In my emergency fund article last week, I referenced the greek phrase know thyself mostly in context. Well to expand our conception of Greek philosophical sayings, I now declare that to truly know thyself you must also know thy finances. Luckily we are living in 2016 and understanding your financial position has never been easier. You don’t need to be an accountant or financial advisor to understand the basics of where you are at financially. And that’s a good thing because understanding your finances is absolutely necessary to budget, save, and spend your money appropriately.
Now I can only speak to managing finances the way I do it and that’s by using a handy app made by Quicken called Mint. There are other personal finance/budgeting apps out there, but I simply have not tried them out. Mint is an industry leader and I personally think it is great (note: I am not getting paid by Mint, but if there are any Mint employees reading this, I would love to be!). With Mint, you connect all of your checking, saving, and investment accounts so it can all be managed in one place. You can also add any non-electronic assets like vehicles and real estate so that you can get an accurate net worth figure.
The screenshots above show an example of how the app looks when you connect all your accounts. On the Overview screen, you can easily see how much cash, debt, and investments you have. Keeping a close watch over Mint is much easier than logging into each of your accounts individually and trying to aggregate them all. You will also notice that Mint can track your credit score for free and they provide an analysis to show you what is specifically bringing your credit down. I will talk about credit scores more intensively in a future article, but this is a great feature. Knowing how much cash you have net of your debt is essential so you know what you can truly afford. That’s really it in terms of understanding your current financial picture. Clicking into anything on Mint of course provides more detail so you can really delve into your transactions.
Budgeting and Saving
Once you are able to see your financial position, it’s time to better it and luckily Mint has another great feature: budgets. Mint automatically categorizes your expenses as best it can into categories such as rent, transportation, food, etc. Take a look into your spending categories to see how much you usually spend. Then with every category ask yourself how you could reduce your spending and whether you would be willing to incur that loss to save money. Be creative.
For example, I live in New York City and I know I could either pay $150 a month for an unlimited subway pass or I could pay $150 for a year and Citibike everywhere (Citibike is a bikeshare program). Now I know everyone doesn’t have access to a bikeshare program, but consider if you are spending too much for a car or whether public transportation is feasible. The point of this exercise is just to explore and acknowledge your options so you can decide if it’s worth it. Also do some online research to see if there are any alternatives you didn’t know about.
When I analyzed my food expenses and researched alternatives, I discovered I could save a ton of money by cooking food instead of eating out. The problem was that I hated going to grocery stores and I didn’t really have time. So I ran the numbers and found out I could still save a lot of money by cooking – even if I paid for a service to deliver my groceries (I use Instacart now after trying our Amazon Fresh first). Beyond the necessities such as transportation and food, everyone spends a portion of their income on discretionary items (vacation, going out, shopping, etc.). If you can’t reduce spending in your necessities, you need to cut it out of your discretionary spending. But how much is enough?
As a rule, try to save 20% of your after-tax paycheck before 401K deductions (more on 401K’s in a future article on retirement planning). In other words, you need to earn 20% more than you are spending in any given month. If you aren’t, you need to cut down on your spending in any way you can. Once you have determined how much you should be spending on every category to meet your saving goal, start setting up budgets in Mint. I find it easier to create a few big categories that I can easily monitor. Personally I just do Food & Dining, Laundry, and Shopping because these encapsulate almost all of my non-rent expenses. I do not include rent because that is a consistent expense that I cannot change in the short-term. Try not to include any long-term, consistent expenses like this because they may distort your idea of how you’re doing in a month. Then you can track your budget progress every day in Mint and see if you’re on or off track. It’s that simple!
With apps like Mint, understanding your finances couldn’t be easier. It’s time to take an active role in saving, managing your budget, and actually knowing what you can afford to spend on something discretionary. Saving money is the first necessary component toward investing money and that is how you build wealth. If you discovered a unique way you were able to lower your spending, leave a comment below. I would love to hear what has helped you all.
Stay thrifty my friends.
Disclosure: I am not a financial advisor. Do not make any investing decision solely based upon what you read here. It’s your money, invest it wisely.