How to get started saving and managing your finances, a step-by-step flow chart:
All of these topics have more in-depth posts, this is just a big picture overview.
- Create a Budget – This isn’t as hard or as daunting as it might seem. Chances are you already have a pretty good idea of what you spend a month. Most people struggle when they’re not ready to come to terms with their spending. The only one who loses out from not coming to terms with your spending is you. I would start by estimating what you think you spend and writing it down on a spreadsheet. Then go through and adjust it after looking at your credit card bills and receipts after a month has passed. Look for my posts about different budgeting software and for more in-depth information on creating a budget.
- Contribute to Employer matched Retirement Plan- If your employer offers a retirement plan with a matched contribution take advantage of it! This is second on the list because it is literally free, tax-advantaged money. Often an employer will match a small percentage if you contribute to your retirement plan they offer. For example, my employer matches up to 3% of my IRA contribution. If I contribute 3%, my employer will throw in an extra 3% of free money!
- Pay down high interest debt- Pay off any debt that has an interest rate of 10% or higher. The high interest rate means you will have to pay more and more as it takes you longer to pay it off. Eventually tackle lower interest rate debt. There are a few different techniques on prioritizing and paying down debt, see my other posts about paying down debt.
- Emergency Fund contributions- At this point, you should focus on building up your emergency fund. An emergency fund is to be used well, in case of emergencies. You want to have 3-6 months living expenses saved up in case you lose your job or you have a large, unexpected expense. Read more about emergency funds here.
- Retirement Fund Contributions- Once you have a sufficient emergency fund built up, and debt paid off, you should focus on maxing out your retirement contribution. The max contribution for a 401(k) contribution for an individual for 2017 is $18,000. The max for a Roth IRA is $5,500. Max these out to take advantage of the tax implications before you contribute to a taxable brokerage account. The different retirement account types can be confusing, so see my post outlining the different types.
- HSA/529 Contributions- More tax advantaged accounts! A HSA is a health savings account available if you have a high deductible health insurance plan. A 529 is a taxed advantage account to be used for school expenses. These can also be confusing, but I try to make sense of them in my posts.
- Taxable Brokerage account- If you still want to invest some money, and you’ve maxed out all your taxed advantaged accounts (including a backdoor Roth IRA!) you can put your money in a taxable brokerage account and still invest in the market. There’s so much you can do with these accounts, and different types of investments you can make depending on your goals, and risk aversion. See my section on investing to learn more!
- Retire early! Reward yourself! Be financially Independent- Congratulations! At this point, you have maxed out all your tax-advantaged options and invested all you can. Continue to budget and live below your means and you shouldn’t have to worry about finances for the rest of your life!