How to save your hard-earned money? 🤔

You get paid, and before you know it, the money slips through your fingers and you don’t even know where it all went. Sound familiar? Look, the average person gets bombarded with up to 10,000 marketing messages every day. Add to that your friends calling you every weekend to go out, the pressure to keep up with everyone on Instagram, one-click shopping on Amazon Prime, it’s no wonder it’s hard to save money. If you don’t have a plan for your money, your money will be gone.

 

You have to decide in advance where your money will go before you get paid. This blog is called Budgeting for Beginners, and here’s what I’m going to talk about.

• The eight places your money needs to go every time you get paid
• How to automate your finances so that it all happens in the background of your life, even if you don’t have the discipline or the willpower.
• I’ll talk about some specific suggestions on what apps to use and where to open your accounts.

When you have a budget, you get to decide what happens to your money and you get to be in control of your life. So if that sounds good to you, then continue reading this blog and let’s dive in.

The first place your money needs to go

The first place your money needs to go when you get paid is straight to your 401(k). And if you live outside the US, most countries have their own version of a 401(k) plan as well. Typically, you can route a percentage of your paycheck to your 401(k) and your contributions will get deducted from your paycheck before the direct deposit even hits your account.

Also as part of your employee benefits package, many employers offer to match your 401(k) contributions up to a certain amount. Basically, for every dollar you put into your 401(k), your company will put in a dollar as well. Sometimes it’s dollar for dollar, sometimes it’s less, sometimes it’s more.

At my first job, the employer match was three for one, which was pretty amazing. So 401(k) employer match is free money, so there’s absolutely no reason not to max it out. Even if you don’t listen to anything I say in this article, at least contribute to your 401(k) up to the full employer match. I don’t care if you’re the best at hunting down the best Groupon deals on the internet, because if you’re saying no to free money, none of that really matters.

So give your HR department a call and make sure you’re maxing out your 401(k) employer match. Now, what is your self- employed? So for all you freelancers and entrepreneurs out there, you probably don’t have a 401(k), so what you can do instead is open either a solo 401(k) or a SEP IRA. The solo 401(k) is basically a 401(k) plan that creates for your own business, and it looks just like a 401(k) sponsored by an employer, except that obviously there’s no free employer match.

I have my solo 401(k) at E-Trade, which as far as I know, is the best hassle-free place to open one. SEP IRAs have the same tax treatment and withdrawal restrictions as 401(k)s and most brokerages offer them as well. So far you’ve contributed a fixed percentage of your paycheck to a 401(k) up to the full employer match. Then the next step is to have the rest of your paycheck deposited into a checking account.

Checking Accounts

This checking account is your financial hub, any and all bill payments and spending will happen out of there. The reason why I like to do it this way is that it’s a lot easier to manage your finances when it’s all centralized in one place and there’s just one hub where all the activities happening out of. So this is very important.

I recommend a checking account that doesn’t charge any monthly fees. Basically that means not Wells Fargo, not Bank of America, and pretty much not any brand name, brick and mortar bank. These days everything is done electronically and most people just get paid via direct deposit anyway. So you really don’t need a bank with brick and mortar locations, because they often just embed the cost of maintaining that in account fees and a bunch of other fees that you really don’t need to be paying.

There’s a lot of great online-only checking accounts. The one that I use is the Fidelity Cash Management Account, which offers practically everything you could possibly want in a checking account. So you get all ATM fees reimbursed, it pays 0.82% interest, which is a hell of a lot more than most checking accounts. There is no required minimum balance.

They charge no overdraft fees and of course, it’s FDIC insured up to $1.25 million, and obviously there are no monthly maintenance fees whatsoever. If you’ve been following my channel, you know that I freaking love Fidelity and I do all my banking and investing there, and it makes my financial life really streamlined and easy to manage.

Some other good online-only checking accounts to look into our Betterment every day, Varo, Ally and Capital 360. These checking accounts also offer savings accounts that pay really high interest like 1.8%, which nowadays is a lot, and these savings accounts are perfect for your emergency fund, which is exactly what I’m going to talk about next.

Emergency Fund

Next up is the emergency fund. What you’re going to do next is to set up an automatic recurring monthly transfer to a separate savings account. This savings account will serve as your emergency fund. So I use Betterment for my emergency fund because they have a savings account called the Cash Reserves and right now it pays 1.8% interest.

