How to manage your money, according to the experts

Tanza Loudenback

Jun 23, 2019, 23:00 IST

How to manage your money, according to the experts

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The first step to successfully managing your money is looking at your cash flow.

When it comes to learning how to manage your money, there are some basic guidelines anyone who wants to build wealth should follow.
You can avoid debt by bringing in more money than you spend each month, and start to build wealth by setting up automatic transfers into a high-yield savings account.
Prioritize saving for retirement by contributing to your 401(k) or other retirement plan immediately, especially if there's a company match on the table.
If you don't have a retirement account at work, or you have money left over after expenses, consider investing in an IRA.
Looking for help with your money? SmartAsset's free tool can help you find a licensed professional to help with your financial goals »

Personal finance is just that - personal. Very few people's expenses, spending habits, and money proclivities are alike.

The good news is that regardless of your financial situation, the foundation for building wealth never changes: Spend less than you earn and save and invest what is left over.

Below are some guidelines you can use to get started. Remember that these are general steps to take, and what works for one person may not work for another.

How to manage your money

1. Examine your cash flow

The first step to being good with money is knowing how much you have. You would be surprised how many people have no idea what's coming in and going out of their accounts each month.

You want to aim for positive cash flow - that is, you're bringing in more money than you're spending. Make a list of your fixed monthly expenses, such as housing costs (rent, mortgage, utilities, etc.), any out-of-pocket insurance premiums, and any debt payments.

Signing up for an account with Personal Capital or Mint can make it easy to see how much you typically spend in any given week or month on more discretionary items, like food and entertainment.

2. Contribute part of your pretax salary to your 401(k)

If you have access to a 401(k) or other defined contribution retirement plan at work, enroll and set a contribution rate immediately. If your company offers a match on your contributions, set the deferral rate high enough to score the free money. Whether you're contributing 2% of your salary or 10%, something is better than nothing.

Since the money is taken out of your paycheck pretax, thereby reducing your taxable income, you will quickly learn to live without it.

3. Send the rest to your checking account

After your 401(k) contribution, health insurance premium, and any other benefit you pay for pretax is taken out of your paycheck, the remainder should go directly into your checking account.

It's like an email inbox for your money: Everything goes there before it's filtered into the right place, writes financial expert and bestselling author Ramit Sethi.

4. Set up bill pay for recurring monthly expenses

From there, set up automatic transfers from your checking account to pay any fixed monthly costs, Sethi says. This can include rent, utilities, renters insurance, car insurance, credit card payments, student loan payments, a gym membership - basically, anything that has a due date.

If you can pay for any of these bills with a rewards credit card without incurring an additional fee, that could be a better option than pulling from your checking account. In that case, set it up so the companies charge your credit card on the bill's due date, and your credit card pulls from your checking account when that bill is due. Paying the full amount due on your credit card, on time, is one of the biggest factors influencing your credit score.

5. Prioritize paying off high-interest debt

Most financial experts recommend paying off high-interest debt before saving aggressively or investing. That's because a credit-card or auto loan with an interest rate above 7% will usually cost you more in interest payments than investing in the stock market will potentially earn, even on its best days.

If you have consumer debt, pay at least the minimum each month, but ideally as much as you can. Categorize this payment as an expense and automatically set up the transfer from your checking account once a month.

6. Automate your savings into a separate account

Next, set up automatic transfers from your checking account (or even directly from your paycheck if you prefer) to a high-yield savings account. This is "goal-specific money" - think: your emergency fund, or money for a vacation, wedding, or down payment on a house.

Think of savings, at least for your highest-priority goals, as an expense, even if it's just $10 a month while you're working on paying off high-interest debt.

"By breaking them up into different accounts or buckets, you get to keep better track than if you lump all the money together," Luis Rosa, a certified financial planner, previously told Business Insider.

These accounts can be held at the same bank - Ally makes it easy to open up new accounts and label them with different savings goals - or even separate banks, to keep temptation to spend to a minimum.

7. Spend, or save, what's left in your checking account

By this point, your expenses, goal-specific savings, and retirement savings are all automated.

Since we didn't consider things like groceries or incidentals as fixed monthly expenses, use the remaining funds in your checking account to cover those costs. If you find you're coming up short, pull back on your savings contribution or reduce your housing expenses.

8. Invest in an IRA

If you find you have more than enough money left over in your checking account to cover your daily spending, consider opening an IRA to put away more for retirement.

An IRA is a type of a tax-advantaged investment account that you can open at almost any financial institution. Money is contributed after-tax - up to the federal limit of $6,000 in 2019 - and put into a holding account, where you can buy investments of your choice, whether stocks, bonds, or mutual funds.

The two types of IRAs differ only in tax treatment. Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not. Each year you put money into an IRA, you can deduct that amount on your tax return, lowering your overall tax bill. However, when you withdraw the funds after age 59 and a half, they'll be taxed as ordinary income.

9. Meet with a financial adviser

While many people are perfectly capable of managing their money themselves, you may also consider hiring a financial adviser if you're too overwhelmed or confused by your money to make big financial decisions like how to balance multiple financial goals, manage a business, get out of crushing debt, or establish a retirement savings plan. If the alternative to meeting with a financial adviser is decision paralysis, you're better off seeking outside advice.

A good certified financial planner can help organize your overall financial picture, including setting up a retirement saving and investing strategy; planning for big expenses, like buying a house or having kids; everyday budgeting and spending; plus tax and estate planning.

SmartAsset's free tool can help you find a licensed financial professional near you »

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