Get Your Finances Organized

Stop stressing and clean up your money.

Are your finances organized? Do you have a clear overview of your money situation?

Power to you, if you do. If not, grab a broom and let’s get cleaning.

You know why it’s important to be in control of your money. You should also have a solid perspective on your money situation after we walked through your self-assessment. Now, it’s time to put the infrastructure in place.

Let’s dust off the ole drawing board and outline your financial blueprint. It’s gonna be clean, it’s gonna be organized, it’s gonna be money.

Once you’ve finished reading this, you’ll know how to allocate your funds so that they have a purpose. You’ll have a better understanding of the types of accounts you need and the best approach for funding them.

Your money won’t just be a jobless freeloader sitting in your living room (i.e. a checking account) binging Breaking Bad and The Office.

Instead, we’re going to put your money to work.

Put the infrastructure in place

Let’s consider something first: you don’t need money — nor should money be an end goal in life.

The dollar is fiat currency — it has no intrinsic value whatsoever. You can’t use it for anything besides trade, except maybe crappy firewood. But we put our faith in it. We put faith in the idea that it will continue to sustain and serve as a method of exchange and holder of value.

What you need is a roof over your head, food, clothing, etc. Along the same lines, you probably also have life goals like buying a house, getting married, retiring early, etc.

But, of course, none of this is free. Housing costs money, food costs money, weddings cost money.

So, to better phrase it, your needs and goals require money — because you can exchange money for all of the above.

Money is a vehicle that helps you get from A to B. One way to think about this is in terms of needs/goals, whereas point A is unsatisfied needs/goals and point B is satisfied needs/goals.

With this concept in mind, we’re going to sort your money across four categories.

Immediate needs

Your immediate needs represent your recurring monthly expenses: housing, food, clothing, entertainment, etc. Since these needs are immediate and frequent, a checking account is the best product — easily accessible and allows for a high volume of transactions.

Think of it as an operating account — money flows in from your job(s), pays expenses (rent, credit card bills, etc.), and (ideally) the excess then becomes savings.

BUT — can you guess what BIG mistake people often make when it comes to their checking account? Having waaaay too much sitting in it. Like months and months' worth of expenses. At most, you want to have two to three months' worth of expenses in your checking account.

Why would you want or need more in there? Checking accounts yield pennies in interest. For most major banks, the average annual percentage yield (APY) on a checking account is 0.01%.

Zero-point-zero-one.

Even if you had $100k just chilling in a checking account — that would equate to $10 of interest per year.

Meanwhile, inflation is outpacing your worth. So, in a way, you’re losing value by doing nothing.

Unexpected needs

What’s the best monetary solution for unexpected needs? An emergency fund.

It’s a money reserve that acts as a security blanket, protecting you from the unexpected.

If you’re living without one, maybe you’ve never considered it — or maybe you don’t think it’s even necessary.

But it’s a burden that hangs by a loose thread above you, waiting to collapse onto your shoulders. It’s a stress that’s looming in the shadows.

Yes, that should be scary.

You need to have an emergency fund. It’s there for when you get in a car accident, contract a disease that leads to costly medical bills, lose your job because Corporate America just does that sometimes, or some other expensive life emergency.

Keyword: emergency. This isn’t for a trip to Italy or a down payment on a car.

Your emergency fund should be approximately six months' worth of expenses, and it should reside in a high-yield savings account.

If you already have your immediate needs covered in your checking account, go ahead and transfer the surplus to your emergency fund.

Life is unpredictable, but you can be prepared to roll with any financial punches.

Short/mid-term goals

Now, on to goals.

Short to mid-term goals are pretty much any significant event or purchase that you expect to take place in the next 15 years or so. We’ve mentioned buying a house, paying for a wedding. Other examples include buying a car, traveling to Europe, or funding education — like graduate school or even your children’s education.

Your goals should be married to your investments — which should be housed in brokerage accounts.

If you haven’t thought about your life goals or you’re just not sure at this point in time, that doesn’t mean you shouldn’t start prepping. You should still open up a brokerage account and start depositing money on a recurring basis.

Your future self will thank you.

Long-term goals

These goals are anything beyond 15 years. The biggest one being retirement.

It’s weird thinking about retirement. It can be hard to wrap your head around setting money aside for something that could be several decades away.

But. B-U-T. BUT. It would be a huuuge mistake to ignore or avoid saving for retirement. If this hasn’t even crossed your mind, you need to get your head in the game A$AP Rocky. Because the sooner you start taking advantage of compound interest — the better.

Let’s say you’re 25 years of age, and you’re planning to retire at 65 because, hey, that’s a clean number. We’re also going to assume you set $2,000 aside every year just for retirement. How much do you estimate you’ll have 40 years down the road when you reach that magic retirement number?

No need for that calculator, I’m going to tell you.

Based on a 10% growth rate — which is the historical average annual return of the S&P 500 (an index of 500 of the largest U.S. companies) — you could be sitting on over $1 million when you retire.

Just from investing $2,000 a year.

Nice.

The most common retirement accounts are individual retirement accounts (IRAs) and 401k plans. Although these accounts come with caps on how much you can put in each year ($6,000 for IRAs in 2019; $19,000 for 401ks in 2019), they also offer solid tax advantages.

Your annual contributions into these accounts act as deductions to your earnings. In other words, you pay less in taxes.

Plus, if you have a 401k and your employer has a matching system (i.e. you contribute 5% of your paycheck to your 401k and your company matches it with another 5%), you can really boost your contributions.

Putting it all together

For the most part, the above categories are listed in order of priority.

In other words, you can’t start building up your emergency fund without an operating account. Otherwise, you’d be prepared for unexpected expenses — but couldn’t cover your rent. Similarly, you shouldn’t start investing until you have an emergency fund set aside.

Emergency funds are meant to be immediately accessible and liquid. You wouldn’t want to be forced to sell your investments to cover medical bills.

I say “for the most part” because I’m not suggesting you should ignore saving for retirement because you haven’t saved enough for other life goals. Once you’ve saved enough to meet your needs, you can split your savings across your goals.

So, when you take the sum of the parts, what does this look like?

You need a…

Checking account for monthly expenses like rent, groceries, etc. This is your “operating account.” Keep roughly two months of expenses here. (Oooh check out this link on credit cards)

Savings account for unexpected expenses like car accidents, fines, or whatever trouble you get yourself into. This is your “emergency fund.” Keep roughly six months of expenses in here.

Brokerage account(s) for your short/mid-term life goals like buying a house or car. These accounts will house your investments — most likely an assortment of exchange-traded funds (ETFs) or mutual funds.

Retirement account(s) for your long-term goals (i.e. retirement and everything thereafter). In all likelihood, you’re looking at an IRA and a 401k. Remember our example from earlier? If you can manage to consistently contribute $2,000 a year to your IRA, you’ll be sitting pretty with over $1 million once you retire. That being said, the sky’s the limit — max out your contributions if you can. For your 401k, you should at least be contributing up to your employer’s matching limit.

Next Steps

We’ve covered the why, how, and what to do in terms of getting your personal finances in order. If you haven’t already, it’s time to create a budget (it’ll take 15-minutes max) and read up on credit cards.

Do you want to learn more about personal finance? But without the complicated jargon and dry explanations? Sign up here for Bits — our personal finance newsletter.