Managing finances is a tough thing to do for a lot of people. Growing up there’s not much you have to deal with money-wise, and when you finally join the “real world,” figuring out a good balance can be challenging, especially when you’re dealing with a lot of new things like living expenses, debt, saving for retirement (even though it’s decades away), paying for vacations, etc.
So where do you begin?
Set up separate bank accounts
If you get all of your money dumped into one account it can be easy to mismanage what you have. The most helpful thing I’ve ever done is create 4 separate bank accounts, 2 checking and 2 savings accounts, to keep my money organized and allocated to specific things. My breakdown is:
- Housing + Bills (checking): Money for monthly recurring items such as rent, cable, water, electric, and car payments.
- Long-term savings + Emergency (savings): Retirement money (separate from 401k), savings for big-ticket things like a house or car, and any unforseen events
- Vacation fund (savings): Money for travels
- Main account/”Fun” money (checking): All “leftover” money
Establish a budget + goals
This is the toughest part of managing finances. There’s a popular formula out there that says 50% of your income should go to essentials/living expenses, 20% for savings/investments/debt, and 30% for flexible spending/”fun money.” While it’s a good starting point, I don’t think it’s necessarily for everyone. Here’s how I set my budget and goals.
- The first thing I do is look at my living expenses (housing/bills). What can I be sure that I’ll need to spend every month? It’s usually a semi-fixed number, although water/electric bills tend to fluctuate slightly.
- Next, what are my savings goals? I have 2 savings accounts – one for long-term + emergencies and the other for vacation. I also technically have a third, my 401k retirement fund, which I make sure to set a little aside for.
- The rest of the money goes into my “fun” account for non-essentials, which also goes toward my credit card bill, since I use my credit card as if it were a debit (only spending what I know I can afford – the KEY to credit card usage)!
So what’s the magic budget formula? There’s no right one for everyone, but here’s what works for me:
- Calculate my monthly net income (multiply paycheck by 2 – the typical number of pay periods in a month)
- Subtract my fixed living expenses for the month
- Divide what’s left by 2 to allocate between “fun money” and savings accounts
- Half will go to the “fun money”/non-essentials account
- The other half will be further divided by 3 and equally allocated to my long-term/emergency savings, vacation fund, and 401k fund
Utilize direct deposit
Direct deposit is probably one of the greatest things since sliced bread. I love being able to put in how much I want going to each of my accounts with every paycheck, without having to deal with manually dispersing funds across accounts. Once you’ve established your budget, take the numbers you set for each account and divide by the number of paychecks you receive each month. That will be the amount to input for each account in your direct deposit.
The final step is an ongoing one, but extremely important. Tracking your finances. There are a ton of different ways you can do this, whether manually in a spreadsheet on your own, or with an app or tool. My personal favorite is Mint, since I can see a full view of all accounts and debts, no matter which bank/company they’re with. You can also get even more detailed in your budgeting, selecting how much you want to spend on things like dining out, entertainment, travel, etc., and notified if you’ve exceeded your set budget so you can re-evaluate if you need to allocate more or cut back.
Do you have a budget in place? What works best for you?