Other good high yield savings accounts are Varo, Ally and more recently I learned about Capital 360. I talk more about high yield savings account options in this article, so check it out to learn more. But the bottom line is you want to get as much interest for your money as possible, because why not? It’s free money.

Building up an emergency fund is always step “numero uno” in personal finance, because it helps you stay out of debt and next time you get hit with an unexpected expense like your car breaks down or your pet gets sick, instead of stressing about how you’re going to pay for it, you’ll just be able to dip into your emergency fund instead of putting it on a credit card.

So having an emergency fund is going to make you feel like such a responsible adult and it’s really awesome. Ideally, you have about three to six months set aside in your emergency fund. That does take a while to build up to, so $1,000 makes a great starter emergency fund. Having a $1,000 starter emergency fund already puts you ahead of the 61% of Americans who don’t have even $1,000 saved to cover an emergency.

$1,000 is very doable and it’s much better than nothing, so just start with 1,000. I want you to set up an automatic monthly transfer from your checking account to the savings account and just make it $100 a month. That will get you to 1,000 in 10 months. And once you have it, you just going to get this awesome boost of confidence and that’s going to help you crush some of the other budgeting goals that I’ll be talking about next.

So far you’ve gotten paid into your checking account hub after a portion got taken out for your 401(k), then you made an automatic monthly transfer to your emergency fund until you build up to at least $1,000. And the emergency fund is in a high yield savings account, and now you’re going to put some money into a Roth IRA.

A Roth IRA is a type of tax-advantaged investment account that’ll help you save and invest for retirement, tax-free. The reason why you should absolutely get a Roth is that it’s the only investment account that allows you to just avoid paying taxes on all your investment gains. And this is huge because typically anytime you buy a stock and you make money on it, you have to pay capital gain tax, and anytime you get a dividend payment, you have to pay income tax.

So when you invest within a Roth IRA, there’s a lot of tax savings that come with that. I talk more about Roth IRAs and how they compare to other retirement accounts in this video right here so check it out to learn more. Some good places to open a Roth IRA are Fidelity or Vanguard if you’re a more DIY investor, but if you kind of wants everything just done for you, then you can also open a Roth IRA at a Robo advisor like Betterment, Acorns, and Ellevest.

Personally, I have my Roth IRA at Fidelity and highly recommend it. However, I’ve also experimented with the three Robo advisors that I just mentioned and I think they’re all also great. It’s just a matter of do you want a Robo advisor to choose your investments for you or do you want to choose them yourself?

So Fidelity and Vanguard are for the people who want to choose their own investments, and the others are for people who want someone else, in this case, a robot, to just pick your investments. I have lots of videos on my YouTube channel that review each and every one of these platforms, so check out my channel page to watch them.

And while you’re at it, you should subscribe too, just a thought. Consider contributing $500 a month to your Roth IRA. You can also set this up as an automatic monthly transfer so you don’t have to think about it. And the reason why I say $500 a month, is because that gets you to $6,000 a year, which is the annual Roth IRA contribution limit.

So I know $500 is a lot to commit to every month. So if you can’t do that, just do what you can, even if it’s just $50. I can’t think of anything worse than ending up old and broke, and the Roth IRA is the single best way to enjoy a tax-free retirement. So start putting money away budgeting into a Roth IRA, and future you will thank you.

Paying Yourself First

Now it’s time to also pay your living expenses. So notice how I didn’t start off the budget by paying your bills first. Everything up till now was to start putting money away into your own accounts, into your own pockets. This is called paying yourself first. So instead of paying your landlord, your student loan servicer, Amazon Prime, Whole Foods and everyone else except yourself, you’re allocating a portion of your paycheck to your own savings accounts and then working with what’s left.

I know that not everyone has the disposable income to be able to do this, because if you’re living from paycheck to paycheck just to survive, then it may not be realistic to pay yourself first. But many of us have the income and the ability to do this, so you really want to find a way to increase your income or do whatever you need to be able to pay yourself first.

And this is exactly how successful people manage their time as well. They wake up early and they work on their top priorities first, whether it’s meditating, exercising or working on a big project, and that way even if the rest of the day gets hijacked, they’ve taken care of what’s most important to their goals first.

