I first started getting financially savvy by (yes, this is true) reading personal finance blogs. But I had a little bit of trouble with it, because there was just too much information – and a lot of it didn’t apply to me, at least until I knew where to start.
So, if you anything like me, you might need it boiled down before you can start digging in and trying all the tips, tricks, and plans outlined on the internet and in personal finance books. Hey, I understand – I was there, and I feel like I wasted a lot of time just trying to figure out how to start.
So, to save you a little time, I’ve thrown together this Quick Start Guide, pieced together from my favorite bits of other personal finance blogs and books (links at the end), and from my own experience. It’s only three steps, so don’t panic! Enjoy!
RULE ZERO: SPEND LESS THAN YOU EARN
Rule Zero is at the heart of everything else – everything in this guide, everything on this site, everything on the other PF sites and in all the books. Spend less than you earn, and save the difference. But how? HOW?
Step #1: Track what you spend
In order to spend less than you earn, you have to know what you spend, and what you earn. Knowing what you earn is generally pretty easy – for most people, you just add up your paychecks, and you’re done. Boom. But what you spend? That tends to escape most of us unless we write it all down.
I don’t care how you track it. I use a simple Excel spreadsheet that I made. A lot of people use a little notebook and pencil that they carry around with them at all times. Some people keep all of their receipts in one place and then write it all down at the end of the week. Some people carve it into a wooden block, because those people are crazy.
This step is rather important, so I implore you not to skip it. Of all the tools I have made for myself on my journey to financial freedom, none have been as useful to me as my spending list has been. I’ve been keeping it for over a year now, and I still wish I had more data. (I love data.)
Step #2: Don’t pay the bank, make the bank pay you
Once you start tracking your spending, you’ll probably see a few expenses that you just wish you weren’t paying. If any of those expenses are bank fees, stop. Stop now. If you really like your bank, go in and ask if you can have the bank fees waived for your account.
If that doesn’t work (or if you just want to switch banks), shop around for a free checking account. You can usually get a free checking account pretty easily if you’re a student, or if you can do a qualifying monthly direct deposit. Or you can use ING’s Electric Orange checking account, which has no maintenance fees.
Also, make sure you have a savings account, and that it’s paying some actual interest. Most brick-and-mortar bank savings accounts offer interest rates around .2% (that’s POINT two percent, or one fifth of one percent), and considering inflation averages out at about 3%, that makes your “real” interest rate around -2.8%. That’s terrible. Online savings account offer rates upwards of 4%, which beats average inflation and gives you a little something extra. I have online savings accounts with Emigrant, E*Trade, Citibank, and ING Direct, and although I’ve never had any problems with any of them, the one I recommend more than any of the others is ING’s Orange Savings.
Step #3A: Take down debts
(If you’re debt free or your debts all have interest rates of less than 8%, skip to Step #3B.)
Debt – your future money that someone else has a claim to. Ick – let’s get rid of that. Use this calculator to snowball your debts – whether you pick the “interest order” or the “balance order” depends on whether you feel better knowing your saving the most amount of money, or feel better knocking down debts as if you were shooting in Duck Hunt.
If you have some wacky debts that make it impossible for you to use the snowball calculator with any sort of accuracy (for example, you might be like me and have student loans that are in deferment), then just rank them for yourself on a piece of paper. But no matter what, pay the minimum payment on all of your debts every month and throw whatever else you can at the debt on the top of your snowball list.
Step #3B: Save up some savings
Start with an emergency fund. You probably know better than anyone how much of one you should probably have, but the rule of thumb that’s generally thrown around is “3 – 6 months worth of expenses,” more if you have dependents. If you’re a college student or anyone else with strange, unpredictable, lower expenses, you might just want to pick a nice round dollar amount, like $1,000.
Don’t feel like you have to build this all up as fast as possible, although it is important, so don’t shrug it off either. How much you throw into your savings probably has a lot to do with whether you have a lot of debts from Step #3A or not. If you’re paying on a lot of high interest debts, it makes more sense to worry about knocking those out, and only build your savings up by about $10-$20 a week (or per month, if you’re a college student or younger). Otherwise, try to save at least 10% of your income, bare minimum – more than that is better.
It might hurt at first, and you might not even be able to save that much at first. Don’t freak out – just save something. Even if it’s $5 a month. Or $1 a month. Get in the habit and try to increase it each month. The habit is 90% of the process, the dollar amount is only the other 10%.
(It might seem obvious to some people, but this savings should be going into a high yield account, like one of the ones I suggested in Step #2.)
Once you’re tracking what you’re spending, your bank accounts are in order, you’re snowballing your debts, and putting something aside into savings, you’re ready to start sifting through the vast amounts of information out there. Time to move into budgeting and frugality and retirement accounts and all of those things that might seem very daunting right now. Once again, don’t panic. You’re already ahead by having made it through this guide, the next steps are just as simple.
