Examining, reviewing and managing your personal finances is not the most exciting topic for most. It’s boring and stressful. It causes anxiety about your spending decisions. And to top it off, it’s overwhelming figuring out where to even begin. So why am I going to argue that you need to start doing it immediately?
Simply put, it will not get any easier and you will need to face the music at some point.
Honestly ask yourself, what is your plan when it comes to managing your financial health? Wait until you turn 30 to start taking it seriously? Wait until you get married or have a child? Hope that if you make enough money that it will all work itself out?
Below are 3 simple reasons why you need to stop procrastinating and get your financial health in order:
1. Life Doesn’t Get Easier
If you are in your mid-to-late twenties then you are in prime position to get smashed with a tidal wave of life. At the moment, you probably do not have children, a spouse, elderly parents or a mortgage. In fact, on the surface your life is quite simple. You work hard during the week, play hard on the weekends and pay your rent on time. You don’t have to take care of anyone but yourself.
It may feel like your time is limited, but I promise you have more free time now than you will in the near future. Establishing good habits and monitoring systems regarding your finances requires an upfront time investment. However once set up, it becomes quite easy and quick to maintain. Make that time investment now, while life is still affording you some breathing room. Whether it is kids, marriage, aging family members or a big promotion, the tidal wave of life is steaming towards you.
2. Defense Wins Championships
When it comes to medical health, prevention is always easier than curing a disease after the fact. The same principle holds true for financial health. It is much easier to develop good habits and avoid financial blackholes in the first place. Credit cards are a perfect example of this principle. By tracking your spending and income, you can consciously spend within your limits and pay off your full balance each month. This practice is much easier than “living your best life” and waiting for a later date to cure your disease (thousands of dollars of high interest credit card debt). Again, these habits will not become easier with time.
3. Compounding Interest Thrives with Time
When it comes to investing your money, time is your best friend. The power of compounding interest gets magnified with each additional day your money is invested. In other words, if you want your money to grow to an enormous sum, then you should have started investing it yesterday.
You do not need thousands of dollars to start investing. You can start with $5, $100 or whatever amount you have readily available. Every excuse you make and every day you delay results in less money for future you.
Financial Health Checklist
So, by now you are hopefully motivated to do something. However, your motivation is probably accompanied by an uneasiness: “where the hell do I start?”. Fear not, the Milk Man has got you covered. The following checklist will provide you a step-by-step roadmap to master your finances and develop a system for future monitoring. As mentioned above, getting started and setting everything up is the hard part. Once that is done, you will only need to put in a few hours per month to keep your finances healthy and thriving. Do not try to tackle this entire list in one shot. Take your time and work through it one step at a time. Baby steps!
- Organize Your Accounts: This one should be relatively quick. Make a list of all the places you have money or debt. This includes 401(k), savings accounts, brokerage accounts, student loans, car loans, mortgages, etc. For each item, jot down your log-in credentials. For example, if you have a credit card with Chase, make a note of the login credentials you use to access your account on Chase.com. Time Estimate: 30 minutes
- Set Up Mint and Begin Tracking Your Income/Expenses: Follow the steps outlined in the linked article and set up your Mint account. With a little guidance, this software will help you understand your spending habits and where all your income is going. Time Estimate: 45 minutes
- Set Up Personal Capital and Track Your Net Worth: Your net worth is a snapshot of your financial health at any given point in time. If this number is increasing month after month, then you are doing something right. However, don’t settle for mediocrity. Even if your net worth is continually on the rise, there is always room for improvement and ways to accelerate the growth. Time Estimate: 30 minutes
- List Your Insurance Coverages: Create a list of your insurance coverages, the name of the insurance providers and your login credentials. If you are employed by a company, then most of your insurance coverages will be provided via your employee benefits. Common insurance coverages include: Medical, Dental, Life, Long-Term Care, Disability, Renters/Homeowners, Auto. Time Estimate: 30 minutes
- Create and Maintain a Rainy-Day Fund: Set aside $1000 for unexpected one-off expenses such as car repairs, moving expenses, broken iPhone, etc. These things will not pop up every month, but when they do, you need to be ready. Now if something drastic happens (ex: large medical bill) then this $1000 probably won’t be enough (see Emergency Fund). But it should cover most of life’s inconveniences. Make sure to replenish this fund if you use it! Time Estimate: N/A
- Create and Maintain an Emergency Fund: Most experts recommend having 3-6 months of essential living expenses set aside in case of unexpected medical expenses, being laid off your job, etc. The rainy-day fund is for minor problems, the emergency fund is for the “oh shit” problems. These side funds will help you navigate compromising situations and avoid taking on high interest debt. Time Estimate: N/A
- Pay Off Bad Debt: Bad debt is essentially any debt with a high interest rate. For example, credit card debt, personal loans or payday loans. Car loans, student loans and mortgages are still debt, but typically they don’t carry ridiculously high interest rates. Time Estimate: N/A
- Calculate “Playground Money”: Use the flowchart in the linked article to determine if you have any “playground money” which you can invest. Time Estimate: 1 hour
- Invest Your “Playground Money”: start by making use of tax-advantaged accounts such as an employer 401(k) or Roth IRA. If you are completely new to investing, then it’s a good idea to use a target-date fund, robo-advisor or fee-based financial advisor. You will pay higher fees as someone else will be handling your investments for you, but at least your money will not be on the sideline. Over time you can observe their moves and educate yourself. Once you feel comfortable, you can take over and manage your own investment portfolio. Time Estimate: 3 hours
- Examine Your Spending (Weekly): you want to GET OUT of debt and STAY OUT of debt. Use Mint to review your spending each week and try to make reductions where possible. Time Estimate: 15 minutes
- Monitor Your Investment Portfolio (Quarterly): this is mainly for DIY-investors. Use Personal Capital to monitor your investment allocation, expense ratios and portfolio performance. Aim to re-balance your portfolio once per quarter. Time Estimate: 2 hours
- Review Insurance Coverage (As Needed): have you gone through any major life changes such as getting married, having children or buying a home? If so, do you now require any additional insurance coverage? Time Estimate: N/A