We’ve talked about WHY you should save.
Most of the blog is dedicated to HOW to save in this fair city.
There is one question left glaring at us. What should I do with this money in order to achieve my goals and freedom?
For those of you who read personal finance blogs, this may be a bit old, but for the New Yorkers out there who are here to live cheaply and well in the city, I want to lay this out as simply as possible. This is a practical post, a step-by-step to get you set up.
1. Start a Budget: You can’t decide what to do with your money until you know how much you have after you are done spending. You can dive into budgets and get complex with them, but here’s the easiest way to get started:
- Sign into every bank and credit card account you have.
- Look at each expenditure for the last month. Think of ways that you could save for each.
- Add all of these up to see your total spending for the month (for these accounts, set the time frame on your transactions to the duration of the previous month – it will total up that account for you – that way, all you have to do is add the totals from each account here).
- Each month, try to spend less than the previous month.
- Compare how much you spend to how much you make – that’s how much you can save. If you are saving more each month, the amount you can save goes up. Trust me, this game gets addictive!
- For the Future: As you get better at this, you can be more aggressive about your budget. Group spending by category and set limits for each category, etc. I will have a full post on budgeting, but I wanted to let you know there IS a way to ease into budgets and make them very simple at the start.
2. Create an Emergency Fund
- That extra money you have each month – put it in a savings account. How much do you need to save for your emergency fund? There are different opinions on this and it depends on your situation. The following is what I would do, but feel free to set your emergency fund goals at different levels (just be sure to actually set those goals).
- If I had debt, I would only save up enough to cover 1 month of my expenses. That way, I could attack the debt sooner (if you have a serious emergency, you can always use the credit card again. Just realize that this is an exception and you still need to break the credit card habit).
- If I didn’t have debt, I would save up enough to cover 3 months of my expenses.
3. Pay Off Your Debt
- Positive thinking is key. You CAN get out of debt. And faster than you expect. You just have to go into attack mode.
- Look at all of your debt and find the accounts with the HIGHEST interest rate – pay as much as you can afford (look back at your budget) each pay period to this debt.
- Continue paying the minimum amount to each of the other accounts
- Once the highest interest rate debt is paid off, move to the next highest and pay as much as you can afford to pay that one off.
- Repeat until you are debt free (If you want to pay off debt that has an interest rate lower than 5% over a longer period of time, that’s fine, but if you are new to this, I would still recommend paying down your debt completely).
4. Invest in Your 401(k)
- If this is daunting to you, call on someone in your HR department and ask to sit down with them and go through your options.
- Note, the following is NOT a one size fits all solution, but this is what I do and unless you are over 50, this will work for you too.
- Find the mutual fund (preferably an index fund) that captures the largest section of the stock market and has the lowest fee (look for words like “Total Stock Market Index” or “S&P 500 Index” with fees less than .2 if possible – the lower the better, but this depends on what your company offers).
- Set the percentage you contribute to your 401(k) to as high as possible, without going over the $17,500 limit per year (you may have to do some math on your own here, sorry)
- Does your employer match? Congrats, you get free money as well! At the very least you want to strive to maximize your employers match (if they match up to 5%, you want to AT LEAST be contributing 5% of your salary).
5. Invest in an IRA
- If you don’t have access to a 401(k) or you have reached the $17,500 max contribution per year, move on to an IRA*. For now, I recommend a Roth IRA as long as you qualify. Do you make less than $114k annually? Yes? Then you can invest in a Roth IRA. Between $114k and $129k, you can invest a reduced amount.
- How do you invest in an IRA? Simple, go to Vanguard.com and sign up for an account. Follow the instructions they have in the link I provided. Vanguard is not paying me to promote them, they are simply a great option that has worked well for many personal finance experts. You will need to have at least $1,000 saved up to buy into a fund (some funds require $3,000).
- If you don’t know what fund to go with, purchase the Total Stock Market Index Fund – search for this and you will find it. As you progress, you may want to look at other index funds (international, emerging markets, etc), but even if you never get past the total stock market index fund, you will be fine.
- After the initial investment, you can set recurring automatic contributions from your bank account. Do that. You can contribute as little as $25 per transaction, but if you can afford it, choose the option to set your contribution amount to maximize contributions. Vanguard will automatically invest the right amount weekly, monthly (or at whatever interval you set) to hit the maximum contribution limit of $5,500 for the year.
6. Invest in a Taxable Vanguard Account
- You STILL have more money? Man, you really have been reading this blog closely! Ok, in your Vanguard account, start a taxable account.
- This is where you might want to start getting creative and investing in other funds. Here are a few I recommend to stay diversified:
- Total Stock Market Index (This one you know already)
- Total International Stock Index
- Emerging Markets Stock Index
- Total Bond Market Index
- You will need $3,000 to start investing in each new fund. After that, you can contribute smaller amounts, regularly.
7. Keep Track of Your Net Worth
- Ok, this step is not important, but it is fun! Watching your money grow and tracking your progress can help motivate you to stay the course.
- Sign up for PersonalCapital.com. This one is an affiliate link, but I use this myself and love it. It also shows your net worth in the upper left corner as soon as you log in.
- Connect your accounts and you are set. Check back in whenever you want!
- Sites like Personal Capital and Mint.com are secure, but if you are distrustful of them, you can also track your finances in excel and keep track of your progress. This way requires more work, though.
That’s it. Those are the nuts and bolts. Throughout the process, don’t forget why you are doing this. This money will translate into fewer financial worries, early retirement if you want it, and most importantly, the freedom to do whatever you want in life – whatever makes you happy.
* Before I get scolded, the idea of investing up to the company’s match, then contributing to an IRA and only when you max that out, going back and contributing to the 401(k) is solid. In IRA’s you have more freedom of choice in terms of the funds you invest in. However, I want to keep it simple for people who don’t even invest in their 401(k) at ALL yet.
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