We’ve talked about why money management matters. But where do you begin?
Start where you are.
If you’re struggling to pay your monthly bills, it’s not the time to buy bitcoin. If you have credit card debt, don’t worry yet about investing in the stock market.
Very simply, the initial steps to tending to your money are:
- Spend less than you earn
- Save enough money for an emergency
- Manage your debt
- Save a consistent percentage of your income
- Start learning about investing
Wherever you are, start small and stay the course. Consistency matters more than intensity.
1. Spend less than your earn
This is the golden rule of personal finance. If you consistently spend more than you earn, financial stress and debt are inevitable. To change course:
- Track your spending: For at least one month, log every dollar you spend. Budgeting apps can make this easier, or you can use a simple notebook or spreadsheet.
- Design a budget: A budget isn’t about restricting yourself; it’s about directing your money where you want it to go. Prioritize essentials like housing, food, and transportation, and set limits for discretionary spending like dining out or entertainment.
- Review your consumption: If necessary, identity areas where you can reduce spending, like subscriptions you no longer use or impulse purchases.
- Consider meaning: Align your spending with your values. Look at every dollar you spend and ask yourself: “How is this dollar contributing to my well-being and enjoyment? How does it impact the planet? Other people?”
When you can consistently spend less than your earn, you make room for saving and investing, achieving long-term goals, and building security for the future.
2. Build an emergency fund
Life is unpredictable, and having a financial safety net — often called an emergency fund — can prevent small setbacks from becoming major crises.
- Start small: Aim to save between $500 and $1,000 to cover minor emergencies like a car repair or a medical bill.
- Grow over time: Gradually build your fund to cover 3–6 months of living expenses.
- Automate: Set up automatic transfers to a dedicated savings account to make saving effortless.
Even small contributions add up over time. One step at a time.
3. Manage your debt
Debt — especially consumer debt (e.g. credit card debt and auto loans) — is a significant obstacle to financial well-being. If you’re in debt, make a plan to pay it off.
- List your debts: Write down all your debts, including the balance, interest rate, and minimum payment for each. It can be difficult to confront the entire of what you do. But acceptance is a necessary first step. That money is spent. It is money you owe.
- Pay them off strategically: Choose one of these strategies to pay off your debts in an organized way.
- Debt snowball: Pay off the smallest debts first for quick wins, then move on to larger ones. This will cost you more in interest payments in the long-run, but may be emotionally beneficial because of the faster small wins.
- Debt avalanche: Focus on debts with the highest interest rates to save the most money over time.
While paying off debt, avoid accumulating new debt whenever possible.
4. Save a consistent percentage of your income
With an emergency fund saved and high-interest consumer debt paid off, it’s time to earmark a percentage of your income for savings. How much you save is up to you, but the more, the better.
- Take advantage of savings accounts. Online savings accounts pay considerably higher interest than most community banks.
- Utilize multiple accounts for different goals. Savings accounts are generally free to open and maintain. Keeping a discrete account for each of your goals can be helpful.
Cash in a savings account is appropriate when you plan to spend it within a few years’ time or you cannot risk it losing value in the short-run. But over time, even cash in a high-rate savings account will lose value due to inflation.
5. Become an investor
Without investments, you will forever be waiting on your next paycheck and watching inflation erode the value of your cash.
The top 1% of American adults own 50% of the stock market. The bottom 50% of American adults own only 1% of the stock market (The Motley Fool, 2024). This is a testament to the astonishing level of income inequality in the United States. But it should also be a wake-up call to anybody who feels investing isn’t for them. Investing creates wealth.
- Participate in your employer’s 401k, if they have one. Most large employers offer a 401k or a similar retirement benefit at work. Sign up with your benefits manager and have a small amount of money automatically deducted from your paycheck. There are tax benefits, and you’ll get used to the slightly smaller paycheck until you forget the money is even coming out.
- Open an IRA. An individual retirement arrangement (IRA) account allows you to invest money for retirement while saving money on taxes. Open one at any broker.
- Learn about stocks, bonds, and index funds. You don’t need to become an expert on investing, but you should learn the basics.
- Invest money for the long-term. With few exceptions, money you put in retirement accounts like a 401k or IRA can’t be withdrawn without penalty until you’re 59 ½. While it’s best to save any “leftover” money in these accounts due to the tax benefits, the accounts have annual contribution limits. It’s also possible you want to invest money you might want to use before you’re 59 ½.
Learning how to invest is one of the best financial decisions you can make. And if you want help, a financial advisor can explain your options and even invest your money for you.
Start small, stay consistent
Tending to your money isn’t about making drastic changes overnight. It’s about adopting small habits that add up over time.
Ideally, you reach a place of living in harmony with your money. Every time dollars come in, they goes to the right place: Savings accounts, retirement accounts, investment accounts, and a checking account for spending. And the more time you spend in this state, the more your money is growing — like a garden — to produce future bounties.