Manage Your IncomeYour saving and spending will always depend on how much income you can start with. Your career goals and personal finance goals are the same thing, so always start by looking at your career.
Making a Career PlanInterviewers often as “Where do you see yourself in 5 years?” You should always have an answer to this question, because it helps build a clear roadmap forward. Make a Career Plan by trying to define your ideal job (and salary), and set a series of obtainable goals for the next 5 years. Start by looking at job postings – not for jobs that you can apply for now, but for jobs you want to land in the future. These job postings have all the information you need to make an effective career plan:
- Experience requirements: Use these to define the stepping stones for jobs between now and then.
- Skill/Education requirements: See what kind of extra education you need to obtain, or skills you need to build on your own time outside your day job.
- Salary offers: Usually included in job postings, this will give you an idea of what kind of lifestyle you are building towards. This helps put a cap on the debt you take on today, since it gives a good way to see your ability to pay it off in the future.
Making a Debt PlanOnce you have an idea of how your career can evolve, you know how much space you have for debt. Student loan debt usually comes first, as you try to knock out the Education Requirements for your career path. You can estimate how much your first jobs will pay after school by looking at job offers for entry-level positions, so your key is to see how much of a debt load you will have as soon as you finish school.
Use Your Spending PlanAlways set aside 20 minutes a month to go over your spending by doing a quick account reconciliation updating your Spending Plan. The key to financial success is knowing where your money is, how it got there, and where it is going next. No matter how good you are at keeping track of these in your head, there is no substitute for a few minutes of dedicated planning with a spreadsheet and your actual spending habits.
Your Four AccountsThere is a secret way to effortlessly build wealth, while barely paying attention: Split your income automatically, keeping different amounts in different accounts. Most adults with healthy finances use four accounts, but it may be more or less depending on your personal situation.
Account One: Checking AccountThis is your primary checking account. Deposit your paycheck here, and use it for all your bills and shopping. You should have all of your bills paid automatically by setting up auto payments, going through this account.
Account Two: Savings AccountThis is a standard savings account, linked to your checking account. Set up automatic transfers every month, set as soon as you deposit your paycheck. This will help with your “Pay Yourself First” savings strategy by making sure your wealth is always growing.
Account Three: Investing AccountHave a brokerage account, and use it. A certain percentage of your savings should be invested in the markets, which will have a higher percentage return than just a normal savings account. Whether it is invested in bonds, mutual funds, index ETFs, or a balanced portfolio you build yourself, investing your savings is the most effective way to help it grow. You can even set up regular transfers from your savings account to your brokerage account, which will help keep it growing.
Account Four: Emergency FundThis is either part of your savings account, or an entirely separate bank account set aside for emergencies. Your Emergency Fund fund will have 3 to 6 months of income standing by, ready to be withdrawn in case you have a monetary emergency. The purpose of your Emergency Fund is to make sure that you do not “steal from yourself” by withdrawing from your savings. Every time you need to withdraw from your Emergency Fund fund, fill it back up with your next paycheck – your goal is to always keep this account “topped up” in case you need it later.
Optional – Account Five: Spending AccountIf you struggle to control your spending, you may want to have a secondary checking account, specifically set aside with your “Spending Money”. Here’s how it works:
- Use your account reconciliation to determine the approximate amount of bills you have each month.
- Set up your main checking account to automatically transfer your savings, plus pay all of your regular bills.
- Transfer 80% of the money left over to this new “Spending Account” (also a checking account).
- Disable overdraft protection on your Spending Account to ensure you cannot over-draw.
- Use this “Spending Account” to go out with friends, buy things online, pay for groceries, and any other spending you do throughout the month.