Before my current role, I would've never imagined having a "high income" (it's high for me). I knew I wanted to be smart with my money, but I didn't know-how.
The resources I used:
My situation will be different than yours, I'm 25, single and have no dependents, but I hope there is something here you can learn from. I am no financial expert, just someone who wants to share what has worked for her.
I think personal finance is like a ladder, each step builds from the previous one, if the previous one isn't strong, you'll fall.
My Personal finance ladder
Step 1: Mindset
I had a very unhealthy relationship with money, spending too much, saving very little, and not investing anything at all. A lot of it stemmed from lack of education on personal finance, and you know when you're young you think that spending money is the cool thing to do.
The most important piece of advice on personal finance mindset I learned is:
- With every bit of income, I have to pay myself. First, it has to go towards my financial system and then can be sent out or spent.
Step 2: Emergency savings fund
I saved 6 months of monthly expenses in a high yield savings account
Once I had this done, I felt a huge relief, in case I lost my sources of income, I would have some buffer room.
Step 3: Tackling Debt
I never went to college, so I don't have any loans, but I did rack up about $7000 in credit card debt as an insecure young person trying to impress people. I used the debt snowball technique to pay it off. Here's a great resource on that.
I now avoid credit cards except for paying bills!
Step 4: Funding my Retirement
I feel like a real adult because I have a 401k and a Roth IRA
If your employer offers a match, make sure to take advantage of the max percentage they will provide.
I divide the total amount of money I can put into my IRA for the current year and make a monthly transfer, for example this year 2020 the max is $6000 for me
so I move $500 into my Roth IRA every month, some people choose to do it in one lump sum. I like to do it over the year. That way, I take advantage of market diversity over time and not just once.
Step 5: Saving for big purchases
I am currently saving for the down payment on my first rental property in my high yield savings account. My rule of thumb for savings is, if I expect to need the money within 5 years, it will be put into my savings account. Otherwise, I invest it.
Step 6: Active investing
I don't want to speak too much on this because of the risk involved in investing. However, I will say I have a dividend portfolio and a growth portfolio.
This is the only step I consider optional and don't do monthly. I like learning about stocks and keeping up with the news and research, but it's not for everyone.
Step 7: Life isn't all about money
I didn't work my butt off to only save and invest, I do spend! But only on things I care about like food, traveling, video games (Can't wait for Cyberpunk 2077!), and not on what society makes me believe I should spend on.
I try to practice essentialism. If it's an absolute YES, I'll get it.
What my financial pipeline looks like
What a month looks like, all money movements are automated except credit card payment and money into my active investing accounts.
- 1st of the month: Pay rent in cash.
- 16th of the month: Move $ in Roth IRA. (after 1st paycheck)
- 20th of the month: $?? I manually move money into my dividend and growth portfolios.
- 30th of the month: Move $ into savings. (after 2nd paycheck)
- All my bills except my rent are paid with my credit card. Which I pay off in full manually at the end of the month. I like to manually do this in case there are any unexpected charges, I'm talking to you cell phone carrier!
- I do keep some money in my checking account for spending, it's never a crazy amount of money though just so I'm not tempted with it.
That's it! Having control and knowing where my money goes has made my life a lot better. I continue to learn about personal finance, and when I make changes to my life, I'll update my pipeline.
Top comments (6)
Great plan Gwyneth! I am currently working for through the Dave Ramsey plan. We are single income with two kids, so it's a bit slower going but we will get there. So many great things have already came but just tackling a portion of our debt. Can't wait to be debt free, and eventually complete financial independence.
Thanks for reading! Yes Dave Ramsey is a great resource! Keep at it my friend, you'll get there.
Thanks for the encouragement!
Love it, very well done! It amazes me how most people don't care / know much about money. With one of my old employers, due to business re-shuffling we ended up with a lower fee employer pension (I found out after calling the pension company). I notified everyone around me (so they can transfer the old pension to the new one if they want) and most people replied with "oh I don't know much about that" or "I don't really get involved" and whatnot...
I do almost exactly the same as you with a few minor differences:
Keep it up!
Passive index funds are a great way to invest and not spend time on research! Glad to hear about your system, thanks for the insight.
Loved this, Gwyneth! I am such a fan of personal finance - the more you learn, the more there is to learn - and it's all fascinating, especially when we can apply it to our own lives and financial situations!
My next goals are to pay off the rest of my student loans and max out my Roth IRA :)
Keep up the great work!!!