Fast and Easy Tips to Save, Invest and Spend Your Money Wisely
It’s payday — cha-ching! You have lots of options of what to do with that fresh wad of cash in your pocket. With your latest paycheck, you could choose to pay down debt, add to your savings, pay off your mortgage, invest in the market—oh my! With so many options, it's easy to get caught in the weeds.
The Reality of Financial Planning Paralysis
Financial planning paralysis is a real thing. (See: How to Overcome Inheritance Paralysis.) This is when we get so bogged down with the details—in this case, where we could put each dollar earned—that we often freeze. Sometimes, we do nothing at all. Other times, we have a knee-jerk reaction and spend the money in a place without truly considering the benefits and consequences of doing so. Either way, in these moments of financial planning paralysis, we're not taking the appropriate measures to save, invest or spend our money wisely.
We get it! You may feel as if a million different voices are telling you a million different things to do with your money. Maybe your parents are nagging you to pay off your student debt. Maybe your roommate is begging for an apartment upgrade. Maybe CNBC is telling you to throw more money at the market. And, that's not even including the many ideas you have about saving, spending and investing your money!
But don’t be frightened, we’re here to help!
Get a Net Worth Snapshot
First thing's first. Before you get started divvying up your cash, take a step back and figure out how much money you have. How much money do you have coming in versus going out? How much money do you have that's "liquid" versus invested? This exercise is called your Net Worth Snapshot. (Read more: Create Your Own Net Worth Snapshot.)
The 50 / 30 / 20 Budget Rule of Thumb
Have you ever heard about the "Budget Rule of Thumb"? It's also commonly known as the 50 / 30 / 20 rule. This budget guideline typically refers to spending 50 percent of your income on NEEDS (think: mortgage, car payment, utility bills), 30 percent of your income on WANTS (think: Netflix, eating out, clothes) and 20 percent of your income on SAVINGS/DEBTS (think: 401(k), extra student loan payments, extra mortgage payments).
Because we believe so thoroughly in saving, we actually flip the quintessential budget rule. We encourage you to spend 50 percent of your income on NEEDS, 30 percent of your income on SAVINGS/DEBT, and 20 percent of your income on WANTS.
This budgeting framework can help you to figure out how to stay on a budget. (Read more in How to Create a Budget.) But, what about extra cash? Holiday gifts of cash? Where does that money go?!
So, WHERE Does That Next Dollar Go?!
Think of it like this: with each dollar you bring in, give it a job. That’s the concept behind our friends at YNAB (You Need a Budget), and we think they’re smart!
The choice will become much clearer once you find which places will grow your dough once you plant your initial earnings in them.
But take caution! At the same time that the growth can increase your future bottom line with returns like investments (👍), it can also decrease your future bottom line with interest charges like debt (👎). Finding a potential growth rate for each of these will help you compare the rates with ease.
Pay Off Debt
To prevent your future bottom line from decreasing, you should first pay off any debt. You can take two different approaches to this debt. You can take the Avalanche Method, where you pay off debt with higher interest rates, such as credit card debt, to pay less interest in the long run. Or, you can choose the Snow Ball Method, where you pay off debt based on amount owed; while you won't save as much on interest as the Avalanche Method, you'll get a little pat on the back and some encouragement of knocking off one debt at a time. The choice is up to you. Either way, you're paying off debt!
Mortgage vs. Investing
But what about aggressively paying down a 4 percent mortgage versus investing in your 401(k)? A bit less straightforward, but still measurable! According to Vanguard, a balanced portfolio generated an average 7-8 percent between 1926 and 2016. These returns are a bit higher than what we expect them to be in the future, but they give you a good measure to think about.
This means, you can avoid paying an extra 4 percent per year to your bank from mortgage interest, or you can potentially earn 7 percent per year in the markets. (We say potentially because market returns are not guaranteed and can change at any time. This means that you can be up one year, down the next; over time, you’ll level out.) The choice is up to you.
Investing in Your Retirement
Don't forget about your 401(k) and its accompanying employer match, if you have one. The match is FREE money! Your employer puts this money into your 401(k) for your retirement benefit. As long as you invest enough in your 401(k) to receive the match, this additional money is considered part of your overall salary package.
If you are not investing enough in your 401(k), then you're leaving this (free!) money on the table. So take it! And not to mention, a 401(k) grows tax deferred, yet another benefit (yay!). 🙌💰
The Bottom Line
Again, the choice is up to you. We recommend sitting down with your partner, roommate, spouse to get on the same page. (Read more: Talk Finances with Your Partner.) Take a hot second and do the math and see what's right for you, your family, and your financial situation. Remember: financial planning isn't a one size fits all approach!
Look at each place you’re putting your cash based on its current rate and potential growth.
Keep in mind any perks, like employer match, tax deductions or an emotional reward like paying off debt.
Make a plan! This can be the most important step you take, and we’ll be there for you along the way.
Great news! We can help you manage your budget—and the rest of your financial plan. Download Pocketnest and get your finances in order—in just 3 minutes a week! No jargony finance-speak, pricey fees or in-person meetings required.