So that’s exactly how it is with money as well. You want to take care of your financial goals first and then work with what’s left. So after you’ve funded your 401(k) and your emergency fund and your Roth IRA, you’re going to use what’s left in your checking account to pay for your rent, utilities, insurance, and groceries.

What’s important is to distinguish between needs versus wants. So groceries like rice and vegetables are a need, but a $7 bag of kale chips is a want. A monthly subway card to get to work is a need, but Uber rides are a want. The next thing to budget for is non-retirement savings goals such as a down payment on a house, or a trip that’s coming up, or an upcoming wedding that you want to go to, or if you’re saving up for your own wedding and things like that.

Again for this, you can use high yield savings accounts just like the ones I mentioned earlier for your emergency fund. For example, if you know you have a trip coming up in five months and it’s going to cost you $1,000, then start doing an automatic monthly transfer of $200 a month into that savings account so that when it’s time to go on your trip, you’ll have the cash there.

If you’re used to just putting things on a credit card and then paying it off later, then this step is really important, because you really shouldn’t be financing things like that if you want to get ahead, because otherwise, you’ll always be playing catch up. And finally, this is my favorite part. Once you fund your retirement goals and your non-retirement short term goals, now it’s time for guilt-free spending.

So as long as you’ve taken care of all your financial priorities first and you’ve paid all your bills, then you can spend whatever’s left in your checking account, guilt-free. You can buy designer shoes, you can go to nice dinners and you can buy all the avocado toast you want without getting that heavy feeling in the pit of your stomach.

You know that feeling of guilt knowing that you are swiping your card when you really shouldn’t be and things like that because that sucks. Most people end up buying whatever they want anyway, but the difference is they’re putting it on a credit card or just doing something that would compromise their financial goals. But if you put all your money where it needs to go first because you follow this budget, then you can relax and feel good about spending your money.

That’s why learning how to budget this way by paying myself first was a total game-changer. Also, what’s good about the system is that you don’t have to keep this strict budget with a million different line items, because I really don’t think that’s realistic. Instead, I have all my pay myself first items automated every month and then I just let myself freely spend whatever’s left in my checking account, and I can do that because I know I’ve taken care of all my other financial goals first.

And what ends up happening is that I don’t even spend everything usually, so I can just let that extra balance roll over to the next month and keep accumulating so that eventually I have the cash to splurge on something nice for myself. Again, guilt-free. All right, this bonus last step is optional, but if you have any money left after all the previous seven steps, you could either add more to your 401(k) or open a taxable brokerage account where you can make more investments.

If you’re able to get to this bonus step, then you obviously have a lot of disposable income and you’re doing really great with your money. So the key is to not let lifestyle creep eat up all that extra money. A lot of people, when they start earning more and more money, they just end up spending more and more because they upgrade their apartment, their house, everything.

So the net result is that they don’t build wealth any faster than when they were making less. You want to use that extra money to build wealth, not to get more stuff. I really wish I’d understood this when I got my first bonus check back when I started my first job on Wall Street. Back then I just didn’t have the financial know-how that I do now. So as soon as I got my bonus, instead of planning for ways to invest it and put that money to work, I basically just focused on how to spend it.

A Chanel bag, a trip to Miami, a nice watch, and pretty soon my bonus was all gone and I didn’t even really know where it went. It makes me kind of cringe just thinking how bad I was with money, because back then I just didn’t know any better. Now I know better. No one ever sat me down to explain how that $20,000 bonus could be worth way more in the future if I just saved an invested it.

My mom did tell me over the phone once to save my money, but it didn’t really sink in because I never listen to my parents and I really wished someone had just hit me over the head with this advice and forced me to start doing it earlier.

The Final Recap.

Whenever you get paid, you want to route some of that money to your 401(k) to get the full employer match, then get the rest deposited to a checking account. And then from here, you have automatic monthly transfers going to your emergency fund, a Roth IRA and your other non-retirement savings goals, and you can also pay all your expenses out of there as well. Then whatever’s left, you just spend it guilt-free and/or you can invest more into your 401(k) or a brokerage account.

The bottom line, keeping a budget and telling your money where to go is the secret to getting good with your money. And when you’re good with your money, you’ll have way more options in life and every other area of your life will most likely benefit, your relationships, your self-confidence, everything. So that’s it for this article on Budgeting for Beginners.

Always remember to go after your dreams unapologetically, and to live life on your terms – cheers!