According to the Consumer Financial Protection Bureau, a third of Americans between ages 30 to 49 have more credit card debt than savings. If you have a high debt-to-income ratio, you may believe that the solution is to work harder, earn a higher income, and refinance your debts. However, people are often surprised to find that their debts increased significantly a few months after getting a raise.
If you feel that your money slips through your fingers like water, you’ll need to think about better organizing your personal finances. This article takes an in-depth look at the best ways to create a system for managing your income and expenses so you can reach your financial goals.
What does it mean to “organize my finances”?
To organize your finances is to gain control over your income and expenses. Do you know how much you spend every month on everyday expenses, such as magazine subscriptions, online purchases, and convenience store shopping? When you receive your paycheck, do your retirement funds and high-interest debts enjoy priority?
By organizing your finances, you ensure that you are distributing your income to promote financial prosperity. Coordinating your finances also means building an automated system for wealth creation, which takes the time and hassle out of money management, making it less complicated to meet your financial objectives.
Why do I need to organize my finances?
According to a Congressional Research Service report, about half of American adults live in households that have lost employee income since March 2020. Such an income loss impacts your household’s ability to meet your loan obligations. You may be like many others who are facing foreclosure, wage garnishment, or debt collection. Even before the COVID-19 pandemic, inadequate personal financial skills caused people to live from paycheck to paycheck: always in debt and never able to get ahead.
Investing time and energy in organizing your finances is necessary to ensure that you meet your short- and long-term financial goals. By learning how to budget, you set spending limits, which reduces your debts and allows you to increase savings and investments. You also position yourself to maintain the same standard of living when you are no longer able to work.
Living according to a financial plan allows you to be flexible and cope with unforeseen circumstances, such as loss of income or unexpected expenses. Even if you earn a relatively small income, financial planning will enable you to pay off debts, create additional income sources, and enjoy your money.
What is the best way to organize your finances?
The best way to organize your finances depends on your unique financial situation and goals. Most people’s financial objectives are to pay off debts, start saving money, invest in an asset portfolio, and minimize their tax bills.
The first step is to organize your income and expenses. When it comes to personal finances, it’s the little things that add up that you need to monitor closely. For example, you may think that $14 for a streaming service is affordable. However, all the “affordable” payments for things like web-based products, streaming services, and premium content subscriptions can amount to hundreds of dollars a month.
By establishing and prioritizing a hierarchy of places your money needs to go when you receive your paycheck, you prevent unnecessary expenses from increasing your debt or chipping away at your savings or investment capital.
The second step in organizing your finances is to develop a method for keeping track of your accounts, financial records, and bills. These methods involve using spreadsheets, software, or online services.
How do I organize my income and expenses?
To organize your income and expenses, you’ll need to draw up a budget to plan what happens to your money. You may also have to open new accounts or consolidate existing accounts before setting up automated payments.
Work-sponsored retirement plan
Work-sponsored retirement plan contributions should enjoy the highest priority when you receive your paycheck. You can route a percentage of your pay directly to a work-sponsored retirement plan, such as your 401(K). Your 401(k)-contribution requires minimal time and input from your end, as it comes directly from your salary on a pre-tax basis.
Many employers offer to match employees’ 401(k) contributions up to a certain amount as part of their employee benefits package. Ideally, you should contribute to your 401(k) up to the maximum employer match.
If you are self-employed, you should open a Simplified Employee Pension Individual Retirement Account (SEP-IRA) or solo 401(k).
After contributing to your retirement plan, the rest of your pay should go into a checking account. This account serves as a hub from which you can make the rest of your saving contributions, payments, and investments. Using a single checking account centralizes your finances so that you can manage them from one place.
Ideally, the checking account you choose for this purpose shouldn’t charge any fees. Online-only checking accounts are ideal, as you can access them from anywhere, and they usually don’t have a required minimum balance.
You should set up automatic monthly transfers into an emergency fund, which can be any accessible, high-yield savings account. An emergency fund is a cash reserve you set aside to pay for unforeseen events, such as medical emergencies, vehicle breakdowns, or income loss.
Your emergency fund should be sufficient to cover your expenses for three to six months. According to the Federal Reserve, less than half of American adults have three months of emergency savings.
If you have a relatively small income, try to contribute at least $50 per month to your emergency fund. Within 20 months, you’ll have $1,000 in your fund, which is sufficient to cover most emergencies without the need to obtain credit.
After contributing to your emergency fund, your next priority is to fund a Roth IRA using automatic monthly transfers from your central checking account. This type of retirement account offers several advantages, with the most significant being that you don’t pay taxes on interest, capital gains, or dividends. You don’t pay taxes on your Roth IRA investment gains because you invest with after-tax money.
