I am not a financial professional. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Past performance does not guarantee future returns.
There are two ways to increase your savings. You can either increase your income or decrease your spending. I prefer a combination of both. Once you’ve done that then it’s time to invest that money and let it work for you! I have outlined 6 basic steps for getting your finances under control. If you are a new grad then this is a great place to start. If you don’t understand why you don’t ever seem to have any money even though you make a high income then this is also for you.
Live below your means
The first step for anyone trying to get control of your finances is to make sure you are spending less than you are making. If you are in a position where you are racking up more debt than savings then stop everything you’re doing and start tracking where your money is going.
Track your spending
I use an app called Copilot, which links to all of my accounts including my checking, savings, credit cards, 401k provider, brokerage accounts, and even my car loan. Since there is a fee for Copilot I would recommend going old school and jot everything down the moment you swipe your card. You can easily do this on the Notes app on your phone. Don’t forget to include your $6 daily Starbucks drink.
Decrease your spending
After a few weeks to months, you’ll start to notice patterns of where your money is going and what you could consider cutting back on. Consider the things you value. If you need your latte to survive the day then keep it. But if you have a subscription to something you never use anymore, then it is time to let it go.You don’t need to do this all at once. Take some time and try to decrease one expense once a week.
Once you have collected some data, and made some choices on where to cut back then it is time to consider what to do with the money you are not spending.
Increase your income
This is where the other half of the puzzle comes into play. You have successfully decreased your spending and now it is time to increase your income. I understand not all of us will be in a position where this is possible but if it is then it’s time to take action. This may look different for everyone, but considering ask for that raise or picking up an extra shift. If you’ve been stuck at one pay scale and believe you are worth more than what you are making then it may even be time to consider a job change.
I have been out of school for three years. After the first year, I successfully increased my income by 50%, and after the second year, I increased my income by another 40%. I did this by restructuring how I was paid, moving to another job, and then negotiating a pay raise.
Remember, once you receive that extra income be sure to not spend it. The whole point of increasing our incomes is not to inflate our lifestyle but to direct it to something that will put us in a better financial position than before.
Consider paying off your debt first
If you are familiar with Dave Ramsey’s work then you may be under the impression that all debt is terrible. Since we went to PA school and now have tens of thousands of dollars of debt (or more) that means we’re screwed right? Before we get into how to pay off debt, I want you to rethink how you view your student loan debt. Instead of this evil thing looming over your head, consider it as an investment in yourself. You thankfully decided on a career that, yes includes a lot of student loans, but has also allowed you to become a high earner.
When paying off debt you need to be strategic. Let’s give an example. Let’s say you have three types of debt that are as follows:
- Student loan of $80,000 with 6% interest
- A car loan of $10,000 with 4% interest
- Credit card debt of $20,000 with 18% interest
Which would you try to pay off first? If you are a Dave Ramsey fan then he would suggest paying off your car loan first because it has the lowest amount. This is known as the “Debt Snowball Method”. This would be a mistake and would cost you a lot of money.
I hope you instead chose correctly and know that you need to pay off the credit card debt with a whopping 18% interest rate. I would consider this an emergency and you should be diverting all of your attention towards paying this off. The higher the interest rate the more debt that will compound, and quickly too I may add.
Student loans
Now, the question is what should you do with your student loans? You’ll probably read mixed reviews on this. Typically it is recommended that anything greater than 6% you pay off as soon as possible. If you have debt with an interest rate lower than 6% for example a car or a mortgage then you should invest your money instead.
I decided to pay off my loans first before really diving into investing. Partly because my student loans ranged from 6% to 7.6%, and partly because psychologically it made me feel better. I have not, however, paid off my car loan since the interest rate is less than 3%. I know my money will be better off in the stock market over time.
Start an emergency fund
You know how I was just talking about the psychology of money? An emergency fund is one of the best ways to gain confidence around money. Most people will recommend that you have anywhere between 3 to 6 months’ worth of expenses saved. You don’t want to have too much cash in your savings account however because it could otherwise be accruing more money in the stock market.
I don’t have children yet and both my husband’s job and mine are secure so my savings are closer to the lower end of that range. I have a few thousand in my normal checking account and the rest I keep in my Amex High Yield Savings Account. That way it is still accruing interest at a rate of 4.35% but is more accessible.
You will need to make the decision based on whatever is best for you and your family. If having 6 months saved up before you start investing makes it easier for you to sleep at night then aim for that. If you know you could easily put a large unpredictable expense on your credit card and easily pay it off with your next paycheck then aim for 2-3 months’ worth of expenses.
Contribute to tax-advantaged accounts
Now that you have completed the basics it’s time to talk about the fun stuff, investing! There are two important tax-advantaged accounts that everyone should be aware of. That is the 401k and the Roth IRA. When it comes to investing first look at what your employer offers. If they offer a 401k match then you should be contributing up to the match. This is money you should consider as part of your salary compensation.
401k
A 401k is important because it contributes pre-tax dollars and in doing so decreases your tax liability. In 2024, the max a single person can contribute to their 401k is $23,000. If you can max out your 401k then you should. I finished paying off my student loans at the end of last year and am excited to max my 401k out for the first time.
Roth IRA
The Roth IRA is different from the 401k because instead of contributing pre-tax dollars you instead contribute post-tax dollars that you can then withdraw tax-free when you retire. You also can withdraw your contributions tax-free at any point before retirement. In 2024, the max a single person can contribute to their Roth IRA is $7,000. You are not eligible if you make more than $161,000 single or $240,000 married jointly. There is a loophole called a backdoor Roth conversion which allows people who are making more than the limits to still contribute. I would recommend talking with a financial advisor about this if you are interested.
Invest in a brokerage account
Last but certainly not least is your brokerage account. Brokerage accounts are taxable. There are many platforms where you can open brokerage accounts for low to no fees. If the thought of learning about this makes your palms sweat and mind go blank then consider using a robo-advisor to make the investments for you. All you need to do is answer a few questions and deposit cash monthly with little to no thinking on your end!
Time in the stock market matters. Once you’re financially secure then investing in the stock market is a no-brainer. When I say investing in the stock market, I mean long-term investing. Don’t try to time the market, you won’t be able to. Not consistently at least. While there are no guarantees of returns, the S&P 500 has a historic average return of around 10% since it began in 1957.That’s 66 years of data for you!
