A Beginner's Guide to Money Management （上）

3/01/17 4:00am

 You know it’s important to get your money under control if you ever want to get outof debt, go on awesome vacations, or retire someday. The problem is, a lot ofpeople don’t know where to start or feel like they don’t have time. If you have just a day, we have you covered.

A huge part of personal finance is behavioral, so we won’t pretend this guide will give you complete mastery over your finances in a day. Anyone who’s worked hard to reach financial security will tell you: it takes time to learn better habits. However, you can make great strides in a day. If you’re new to personal finance, here’s what you can do to kick things off.

Build a Realistic Budget and Start Saving for an Emergency

Most of us suck at budgeting because we think about it the wrong way. We think of it as a strict set of rules meant to keep us from spending money on stuff we enjoy. Forget that. Let’s kick things off with the crucial question that many financial planners ask their clients:Why?

Why do you want to get your finances in order? It could be travel, supporting a family, saving to switch careers—whatever. Your answer will serve as the backbone of your budget.Instead of a strict set of rules, your budget becomes a spending plan that supports what actually matters to you, even if it’s just saving up for a new laptop. It’s a lot easier to stick to that plan when it works for you, instead of the other way around.

From there, it’s time to pick a budgetingmethod. Here are a few examples:

The 50/20/30 Method: With this classic method, 50 percent of your income goes toward fixed expenses, like your rent or your cellphone bill. 30 percent goes toward flexible spending, like groceries or restaurants, and 20 percent goes toward financial goals, like paying offyour student loan.

The Subtraction Method: This is dead simple. Add up all of your monthly bills. From there, take your monthly income and subtract from the total of your bills and then subtract more for savings. Whatever is left is how much you can spend in a given month.

Ramit Sethi’s Spending Plan: Personal finance writer Ramit Sethi suggests a variation of the 50/20/30 method with a little more detail. 50-60 percent of your take-home pay should go toward fixed costs, 10% should go toward retirement savings, 5-10 percent should go toward saving for other goals, and 20-35 percent should be guilt-free spending money.

Once you pick your method, budgeting comes down to a few basic steps:

 Make a list of all your expenses. (don’t forget the irregular ones!)

Determine your monthly take-home pay.

Divvy up your expenses into categories using the method you picked.

Come up with a system for tracking. We’refans of budgeting tools Mint and You Need a Budget. They make it easy to gets tarted, but you’ll need your bank account’s login credentials. You can always use Excel, too.

Be realistic when you decide how much to spend in each category. If you spend $600 a month on restaurants, for example,don’t expect to go from $600 to $50 in a single month. Chances are, you’ll go back to your old restaurant habits, blow your budget, and give up on it completely. Buffer some room for reality. If you need to cut back on yourspending, by all means, cut back, but you’ll probably have more success if you take it a little at a time. As money site Femme Frugality puts it, be liberal with your budgeting and conservative with your spending. In other words, it’sbetter to err on the side of caution and overestimate your spending.

This is also important: you need anemergency fund. This is a savings account you can pull from when your carbreaks down, your dog needs surgery, or whatever emergency comes up. Withou tone, too many people resort to desperate solutions when they hit a rough spot.

When You Have an Emergency Fund, You Have Power

Most money experts say you should have between 3-6 months’ worth of savings in an emergency fund, but that probably seems damn near impossible when you’re just starting out. So start small: save $100, then a few hundred, then a thousand, and then worry about what your emergency fund should look like. For now, it should just be a small pot to tide you over in case of the worst. If you don’t already have one, budget for this savings goal.

Save Money on Every Bill Possible

As a money nerd, a bill audit is one of myfavorite things to do. I go through each bill and research ways to save. We’ve done the research for you in our bill-by-bill guide to saving on your monthly expenses. It’s worth going through to look for savings on everything from yourcell phone bill to your electricity to your streaming services. Here are somec ommon bills people pay too much for and how you can save:

Cellphone plans: There are so many discountoptions these days, it’s worth seeing what’s out there if you haven’t shopped for a new plan in a while. Best of all, many of the larger carriers are trying to keep up with the savings by offering their own cheap options. Use a tool like Whistle Out to help you search.

Credit card interest: Surprisingly, 78% ofcustomers who call to ask for a better credit card rate get what they want. Interest adds up, so it’s worth the call.

