Getting started managing your money doesn’t have to be overwhelming. That’s why we’ve unpacked five key tips for managing your money and setting yourself on the path to financial success.
1. Understand your current net worth
The most important element as you get started managing your money is to clearly understand what you currently have. It sounds obvious, but you’d be surprised how many people don’t really have an accurate sense of their overall net worth. To get the full picture, make sure you consider:
Bank accounts and CD’s, investment accounts, treasury bonds, etc.
Existing retirement accounts (401(k) or IRA)
Stock-based compensation (equity) you may have from a current or former employer
Owned property
Existing debt (car loans, mortgage, student loans, etc.)
2. Set a budget (and stick to it)
Once you have a sense of your net worth, it’s important to set a budget (and to stick to it). While we often think of budgets much like a diet – something intended to restrict our spending (aka “the crash diet financial plan”) – a budget is really just a way of planning for your spending and ensuring that you stay within a given range (think financial fitness).
Being able to accurately predict (within reason) your spending is valuable in understanding your current financial situation and savings capacity. So even if you’re not looking to cut your spending, having a predictable budget is still worthwhile.
3. Consolidate debt
Lingering debt can become a painful thorn in your side over time. Whether it’s student loans from college or credit card debt from years ago, take a critical look at the debt you’ve amassed. It may benefit you to either consolidate that debt or to make a concerted effort at paying it down, even if it means forgoing a bit of savings in the short run.
People most frequently think of debt consolidation in terms of refinancing student loans or credit cards, though its important to consider all forms of debt. In particular, you’ll want to consider not only the interest rate of each loan, but the amount of each payment you make that goes to repaying principal (i.e. actually extinguishing the outstanding balance, not just paying interest). This is especially important for student loans where rates are higher and repayment periods are longer than most other debt.
4. Create an emergency fund
No matter how much money you make, it’s important to make sure you have an emergency fund in case you were to suddenly lose your job or encounter surprise expenses (like large medical bills, home repair, etc.) People often discount the importance of these funds when they are doing well in their job, though unexpected gaps in unemployment may not be easily predicted. For example, if your current job isn’t a fit it’s likely you are already looking, while job losses related to M&A or layoffs are more about the employer than the employee.
When you’re thinking about where to keep this money, it’s important to make sure it’s an account that’s accessible at any time, and where you can remove money without any penalty. For example, you may have significant savings in your 401(k) account, but withdrawing money from there before retirement comes with costly tax penalties. Similarly, if all your money is in investment accounts, you don’t want to run the risk of needing to get money out urgently when markets are down. As a result, it often makes sense to keep your emergency fund in a savings account where it’s always available to you.
5. Save for retirement
When you’re in your 20s or 30s, retirement can seem so very far away. And in some ways, it likely is. But the best way to ensure that you can retire when you want to (and presumably sooner rather than later) is to start saving early. And, since people are living longer than ever now, it takes even more savings to ensure you’ll be set for the last 20-30 years of your life.
It’s important to take advantage of your employer’s 401(k) plan, but if your employer doesn’t offer a 401(k) or if you’re already maxed out, then consider other avenues for saving. This may be an IRA account, or at the very least, simply designating a regular savings account where you’ll be contributing regularly. While it’s typically preferable to use tax-advantaged accounts like a 401(k), the bottom line is any savings you can set aside will benefit you in the long run.
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This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.