I have a hard time keeping my life organized, and I didn’t work about organizing my finances when I was in college, because I didn’t have any money to organize. But now that I’m in the working world, I have an emergency fund, a 401(k), lots of bills, and a condo that I own. It’s easy to accumulate many accounts over a period of time and have your money spread around so much that you lose track of it. My philosophy is to keep it as simple as possible. You can usually put your money into four different categories.
- Bills and Expenses
- Short Term Investments
- Long Term Investments
The problem is that there are too many choices out there nowadays for places to put your money. I’ll give you a peek into how I organize my finances.
Bills and Expenses
I have one checking account for me and my wife. All income goes into that account and everything is distributed from that one account. We have two paypal accounts for selling things on ebay, and any money that we receive from that either goes towards entertainment or we put into our checking accout as income and pay bills or buy groceries/gas with it. If you’ve read my blog in the past, then you know that I am against separate bank accounts for spouses. I don’t mind if you have separate accounts for your “play” money, but I believe you should have one joint account where all of the income goes into first. You are becoming “ONE COHESIVE UNIT”. A marriage should not be treated as a joint venture.
Short Term Investments
Short term investments include large purchases you are saving up for, an emergency fund, or just general petty cash savings. If you are saving for a car, down payment on a house, furniture, home improvement, or any other large purchase, I suggest stashing the cash away in an online savings account. I have ING Direct, but you can also check out Emigrant Direct and HSBC Direct. You’ll consistently make a 5% return on your money without any risk of losing the money. It’s not going to get you rich, but you’re not looking for the investment vehicle to save this money, you’re systematically saving for this purchase, anyway. An emergency fund is essential for financial fitness. The recommended emergency fund to have once you are debt free is 3 to 6 months worth of expenses. If you live off of $2500 a month, then 10K to 15K in an online savings account would ideal for a good emergency fund.
Long Term Investments
This is money that you are not going to touch for AT LEAST five years. I participate in my 401(k) at work, because my company pitches in 50% of what I contribute every two weeks. For every $100 that I put into my retirement fund, my company will put in $50. You cannot beat that deal! Any time your company offers you a match on your contribution, you TAKE IT. If they do not, then I would just open up a ROTH IRA. The reason is that the contributions are taxed now, so that you aren’t taxed when you pull the money out at retirement. A 401(k) is pre-tax, but it’s taxed when you take it out. Now, companies are starting to offer the Roth 401(k) whic is the Roth IRA and the 401(k) put together. In my 401(k), I invest very aggressively with the mutual funds that I selected. I go for small cap and medium cap growth and growth & income mutual funds. I also invest in an international fund to balance out the other mutual funds when the American economy is sour. I take an aggressive approach to investing, because I am 25 years old, and I have PLENTY of time to ride the waves of investing. Your level of investment risk should change with what stage you are in your life. A 55 year old person would need to invest in more conservative funds, because he or she will be pulling out that money in ten years.
You can either stash this money under your mattress or put it into a separate checking account. This includes tithing if you are a Christian and other offerings that you may give to charity or to help out a friend or family. I think it’s a very bad idea to loan friends and family money, but it would be a really cool idea to have money set aside for the purpose of just GIVING it to someone with no strings attached, when the time is right. You may come to know a single mother struggling to pay the bills, and you help her pay her rent or utility bill one month. Giving is why we pursue wealth. Look at Bill Gates. He has WAY too much money. The only feasible thing for him to do with it is give it away! If you pursue wealth with the intention of giving back abundantly to others in need, you will live a much happier and meaningful life.
So, keep it simple. Keep two checking accounts, one retirement account, a high-yield savings account, and any other long term investment cash can be thrown into a brokerage account consisting of 5 to 8 different mutual funds.