I don’t know about you, but as someone who writes about money, I sometimes feel like I don’t know anything about it. There’s a lot going on with it – saving, investing, not to mention earning it! Words like hedge funds, mutual funds, and dividends get thrown around like it’s nothing.
It’s easy to feel overwhelmed by it all. If you feel out of your element, get ready to take some control back. Turns out, with a little bit of information and by paying a lot of attention to it, managing your money can be pretty simple.
How Much Do You Need to Earn?
So first things first (I’m the realest): You have to know how much of it you’ve got! For people who make a salary, that should be pretty easy to figure out. You make X amount per year and get X amount per month. For those who work by the hour, for tips, or on commission, it’s a different story.
If you don’t have a regularly scheduled income, start with your costs. Add up all your essentials – rent, food, transportation, clothing, utilities, etc., for each month. Be totally honest – these are simply the things you NEED, not the movie night out you WANT.
That number is your baseline. It’s what you must bring in each month in order to survive.
Once you have that number, you have a goal. Now divide your goal by your hourly pay or your commission rate, and you should know roughly how much you have to work to bring it in. That will give you a structure for your work and your money.
How Much is Going Out?
Once you know where your income stands, you have to examine your spending. Your spending will show you really quickly what it is you prioritize. Apps like Personal Capital or Mint are fantastic at tracking every purchase you make, and you can set up budgets to see how close you get to them, or when you go over them.
If you see that you’re spending an insane amount on dinners and drinks out, you can cut back on that category. Tracking your spending can be uncomfortable because you’ll come face-to-face with every purchase you make.
That late night Wendy’s or that guitar you bought and never play may seem like mistakes. If you take a fresh look at them, you might be able to say, “I don’t actually want to spend $30 a month on fast food. And maybe I can sell that guitar…or use my former fast food budget for some lessons!”
Save for Emergencies
Now go back to your baseline income. While that’s the number you need to survive, it’s not a number you can thrive off of. If you’ve tracked your spending for at least a month and have decided to make some changes, I have a next step for you: an emergency fund.
Traditional wisdom says to save three months of living expenses in that fund and keep it in an easily accessible account. I personally have $2,000 saved in an emergency fund. I could make that last for just under four months if I go into super frugal mode.
It’s comforting knowing you don’t have to live paycheck to paycheck. It’s comforting to know if disaster strikes, you don’t have to rely on your credit cards.
So now you know how much you need, how much you’re spending, and you’ve built a buffer for emergencies. Well done! I promise you, you’re way ahead of about a million millennials just with those few steps. But I know you. You want to get to the next level, and I’m going to help you get there.
Make Your Money Work for You
Say it with me now: make your money work for your future. That’s what the next level is. It’s important to know what you want and how much it’s going to cost you.
Are you planning on having kids or buying a house? Want to retire to a yacht and sail around the south Pacific for your golden years? You have to start planning for that now.
Financial foresight is something that a lot of us lack. Setting yourself up with a vision is the first part of the final step. Following through with action is the next part.
Cutting expenses and tracking spending is an essential part of money management. Keeping your money in just one savings and one checking account isn’t going to propel you to the next level. You work hard for that money and even harder making sure you’re spending it smartly. Let’s put that money to work for you!
This is when those mutual funds, hedge funds, and dividends come back into play. You have to invest your money in some kind of stock or bond if you want to see it grow.
I know up until now you had all the control – you tracked your spending, you did all the math on your income, you said no to dinner at that new steakhouse your friends wanted to try out. Now, you’re putting your money into someone else’s hands, and it’s scary! I definitely get it.
I promise you though, it’s only scary for a hot minute. Once you understand that a mutual fund is merely a few different funds that a bunch of investors went in on, it doesn’t seem so scary anymore. And when you realize a dividend is really just money your stocks are paying YOU back, you’re sitting pretty! How did Warren Buffet get to be Warren Buffet? The stock market. How did Jay-Z build an empire? Investing.
Informing yourself about how investing works means making investing work for you. You can dump some money into an index fund and basically let it run itself. You can set up a 401K through your company and maybe get a match (free money!). Knowing what an IRA is (Individual Retirement Account) means getting closer to the day you can retire.
Managing your money doesn’t have to be this mysterious skill only “real” adults possess. We can all do it! I’ve broken it down into four steps to get you started:
- Figure out your income
- Track your spending and cut in certain areas if necessary
- Build an emergency account with three months of expenses
- Familiarize yourself with and start investing
Do these things and the rest will seem to fall into place. Money is a tool that you use to run your life, not something that runs your life for you.
If you want to take your money to the next level, open an account with Wherewithal – we invest your money for you according to the goals you choose.
Do you have trouble managing your money? What’s the hardest step for you?