Car insurance: Many of them offer discounts if you combine policies. If you have renters or homeowners insurance with aseparate company, call your auto insurance carrier and see what your bundledrate would be.

Start with those three—you might bes urprised at how much you’ll save. Then audit all of your other monthly bill sand see if there are additional ways to cut costs. The best part of this exercise is you do the work once but continue to save month after month.

A Bill-by-Bill Guide to Saving Money onYour Monthly Expenses

If you’re in debt and you don’t have a plan to get out of it, it’s time to make one.

The first step: make a list of all of your debts. Track them in a spread sheet, or just write them down. Make a column for the following: balances, interest rates, and minimum payments. From there, revisit your budget and figure out how much money you have available to go toward all of your debt. Set a general goal to pay off X amount of debt every month.

Second, pick a debt-busting method. Somepeople prefer the Stack method, where you pay off your highest interest rate balances first, then focus on your lower interest rates. If you have a handfulof smaller debts, though, you might prefer the Snowball method, which focuses on paying off your debts with the smallest balances first. If you’re on the fence, research shows the Snowball is the more effective method. People tend to stick to goals when they see progress. Since the Snowball method focuses on quicker wins, many people find that motivating.

Whichever method you choose, the next step is to prioritize your debts accordingly. Make a list of debts ordered by which one you’ll focus on first. Of course, you’ll still pay the minimums on you rother debts (don’t want to rack up late fees). When your priority debt is paid, add that amount to your next debt on top of the minimum. Then move on to the next debt, and the next one, until you’ve tackled them all. Yeah, it’s easier said than done, but before you make progress, you need a plan.

Here’s a calculator (http://lifehacker.com/5310579/calculate-exactly-how-long-youll-be-in-debt#_ga=1.181220711.1776565608.1488071496) that will tell you how long you have until you’re debt-free. This spread sheet (http://lifehacker.com/this-spreadsheet-calculates-when-youll-pay-off-debt-wit-1790746417) can help you calculatewhen you’ll back off debt with the Snowball method in particular.

Your credit matters, particularly because if it’s bad, it can make your life difficult. Not only is it harder to get credit cards and apply for loans with poor credit, you might also have a tough time renting an apartment or getting a job. Bill providers are also legally allowed to charge you a fee for having bad credit. It’s important to know where youstand, and that means checking your credit score and, more importantly, your credit report.

What Your Score Means

There are a number of places you can seey our credit score for free: there are Credit Karma and Quizzle, for example, and Mint offers free periodic credit scores, too. Discover credit card holders also get their scores for free on their monthly statements. Once you know your score, you want to know where you stand. Here’s the range for credit scores,according to Nerd Wallet:

300-629: Bad credit

630-689: Fair credit, also called “averagecredit”

690-719: Good credit

720 and up: Excellent credit

If your score is bad to fair, you have workto do, and that work starts with checking your credit report. Even if your score is excellent, though, you want to check your credit every now and then. If there are any issues, like late payments or fraud accounts, you can nip them in the bud.

Annualcreditreport.com is the best site forgetting a free copy of your report. You’re entitled to a free copy every year from each of the three credit scoring agencies (Equifax, Experian, TransUnion).Once you get a copy of your report, you’ll notice a few general sections:

Personal information: Your name, address,etc.

Public record information: Any liens, wage garnishments, or bankruptcies.

Creditor information: The meat of your  report, where you’ll see detail on each credit account you’ve opened.

Your accounts are split into two main categories: accounts in good standing and potentially negative items. If you’ve paid any accounts late or they’ve gone to collections, for example, you’llprobably see them under “negative items.”

You’ll want to review these items and makesure they’re all legit. If there are mistakes, you can dispute them (the Federal Trade Commission has sample dispute letters here). Otherwise, if there are too many negative items on your report, you just have to improve yourcredit.

Paying your debt in full and on time is the best way to fix your credit, but FICO offers some additional information on how your credit is calculated, which is helpful. According to FICO, your credits core is based on five categories:

Payment history (35%): Your payment historyis your history of paying past accounts on time. The better you are at making p ayments on time, the higher your credit score will be. According to the site:“A few late payments are not an automatic ‘score-killer.’ An overall goodcredit picture can outweigh one or two instances of late credit card payments.”