With a Roth IRA, you can also get early access to your funds to pay for emergencies, though this is not the best use of this account. You can open a Roth IRA with your bank or a brokerage firm. If you don’t want to choose your investments yourself, you can also open a Roth IRA at a robo-advisor.
High-interest debts and essential monthly expenses
Only after funding your emergency and retirement accounts should you use the money in your checking account to pay for living expenses and debts. Some of the payments under this category include your rent, groceries, utilities, insurance, and gas. Don’t use this portion of your income for luxury expenses, such as jewelry or going out with friends.
With the high-interest debt repayments, start with the debts that are difficult to discharge when filing for bankruptcy, such as your credit card debt and student loans.
High-yield savings account
After you’ve paid your living expenses, focus on your short-term or non-retirement savings goals, such as a property down payment, an overseas trip, or a wedding. You can use a high-yield savings account, like the one you use for your emergency fund.
Funding this account is critical if you want to make future payments without using credit. Contributing to a short-term savings account will allow you to reduce your debts while making your dreams of traveling and owning your own home a reality.
Luxury expenses and additional investments
After you’ve taken care of all your financial priorities for the month, you can use the rest of the money in your checking account for guilt-free spending on wants instead of needs. By drawing up a budget, you can leave yourself enough cash to spend on things like home décor, new appliances, or your streaming service.
If you don’t spend everything, you can let the balance roll over to the next month or focus on taxable investments, such as opening a brokerage account.
Methods to keep your finances organized
After setting up all the accounts you need to keep your finances organized, the next step is to develop a method for keeping track of your budget. Organizing your finances with one of the methods below will allow you to view the balances and transactions of all accounts in one place so you can make informed financial decisions.
The online method
Various free online services are available to help you monitor all your accounts. These platforms are generally easy to use, and you can access your financial information from anywhere in the world. High-end online services will allow you to add all your accounts and provide you with updated information on all of them, including transactions, balances, fees, and interest.
When selecting an online service, helpful features to look for include information updates on all asset classes in your investment funds, automated transfers, bill payments, and recommendations to increase savings.
The software method
With the software method, you organize your finances using a desktop application that you install on your computer or another device. To track your accounts, you’ll need to link your accounts and monitor activity using a financial dashboard.
Many products offer investment and retirement features as well as check-up scores with suggestions for improvements. Budgeting software requires an internet connection to provide you with real-time data on your accounts.
With the spreadsheet method, you list all your accounts and update them manually every month, using your online banking app or paper statements as information sources. Organizing your finances with this method requires some work, especially in the beginning, but various templates are available online that you can download to make the process easier.
Microsoft Excel and Google Sheets are the best options for organizing your finances with the list method. The spreadsheet method doesn’t provide you with real-time account information, but it offers ample flexibility for complex financial situations.
How can I organize my financial records at home?
Keeping your financial records organized will ensure that you don’t miss payments, and it will take the stress out of the tax season. If you have a stack of unopened bills and financial documents lying around, gather all of them and sort them according to categories, such as:
- Bills due
- Credit cards
- Bank accounts
- Tax records
- Home repair, maintenance, and utilities
- Estate planning, wills, and trusts
- To do or to read
Place the documents of each category into a folder and set up a filing system. Then, whenever you receive documents in your mail or inbox, place them in the correct folder.
FAQs on organizing your finances
How do I choose the best method for organizing my finances?
Finding the optimal system for organizing your finances may take some time. Select the system that you think will work best for you, and stick with it for a month or two. Over time, you will start noticing features you need, and you can transition to a more effective method.
How quickly will I see results after organizing my finances?
After you start organizing your finances, you may notice a difference in your disposable income within the first three months, especially if you had many unnecessary expenses. Over time, you will also find it easier to increase contributions to your emergency and savings accounts.
What is the most effective way to keep track of bills and obligations?
Some expenses, such as your car loan payment and rent, are due at monthly intervals, and you can automate these payments. However, for one-off obligations, such as medical bills and purchases, you can use your money management software or a calendar app to set up a payment reminder.
Organizing your finances is a critical step towards improving your financial position. By drawing up a budget and creating a plan for every aspect of your financial life, you will uncover and address wasteful behavior, set priorities to maximize your income potential, and develop frugal habits. Streamlining your finances will also give you more control over your money and help reduce financial stress.
It is never too late to gain control over your finances. Start today by setting realistic goals and establishing a money management system that fits your lifestyle.