So a lot of my friends and co-workers have been asking me for advice on where to put their money and what kind of credit cards they should apply to… well, mainly it’s been about credit cards, as I have over lot of cards open and active for travel hacking, but I’ll give you guys more details on that later.
Anyways, I decided to write up a simple guide on what they can do with their money to help assist my friends and also people who might have the same question.
As a word of precaution, I’m not a Certified Financial Planner (CFP), so please take my suggestions with a grain of salt. I was able to triple my Net Worth in a year, so maybe I do “know” how to handle my money?
Keep in mind that these suggestions are mainly my observations on how money should be handled. If you want professional advice, please contact and see a CFP.
Finally, there are many different ways of using your money. It is important to be flexible and adjust your plan depending on your priorities.
Brief Disclaimer: Some of the products and services on this post may offer compensation for referrals. For the products and services that do not receive compensation, there are referred simply because I think these products and services and useful and will be convenient to have.
Find out What Accounts You Have and Understand Where Your Money Is Going
The first thing you should do is really simple – make a list of all your accounts. This task will allow you to find out how many total accounts you have – whether it is student loans, savings, checking, investments, etc.
I had mentioned Mint and Personal Capital briefly on my Net Worth Reports as tools that I use to keep track of my transactions and net worth. I highly recommend using them as they make it really convenient for you to understand as it collates and categorizes where your money goes.
They also have great visualization tools to detail your net worth, cash flow, portfolio balances, and more.
If you would like to see more products and services I recommend, head over to the Recommended page to see more.
Once the data is gathered and organized in Mint or Personal Capital, take a look at your transactions and ask yourself the following questions for each category:
- Did I spend too much on the category because of an emergency?
- Is this what I expect to spend on this category every month?
- Did my spending improve my life by making it more convenient or give me unforgettable memories?
- Can I reduce the spending on this category?
How do you feel about your spending after analyzing where your money goes? Do you think that you spent a bit too much and that you should have cut back on it? What can you do to reduce your spending, if you could?
Create A Budget and Hold Yourself Accountable
One of the best ways to reduce spending is by creating a budget.
It’s just like dieting in a way. If you want to lose weight, you would have to reduce the number of calories going in to your system.
The same can be applied to your finances. If you want to spend less, you would have to reduce your spending and not have your money leave your wallet or bank(s).
The goal of having a budget is to enable yourself to have complete control of where your money goes. It is a tool used to forecast your income and expenditures, to allow for better decision making, and even analyze the performance of your finances.
For example, take a look at my budget for 2017.
It’s not the best example as I don’t have many categories, but I’ll explain why.
For 2017, the only things I am certain of spending on are:
- Auto Payments
- Auto Insurance
I don’t have to pay for rent, gas, utilities, and a whole bunch of things other people would have to pay for. This is why I don’t have many categories created in my budget.
Additionally, the “Everything Else” category will mainly cover transactions that are one-time and do not fit in under Auto Payments, Auto Insurance, or Groceries. The main transactions that would go under “Everything Else” are:
- Credit Card Annual Fees
- Emergency Fees
- Credit Card Payments
- Tax-Advantaged Account Contributions (as I have not automated this)
- Business Services, such as server costs for this blog and more
The most important thing to note is that your budget won’t always cover all of your transactions. You’ll just have to be flexible and adjust your spending when it happens.
Now with your created budget and “hopefully” reduced spending goals, you can now use your extra money that you save to do a various amount of things.
Here are a few things you can do with your money to set yourself up for financial success:
- Pay off your Students Loans
- Max out your Tax-Advantaged Accounts
- Save up for Other Goals
If you don’t have any specific priorities and just want to be on the right track, keep on reading.
If you already know what you want to do with your money, feel free to skim ahead.
Pay Off Your Students Loans Using the Avalanche Method
For those who just graduated from college, you’ll most likely have student loans that you need to pay off.
It is important to pay off your loans and get out of debt as the interest rates on these loans are usually super high.
If you have multiple student loans, it is important to pay off the highest interest loan first, then move on to next highest one. This is also called the Avalanche Method and is the fastest way to pay off your loans.
There is another student loan payment method called the Snowball Method. It is a bit slower than the Avalanche Method as it focuses more on a psychological perspective.
