Personal Finance 101
When it comes to managing your money, there are four main buckets you need to keep track of: assets, income, debt, and spending.
When it comes to managing your money, there are four main buckets you need to keep track of:
- Assets: how much money you have
- Income: what comes in
- Debt: how much money you owe
- Spending: what goes out
Below we explore the foundations of these four components.
Personal Finance Bucket #1: Assets
Assets can seem like an overwhelming term with benefits that are only available to millionaires...right?! But it really just means, how much money do you have? Across all your different accounts, what are their balances? You probably have a checking account. You might also have savings, a retirement account, and some investments.
Action: make a list of your different accounts (e.g. “Chase checking account,” “Bank of America savings account,” etc.), and next to it note their balances. It might seem simple, but most people have no idea how much money they have. This is where I start with all of my clients!
Here’s a breakdown of some of the bank accounts you might need depending on what you’re saving for and when you’ll need the money. This might sound obvious, but different money should be held in different places.
Money you’ll spend this month.
This is where you want your day to day money — the money you’ll use to pay your bills and expenses throughout the month. This is also where your paycheck, social security, and other income should be deposited.
Savings Account Tied to Your Normal Bank
Extra money you might need quickly.
I like to use the savings account at my normal bank as sort of an “oh shoot” account — overflow for those months where a little too much happens and your spending is just a little more than expected.
For example, this month I’ve already gone to the dentist, bought new glasses, and paid a parking ticket. These aren’t emergencies, but sometimes it all adds up to a little more than you planned for in a month.
The savings account should be linked to your checking account so you can transfer any needed overflow money instantly. Keep a small amount here, and only add to it when it needs to be replenished. I wouldn’t keep too much money here because it’s not earning you any interest.
High Yield Savings Account
Your emergency fund.
Online, high yield savings accounts (HYSA) and money market accounts earn you way more interest than your regular savings account. All that extra interest adds up over time, so don’t sleep on this.
There is one drawback: it can take several days for a transfer to be completed because it’s at a different bank. But if it’s kept safe at another bank, that means you’re less likely to tap into this account. Friction to access is crucial for your emergency savings needs.
Personal Finance Bucket #2: Income
Income refers to all of the money that’s coming into your account every month. Even if you don’t have a full-time job, you might still have income. Here are some different examples of income you might be earning:
- Paycheck from your job
- Social Security money
- SSI Disability benefits
- Pension benefits
- Child support
- Money from a relative
- Rental Income if you rent out a spare bedroom in your house
Action: write a list of your income sources and how much you get from them each month. If there’s more than one source of income, write out the total income you receive each month.
Personal Finance Bucket #3: Debt
Debt isn’t anybody’s favorite topic — but it’s very common and important to address. The best thing you can do with debt is to come up with an action plan.
Action: list all of your debt out on paper, and write the balances and interest rates. Count everything from credit cards to student loans to money you owe a friend. I know how overwhelming it is, but you’ll feel much better when you have an action plan I promise!
Next we’ll dive into different debt-payoff strategies...
...but first things first: no matter which strategy you follow, you’ll have the best luck if you focus on one debt item at a time. This can be scary because we usually try to tackle everything at the same time by splitting payments across all debt. But, most of the time, that results in frustration and struggle because you're not making real progress on any of them.
Here are my top three debt payoff strategies including who they’re best suited for:
Pay the Highest Interest Debt First
This is for the type of person who is analytically-minded and don't want to pay an extra cent of interest if they can avoid it. Start with the highest interest debt and work your way down.
Pay the Lowest Balance Debt First
This is for you if you you appreciate quick wins, feel better with some things off your plate, and have a bunch of different debt items. Start with the lowest balance debt. Once you get that cleared away you can tackle the higher balances, and by that point you'll have tons of momentum from your early wins.
Pay the Most Hated Debt First
This is for you if your debt has come from circumstances or events in your life that you just want to be FINISHED with. This could be divorce, illness, an accident, or so on. You've moved past it, and you don't want the debt hanging around as a reminder. So pay what you hate first, and then get to the rest later.
Personal Finance Bucket #4: Spending
Spending is usually the most challenging part of personal finance; most of us really don’t know what we spend our money on every month. Spending should ideally match income, and when spending is higher than income we go into debt.
Action: write a list of what you think you spend each month — rent, food, utilities, subscriptions, shopping, gas, etc. Just get your ideas out on paper. This is the best starting point for everybody new to personal finance, and it doesn’t need to be perfect or accurate. It is the scariest part, but it’s like ripping off a bandaid. You'll feel relief once it's done.
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