Like I said, this quick start guide is borrowed and pieced together from the things I read when I was starting out, and the things I’ve read since. Once you’ve made it through this guide, here are three other guides that you might want to try out:
- I Will Teach You To Be Rich Â» 2006 Makeover – This link leads you to Step 4 of Ramit’s makeover, which includes links to the previous three steps.
- The Simple Dollar Â» 31 Days To Fix Your Finances: A Wrapup – Trent’s super-comprehensive guide will have you examining your goals and developing a definitive vision of
- 8 Ways to Take Control of Your Finances in 2008 âˆž Get Rich Slowly – As usual, JD says more than me, better than me, in less words. Check it out!
Photo credits: YTaP’s “Eat Money”, Kris Taeleman’s “Money, i has it!” and Digital Sextant’s “Money”
The Dividend Guy says
Good summary of the steps. It is not rocket science. It just takes commitment to the steps and a clear path. Once it starts to happen it starts to snowball.
The Dividend Guy
This is a great list. I’m addicted to finance sites now, it’s how I’ve become financially savvy as well. Oh, I like this pasty green color you’ve got going on here!
I think this rule holds true for some things, but not for companies or investments. Sometimes you really do need to spend money to earn money.
Not to be argumentative, but I’m not so sure. The “spend less than you earn” rule can easily apply to business and investments. You probably shouldn’t take a good week at the stock market as a reason to go out and blow a bunch of money – that’s how a lot of people ended up in trouble when the Tech bubble burst.
As for businesses, when a company is just starting out, yes, it may be necessary to inject extra funds to get things going. But if there’s anything to be learned from the current subprime-mortgage-meltdown, it’s that overextending your money with risky loans is a bad idea.
And to bring it back to personal finance, the main point here is that you can’t invest in businesses and stocks (or whatever) unless you spend less than you earn, and then take that difference and invest it. Well, ok, you can, by going into debt, but that’s not always smart.
Of course, I’m somewhat ignoring the concept of leverage here, but that would just make this a super-long comment in which I debate with myself! 😉
Hi Stephanie, I am finally reading your blog. Lets knit soon!
It all sounds so simple, doesn’t it? 🙂 I’m a recent college grad still trying to figure out how to spend less than I make. At an entry-level salary with major taxes and an automatic 401k contribution, it doesn’t feel like there’s much left to pay the bills. But I definitely need to put my savings account into a place where I’m really making interest – thanks for the ING tip!
Minimum Wage says
Is this realistic if you earn minimum wage and have student loan debt and high medical expenses?
Where have you been? I haven’t seen you commenting around in a while! Welcome back!
In response to your question, YES! This is EXACTLY where I would tell you to start: tracking every penny you spend, optimizing your bank accounts, and taking down your debt and working on your medical expenses.
Earning minimum wage can be very restrictive to getting yourself up and running financially, but you can easily tackle the tasks that don’t cost any money at all.
Financial Discussion says
My Rule # 1 is “Earn more than you spend” :). It has a better vibe than “Spend less than you earn”.
Good information. Just be happy spiritually and live in the now. This way lots unnecessary spending habits will vanish.
Is this realistic if you earn minimum wage and have student loan debt and high medical expenses?
Great article that list the steps you need to take to have more money in your pocket. the fact of the matter is; it is not rocket science to have some money in your wallet. All you need to do is “Do not spend more than what you have” and you will just be fine. The most common mistake that most people do is to spend with their credit cards and continue to spend even when they don’t the money.
But then one thing that makes some people make more money is they spend more to make more money.
Regardless, the main thing is to know what are you spending on and know your limits.
Great post! How many people spin their wheels feeding their desires instead of feeding their futures? It’s ok to be broke and young. It’s not ok to be broke and old.
It’s all common sense, but nice round up of first steps, it is easier said than done though, hard to change habits
Benjamin Lee says
Invest in financial education. Knowledge is wealth as well.
Learn how to invest.
Annie @ Credit Dispute says
Budgeting will help you make sure that you don’t spend more money than you have coming in every month. This is especially important because it helps you avoid accumulating debt. You can also allocate some money to go into savings each month so that you can cover emergencies and larger purchases in the future without having to use credit or debt to do it.
Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.
Do you have any recommendations to track what I spend more efficiently, I’ve been using mint.com but that is really quirky sometimes.
Dave, there are other free services you might try, such as http://wesabe.com
But as for me, I track it all by hand in a spreadsheet. That might sound tedious, but I find the Pear Budget spreadsheet (free!) works really well for separating things into categories: https://www.pearbudget.com/spreadsheet