|Credit: Michael Elliott|
1. Start a new checkbook where your current balance is exactly what the bank says it is. This time it’s going to be different. Keep up with it. Write neatly. This way you know how much you have and you are protecting yourself from additional expenses, duplicate expenses, and identity theft. If you absolutely refuse to keep a checkbook, at least carefully review your monthly bank statements. If after a few months of keeping good records you notice your bank account is going down, spend less!
2. Once your bank account is actually growing, start an emergency fund or make sure your rainy day fund is adequate. Remember that you’re looking to save up at least 3 to 6 months’ worth of expenses in a checking or savings account. Work towards 6 months’ worth if you can. Go back and take a look at my post “Check Engine Now!” for more details.
3. Now that you’ve started making money and have saved up a safety net, let’s get fancy. Make whatever 401(k) withholding election you need to with your employer to get their maximum match. If they don’t have a match amount, I’d recommend withholding 3%. Make simple, diversified investment choices. Go back and take a look at my “401-OK” post for more details. If your employer doesn’t offer a 401(k), don’t worry, just keep reading.
4. Pay off all outstanding credit card balances. Chances are the interest rate is pretty high, and you always want to have the best credit score you can possibly have. Feel free to keep using credit cards as long as you can pay them off entirely each month. If when you make your monthly credit card payments your bank account starts steadily going down compared to the previous months' balance, spend less! If your credit card balance is more than you can currently pay off, try to minimize your expenses so you can pay a little extra each month, working towards that coveted zero balance.
5. Life insurance, while not that simple on the surface, is something you should actually consider on your money management short list. Particularly if you have a family or kids, make sure you have a policy in place that will provide enough cash to cover your final expenses, pay off all your debts, and allow your family to continue their current lifestyle for at least 6 months to a year. If you are fairly young, reasonably healthy, and especially if you’re female (you usually outlive us males), a policy won’t be that much annually. The security it will provide you and your loved ones is well worth it!
6. Roth IRAs are one of the best things ever. They are wonderful because they provide you with a retirement investment vehicle that can grow over time, tax free. The only catches are that you are limited to contributing $5,000 a year ($6,000 if you are over 50), and you can’t withdraw the earnings on your contributions before you are 59 ½ without potentially facing penalties. (There is also a Roth IRA income threshold of $173,000 if you file your taxes married filing jointly, but you can always contribute to a traditional IRA.) Setting up an IRA is fairly easy, and it is one of the best retirement planning tools out there. Even if you can’t put in the full $5,000 every year, every little bit will help.
7. If you have followed all of these steps and still have some cash flow left over, it’s time to start eating away at those large debts. Any additional principal you can put down on car loans, student loans, home loans, wedding loans, or any other large loan will help you be debt-free sooner and be charged less interest in the process. Be sure to start with whichever debt has the highest interest rate. Your additional payments may feel like you are spitting into the ocean, but over time, those extra payments will make a difference.
7. For those of you who were excited I made a typo, I regret to inform you that opening an additional investment account is currently tied with paying off your loans in my suggestion book. Over the long run, your investments will offer a higher rate of return than your loans will charge you interest, but with markets the way they are right now, I will leave the choice between loan repayment and investing to your personal discretion. If you still have leftover cash, opening an additional investment account is the way to increase your wealth. Depending on your available assets, you should either purchase some simple mutual funds you’re willing to hold long-term or maybe even open a monitored investment account with a brokerage or wealth management firm. Please note: I would never advise a client to make individual stock picks on their own unless their last name is Buffett, and I don't mean Jimmy!
I hope you found this money management roadmap helpful. Although following all of these steps would help almost anyone financially, a different order might be more appropriate depending on your cash flow needs and your point in life. That being said, this list is intended to be a crude hierarchy, so if you find you are faltering with number 4, go back and fix numbers 1-4 before you continue to move to number 5.