks, the less it costs you.
Checking is free. You can pull your report from each of the three credit bureaus once a week at AnnualCreditReport.com. Look for accounts you don’t recognize and late payments that aren’t yours.
Managing Your 4 Biggest Expenses
Here are some more advanced methods for managing your 4 biggest expenses.
11. Taxes
For a lot of people, taxes are the single largest expense. These three things can lower the bill. The rules are detailed and they change, so run your own numbers or talk to a tax pro before you act on any of them.
A Home with a Mortgage
You can deduct mortgage interest on your taxes, but only if you itemize your deductions instead of taking the standard deduction. For a home bought after December 15, 2017, the deduction covers interest on up to $750,000 of mortgage debt.
A lot of homeowners don’t itemize, and they get no tax break from their mortgage at all. So don’t buy a house for the deduction. Buy it because the numbers work without it.
Small Business
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.
In addition, self-employed people can set up a SEP IRA, which lets you put away pre-tax money for retirement.
Keep in mind the expenses have to be real business expenses. And a business is a lot of work. It isn’t worth starting one for the tax breaks alone.
Annuities (a form of insurance)
An annuity is an insurance contract. You put money in, it grows without being taxed along the way, and later you take it out as income.
The tax bill comes when you withdraw. Depending on how the annuity was funded, the payments are fully or partially taxable, and taking money out before age 59 and a half can mean an additional 10% tax.
There are good annuities and bad annuities. Many carry high costs and charges for getting out early. For most people it makes sense to fill up a 401(k) and an IRA first and look at an annuity only after that.
12. Shelter: The Rent (or Mortgage)
Your second biggest expense, after taxes, is typically your shelter (rent or mortgage).
Whether to rent or buy depends on your situation, so put all the numbers into the comparison: the payment, taxes, insurance, repairs and how long you plan to stay.
The other question is how much to spend. Many of us end up buying more home than we 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 before tax, 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 cut your transportation cost if you lived closer to public transit or didn’t need to commute each day? Could you find a job where you could live anywhere? Any of these gives you more room on what you spend on shelter.
Remember, where you live affects what you pay for almost everything, from a haircut to the weekly groceries.
13. Debt Payments
Debt is probably the most important expense to handle early on. It has such an effect on how much you can save later that it’s worth paying off all bad debt as soon as possible.
High-interest debt should come before extra investing. The exceptions are a small emergency cushion and the free money from an employer 401(k) match. Get both of those.
Now, it’s important to distinguish between good debt and bad debt. Good debt usually helps you earn more.
Student loan debt can be good debt if the degree raises what you can earn. There’s a tax break too: you can deduct up to $2,500 of student loan interest a year without itemizing, though the deduction shrinks and then disappears at higher incomes.
Bad debt typically comes from spending too much on consumption. New car payments and credit card debt are the usual ones. They don’t help you produce more income.
Getting rid of these payments in the first few years of your plan opens up all sorts of possibilities later. It may take some time, but you can get debt payments out of your budget completely.
14. Recurring Expenses
Recurring monthly expenses can be the sneakiest of the four.
It isn’t the monthly amount that gets you. It’s how long you keep paying it.
- If you spend $125/month on a cell phone, that’s $1,500 a year, every year.
- If you spend $150/month on cable/internet, that’s $1,800 a year, every year.
Pay the absolute minimum for the level of service you want. Call and ask for a better rate, switch providers or drop to a cheaper plan. And if you have internet, do you really need to pay for cable?
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 it’s worth less the minute you drive it off the lot.
Paying a substantial car payment each month doesn’t make a lot of sense if you’re truly committed to financial freedom.
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 own the car without a payment for most of the time you have it.
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.
Managing Your Money Doesn’t Have to Be Complicated
So add it up. If you lowered your tax bill, kept shelter to 25% of your income, paid off your bad debt and dropped the car payment, how much more could you save or invest?
I bet it’s a lot.
It doesn’t take much to start, either. 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. Plans start at $4 a month, and like any investment, what you put in can lose value.
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.
Do the same and you’ll notice you have money left over each month. You’ll be able to start a savings account, save and invest for retirement, and buy a house if that’s part of your plan.
Bottom line: know where your money goes, spend less than you make, and go after the four big expenses first.