Five Ways to Enhance Your Personal Finance
Our higher education system deems it proper to not equip recent grads with even the most basic understanding of money. Sure, we all learn about checking accounts, credit cards, stocks, etc. at a very young age (usually from our parents and friends), but not enough to resemble a somewhat complete financial blueprint. I remember reading two different variations of the same Shakespeare play in college, but not once was I taught something practical to enhance my basic financial literacy.
Every rule in the book states, “start early.” But, how and where do you start when you don’t have the slightest idea of what to do? Here, I will outline five basic things you can and should implement, especially if you are just starting out. This list is not meant to be exhaustive — my goal is simply to offer some insight so you can start seeing what’s out there.
1. Maximize your 401(k)
Chances are your employer offers some sort of a retirement plan — most likely a 401(k). Even better, most employers offer some matching contributions to your plan.
So what exactly goes on here? With a 401(k) plan, your employer allows you to withhold a certain amount from your salary and set aside for retirement. The amount you set aside (up to $18,000 under most plans) is deducted from your gross pay so you pay less in taxes. For example, if you make $50,000 a year and contribute $10,000 to a retirement plan, you would only have to pay taxes on $40,000.
Additionally, your employer also contributes a set amount (based on a formula, like percent of salary) into your 401(k) account. Using the example above, your employer can choose to contribute 3% of your total salary, adding $1,500 on top of the $10,000 you supply.
Meanwhile, everything in your account — since it’s an investment account where you purchase various assets— grows tax-deferred. You don’t pay taxes on any earnings or gains while the funds are in your account. Only when you start taking out the money at retirement do the taxes kick in.
If you don’t think setting money aside for retirement in your mid 20s is necessary, speak to someone who is nearing retirement. There are circumstances when saving for the future is not attainable(especially with college debt sucking savings out into the 30s for some people), but know to save when you can.
2. Maximize your Roth IRA
A Roth IRA account is one of the most powerful financial tools at your disposal, especially if you are young starting out on an intro-level income. The recent income tax cuts have made this option that much more enticing.
Here are the details. You open a Roth IRA account with a broker like Schwab, deposit up to $5,500 a year (of after-tax money), and invest in different assets (here is an breakdown of how you should be investing). Everything in the account then grows grow tax-free. For example, you contribute $5,500 now. When it is time to take out the money 30 years from now with your account growing 8% year over year, you will be able to take out ~$55,345 and not have to pay Uncle Sam a single penny in taxes!
Once again, 30 years seems like a really long time, but don’t underestimate the power of starting early. Another added incentive of starting early is that there is usually a phaseout period for Roth IRAs as your income grows.
3. Get a Savings account with an online bank
It is truly disappointing to see how many people still use the measly savings account that banks force upon you in order to open a checking account with them. Do me a favor, never use a savings account of a bank that you have a checking account with.
Banks make money loaning funds you deposit to others. If you deposit $1,000 in your savings account and earn 0.5% interest on it, the bank will take that $1,000 and loan it out to someone else for say 4% interest. You don’t get much in return due to all the additional costs of opening and maintaining local branches.
Instead, open a savings account with an online bank — like Ally or Marcus by Goldman Sachs. Their interest rates are 15–20x more than the traditional banks, because they don’t have physical locations to invest in. The point of savings is that you won’t need to access it as much as checking. Whenever you do need it, log in online and transfer the money from the savings to your checking account.
Look at the chart below to see the difference in earnings of an online savings account vs. a traditional bank savings account.
4. Use Credit Cards/Cashback tools
Okay, so this one comes with a little bit of a caveat — you have to be disciplined. Credit cards can be dangerous. However, if you are using the credit on hand to purchase items you would anyways, and then paying off the full balance at the end of each month, this is the way to go.
Most credit cards offer great rewards that can be exchanged for cashback, discounted gift cards, etc. My recommendation is to have 2–3 different credit cards. Not only does it build credit history, but you will most likely get an initial signup cash reward for spending a certain amount in the first few months. Then, utilize different reward structures on each card for your purchases.
For example, I have 3 credit cards. One of them is the Amazon card by Visa. Since half my purchases are on Amazon, I make sure to use this card to get 5% cashback every time I buy something from there. I also have an American Express card, which offers amazing rewards at grocery stores and gas. Figure out what you spend money on and get cards whose rewards line up — or you could just do cards that offer flat cashback structures (like 2% on everything).
On top of credit cards, make sure to check out other savings apps/websites like Ebates and Honey. These tools not only help you spend less in the first place, but also earn additional cashback on top of what you may earn on your credit cards.
5. Maintain a personal “cash flow statement”
There are a plethora of budgeting tools out there. If you need help with your spending habits, I recommend you check them out (Mint by Intuit is an example). However, in this instance, I want to talk about a “cash flow statement” that everyone should maintain for themselves.
On your cash flow statement, track your personal flow of money — where the money is coming from and where it is going. In your cash flow sheet, there will be two sections. Money in. Money out. Money in is everything you earn. Your salary, side hustle, allowance, etc. Money out is what you pay off — your credit cards, student loans, rent, and what you are setting aside for your IRA (remember, you are not supposed to access your Roth IRA until after the age of 59.5, so look at it as an expense for your future self.)
Your goal is to update the “Money in” and “Money out” at the end of each month. How much money hit your account that month, and how much money left your account that month. It will feel like a drag for the first few months, but trust me, this way you will have true oversight into what’s going on.
Now I want to address an additional point here. Everyone has a different lifestyle. And that’s totally fine. But the one common goal is to always show more money coming in vs. going out. Have some savings. Sure there are people like me who want to account for every single dollar, but I’m not expecting everyone to feel the same way. Do once a month check, make sure you are positive, and that’s it.
