Disclaimer: I am not a professional financial advisor and this is not financial advice for you – each person’s situation is different, and this should be taken as general advice, not professional recommendations
Getting started with your personal finances is really hard, especially if you don’t know where to start. Feeling out of control or clueless about money can be really disempowering (or just vaguely frustrating) – but luckily, there are some easy steps you can follow.
Here is a list of things you can do to start thinking about your personal finances:
- Understand your goals
- Start measuring your income and your expenses
- Make a savings plan
- Get a credit card and / or start building your credit score
- Make an investment plan
Let’s get into the details.
1 – Understand your goals.
What does “better” personal finances mean to you? It’s easier to get started when you have goals in mind for where you want to end up. These will be goals that you can always come back to for motivation and purpose. Goals can always change, and they will be different depending on your individual situation, but let’s look at a few, widely varying examples of goals for your personal finances. Your goals can be more general, like:
- Spend less
- Save more money
Or, they can be more specific, like:
- Decreasing / eliminating your credit card debt
- Paying off car loans or student loans
- Saving up for a specific concert or trip
- Building an emergency fund that can cover 3-6 months of expenses (so you don’t feel like you’re living paycheck-to-paycheck)
- Building an investment portfolio so that you can retire by a certain age
- Paying for a child’s activities – or a child’s education
Or, maybe your goals are more process-oriented:
- Build a budget and stick to it
- Think more about how you spend money and why you’re spending it how you are
- Feel less intimidated by money
All of this might seem a bit overwhelming – I would recommend just sitting down and setting a timer for 5 minutes, and writing down a few goals that come to mind. Why do personal finances matter to you, and what’s your goal in improving them?
2 – Start measuring your income and your expenses
Let’s start thinking about concrete numbers. You can do this in a note on your phone, in a physical notebook, in a spreadsheet, on a stone tablet, or whatever your favorite writing implement is.
Track how much money you make in a month. This may be super easy if you are a salaried employee, or more difficult if you work changing shifts / freelance jobs. You can keep track of this in a separate area from your expenses. You could use past direct deposits to your bank account as way to measure how much money is coming in.
You should also track your expenses. This is where it gets more difficult – you could use an expense tracker like Mint, which links directly to your cards, or you could create a spreadsheet yourself. This may be exhausting at first, but you don’t have to do this for the rest of your life. Try doing this for a few weeks, or for a few months, just to get a sense of how much money you’re spending. This is where a note on your phone may be helpful, since it’s very quick & easy to leave a note in your phone every time you spend money.
While you don’t have to be incredibly detailed, you should have a good sense of how much money you make vs. spend, because that will make step 3 much easier!
3 – Make a savings plan
The TLDR of this section is:
- Decide how much you can save monthly
- Open a savings account
- Deposit money in your savings account every time you get paid
- Track your progress!
More details below:
Once you have a sense of your personal PnL (Profit & Loss – AKA how much money you bring in minus how much you spend), you can make some plans for how you’re going to save more money. There is a key question to consider here:
How much money is realistic for you to save? If you earn $2000 a month and you spend $2000 a month, you don’t have anything left to save – but this can vary. If you are spending all $2000 on rent, food, wifi, medical bills, and other essential expenses, then you might not be able to decrease your spending. In this case, you might need to focus on increasing your income. This might mean taking negotiating for a higher income at work, taking on more hours, or taking on side jobs / side hustles. But, if you’re only spending $1800 on essentials, you have some room to work with here.
Make a goal for how much money you are going to save each month – if you think you have $200 to save each month, make that your goal. You can do this on a month-by-month basis (save $200 by the end of this month) or a yearly basis (save $2400 by the end of this year).
Now, how do you actually execute? The best way to do this is by paying yourself first. When you earn money and it hits your account, you should automatically set a chunk aside for yourself in a savings account. This savings account should be separate from the account that you use to pay for expenses. That way, it’s totally separated from your spending money and you can easily see how much you have saved in one place. (This is why it’s important to be realistic – if you punt your whole paycheck into the savings account and start pulling from the savings account to pay for your daily expenses, that defeats the whole purpose!) Most employers let you set up direct deposit into two different accounts – otherwise, you can set up an automatic transfer between your expenses account and your cash savings account.
Note – choose your cash savings account wisely.
4 – Get a credit card and start building a credit score
Credit scores are important for many things – for background checks, for better rates on debt, for getting approved for apartments and mortgages, and the list goes on. The only way to build a good credit score is to (1) have a credit card and (2) pay off the expenses every month.
You can open a credit card without a credit score – look for what’s called a secured credit card. This means that you give the bank some cash, equal to the amount of credit you can take out. Put small expenses on the card, and pay it off every month. You’ll watch your credit score grow!
Eventually, you’ll have a high enough credit score that you can start applying for unsecured / normal credit cards – there’s a whole world of credit cards out there, and it’s bound to give any reasonable person decision fatigue. Look for some good starter credit cards, and then you can go from there.
If you already have a credit card, great! Make sure you don’t have any debt on the card – savings can earn you at most 4% on your money, but credit card debt can grow at a rate of 28%. That means your debt will be growing faster than your savings, so if you have credit card debt, direct your savings towards paying it off.
5 – Make an investment plan
Alright – you’ve decided on your goals, you’re tracking your expenses, you have a credit card and no credit card debt, and you’re starting to save some money. What should you do with that money?
This is where you make an investment plan.
You should probably keep enough cash on hand to cover 3-6 months of expenses, but that depends on your risk tolerance. Once you’re comfortable with how much cash you are saving / are going to save, then you can think about the allocation of that other cash.
The problem with keeping all of your money in cash is that with positive inflation, 100$ a year ago is not worth 100$ today, and 100$ today will not be worth 100$ in a few years. Everything is on this slow march of becoming slightly more expensive each year, and your money needs to keep up. You can invest cash in a few different ways. My favorite two are:
- The stock market (where you can buy shares of publicly traded companies, and your stock will grow with the value of those companies)
- ETFs and mutual funds (these represent little slices of lots of different stocks, so they are a bit more diversified)
You can invest in these by opening a brokerage account, which lets you buy and sell stocks, ETFs, mutual funds, and anything else that can be bought or sold in a market (all of these are called “securities). You can also buy thing like Treasury bonds or corporate bonds, where you essentially loan the government (or a company) 100$ for a few years and receive coupons + 100$ back at the end of the trade. The list goes on and on…..
The point is that your money can slowly grow while sitting in a savings account, but it will grow faster if you invest it in something. This can work similarly to step 3 – identify how much you want to invest, identify what you want to invest in, and most importantly, make it automatic!
In Conclusion…
There are a lot of resources online to help you out with everything involved in improving personal finances. The most important thing to remember is that this is a lifetime journey – you won’t “fix” anything overnight, and you can’t achieve most goals overnight either. Don’t stress out too much – follow these steps, and see where they take you – hopefully to a better place than you started!