In the Snowball Method, debts are paid down starting by the smallest balance size. By paying off small debts first, it will make you feel more motivated, thus giving you a psychological boost (kind of like a Redbull, but for our psyches!). The downside to this method is that larger loans with possibly higher interest rates are not being paid down for a longer period of time, which will allow the interest to accumulate.
Depending on the person, it might be better to go with the Snowball Method if you like to see your debts drop one by one. You can always switch methods whenever you want. Just keep remembering to pay your debt though!
Check out unbury.us, which is a loan calculator where you enter in your loan details and it’ll calculate which loans you should pay off first. It has simulations for both the Avalanche and Snowball method, so you can see the differences between both methods on there too.
Start Maxing Out Your Tax-Advantaged Accounts
Once you have your first job or if you already have a job, you might gain access to the following Tax-Advantaged Accounts depending on your employer:
- 401(k): A retirement plan sponsored by an employer
- 403(b): A retirement plan for certain employees of public schools, tax-exempt organizations, and certain ministers
- 457(b): A retirement plan for governmental and certain non-governmental employers
Some employers will offer an Employer Matching Program, which will give you free money when you contribute to your 401(k), 403(b), or 457(b) up to a certain extent. As of 2017, the maximum contribution limits to these accounts are $18,000.00 each.
If your employer offers you a match, make sure to put money into your 401(k) to obtain the match as that’s free money!
The 401(k) and 403(b) have a combined deferral limit, so the maximum you can contribute to both plans is a combined total of $18,000.00. This means you can max out the 401(k) or 403(b) at $18,000.00 per year and the 457(b) at $18,000.00 for a total of $36,000.00!
In addition to these accounts, you also have access to an Individual Retirement Account (IRA), which you will have to set up at a financial institution like Vanguard, Fidelity, Charles Schwab, etc. As of 2017, the maximum contribution limit to the Individual Retirement Account (IRA) is $5,500.00.
After contributing enough to meet your employer’s 401(k) match, you should max out an IRA as they usually have better fund choices than the ones offered by your employers and sometimes people just don’t have $18,000 to contribute to a 401(k). The same can be down for the 403(b) and 457(b).
If you still have money left over from funding your IRA, you can go back and max out the rest of your 401(k), 403(b), or 457(b).
Save Up For Other Goals
If you have other goals you want to save up for or already contributing the maximum to your tax-advantaged accounts, you can save up for other goals.
Depending on how much you need to save up for that big purchase (like a house or a car), you can put them into different accounts to let your money grow.
For short-term goals (<1 year), I recommend putting your money in a high-yield savings accounts (like Ally Bank’s 1.00% Interest Rate Savings Account) and just collect interest every month. This is a non-risky method and you will earn interest at 1.00%, instead of the measly interest rates of 0.01% at bigger banks like Chase, Bank of America, Wells Fargo, and more.
For long-term goals (2+ years), I recommend putting your money in a brokerage account with a three-fund portfolio that is adjusted to your risk tolerance. This is a riskier method and typically offers a higher return. As the stock market is volatile, there can be years where your account holdings will increase by a large percentage and there can be other years where it will decrease by a large percentage. But typically, the “average” stock market return is an increase of 7.00% after being adjusted for inflation. Keep in mind that past performance does not indicate future performance.
Different Priorities Have Different Paths
One thing to keep in mind is that this path may not be for everyone as people have different priorities.
For example, since I am aiming for Early Retirement and being Financially Independent, my path is like this:
- Pay off Students Loans (if any)
- Contribute enough for my employer’s 401(k) match
- Max out my ROTH IRA
- Finish maxing out my 401(k)
- Put the rest of my money in a brokerage account
For someone who might want to be purchasing a house in the future, it might look something like this:
- Pay off Student Loans (if any)
- Contribute enough for the employer’s 401(k) match
- Put the rest of the money in a brokerage account or high-yield savings account to save up for a down-payment
These are just two paths, but they can be adjusted to have many different ways to use and save money depending on the individual’s priorities.
Yay! You got to the end! I hope you have gained some knowledge and hopefully will be better at handling your money.
Thank you so much for checking out my simple guide on what you should do with your money. I will be going more in-depth into some of the topics in this article in the near future. If you have any questions, feel free to ask and I will do my best to answer them as well.
Do you agree with my tips? What are other cool tips and tricks that you suggest people to do with their money as well?
If you aren’t already tracking your accounts or net worth, check out Personal Capital! It’s an amazing online tool that provides great visualizations and is easy to use!
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