Amounts owed (30%): Lenders what to know how much outstanding debt you owe. If you’re close to reaching your creditlimit for an account, (“maxing out”), this can negatively impact your credit score, the site says.

Length of credit history (15%): A longer credit history will increase your score, according to FICO. FICO also considers how long you’ve been actively using those accounts.

Types of credit (10%): Your score also considers how diverse your credit mix is, including credit cards, installment loans,retail accounts, mortgage loans, and finance company accounts. It also considers the number of accounts you have open. And FICO adds that closing anaccount doesn’t make it go away; it will still show up on your report.

New credit (10%): Inquiries into new linesof credit can lower your score, FICO says.

Beyond paying your debt bills on time, you want to keep any accounts that are in good standing open and make sure to useas little of your available credit as possible. Fixing your credit takes time,but reviewing your report is the crucial first step.

A 401(k) is a retirement savings account offered through your employer. You set aside a certain amount of money each month from your paycheck, and use it to invest money using this account. Overtime, your money grows and ideally, when you retire, you’ll have a big stack of money that’s been growing for years. You can live out your dream of retiring ona houseboat or buying an RV and road tripping around the country.

Many employers that offer a 401(k) also offer something called a 401(k) match. They match a portion of your own savingsinto the account, up to a point. As our own Melanie Pinola explained:

A common matching scheme is a 50% match of your contribution up to 6% of your gross salary. So for every dollar you put in, the company will put in 50 cents. The max a company will put in for a personwith a $50,000 salary, in this 6% cap scenario, per year, is $1,500.

Calcxml 401 match calculator can help you crunch the numbers to see how much you can squeeze out of your employer. (It’s also worth noting that many companies have a vesting schedule, meaning you canonly get the “free” money they give you if you stay at the company for acertain amount of time).

If your employer offers a 401(k) match, you definitely want to sign up, otherwise, you’re leaving money on the table. Once you have the forms to sign up for the plan, you’ll have to decide how much of your paycheck you want to put toward your savings. Most experts agree: you should at least put enough to get the match. If that stretches your budget tooth in, though, and you end up racking up late fees and overdraft fees, it mightnot be worth it. Revisit your budget and decide how much you can afford to save.

From there, you have to pick some investment options. Your employer usually works with a broker to come up with alist of options to choose from. This means you’re stuck with the list they offer, and sometimes, the list isn’t great. Investor Place lists the five majortypes of funds you’ll probably have to pick from:

Stock Funds: As the name suggests, this type of fund covers a variety of stocks that you can invest a percentage of your account in. According to Investor Place, “Most 401ks only offer a handfulof stock funds to choose from, so selecting funds in this category shouldn’t behard — just look at expenses (lower is better) and long-term returns (higher is better) to find the best fit.”

Target-Date Funds: These funds are prettysimple and basic. You pick your target date for retirement, then pick the matching fund. Because they’re so simple, there’s not much maintenance, as the fund adjusts your asset allocation over time. The fees of target-date fundsmight be higher.

Blended-Fund Investments: These funds havea set ratio of stocks and bonds. You can pick one that’s appropriate for your situation. This means you’ll have to consider your tolerance for risk and how  many years you have until retirement.

Bonds/Managed Income: These funds are meant to safe guard your money, but your money won’t grow much with these funds.

Money Market Funds: Investor Place calls the money market fund a “glorified CD.”  There’s zero growth here, and, in fact,these funds barely keep up with inflation rates. They recommend avoiding money market funds if you want your money to grow

We have a guide to set-and-forget investingfor an idea of which funds to start investing in, but the 401(k) paperwork might give you a general idea of how to get started, too. Basically, it comesdown to your age, risk level, and how long you have until retirement.

Once you open your 401(k), there are a few things to keep in mind. Sometimes when you open a 401(k), you’re given a default investment option and that’s often a “money market fund.”  You’ll get little to no growth with a money market fund. A 401(k)s default isn’t customized for your needs and risk level, so make sure to actually pick some investments once you open your account. If you ever leave your job, don’t abandon your 401(k), either. You’ll have to roll it over into a new retirement account. When that time comes, read our guide on how to do it.

And then there are 401(k) fees. Many 401(k)plans are expensive to maintain, but you can use online calculators to determine and compare how much these fees will cost you over time. It’s stillworth getting the match, but if your 401(k) fees are high, you probably want to invest anything extra elsewhere.