When it comes to managing your money, there are many roads to long-term financial security. The best route for one person may be quite different from what's right for another. But whatever path you follow to fiscal fitness, there are some mandatory steps everyone ought to take along the way.
Alexa von Tobel, CEO and founder of financial planning site LearnVest.com, cuts through the thicket of advice out there to guide you through her essentials to sound money management.
1. Keep Track of Where Your Money's Going
This may sound obvious, but far too many people fritter away their hard-earned cash because they're fuzzy about how much they take home in their paychecks, and precisely where the money goes afterward. The first step to financial stability is getting a handle on how much you have coming in, and precisely what your expenses are. "Organization is half the battle," von Tobel says.
LearnVest offers a free My Money Center tool where users can link all their accounts in a single place, allowing them to see precisely what they're spending in one place, and rapidly calculate down to the penny where their money is going.
(Sites such as Mint.com and ReadyForZero.com offer similar free services.)
2. Cut Your Personal-Finance Pie Into the Right-Sized Slices
Once you've determined where your money is going, it's important to adhere to some guidelines on what you should be spending in order to maintain, build -- or restore -- financial security, von Tobel says.
• Fixed Expenses -- 50%: According to what von Tobel calls "the LearnVest method," you should spend 50% or less of your take-home pay on basic living expenses, which include mortgage or rent, utilities, transportation -- be they car payments and gas, or mass transit expenses -- and groceries.
Whenever possible, she says, "live under your means."
Within that figure, make sure the slice of the pie devoted to your mortgage or rent is no more than 30% of your take home pay -- and, once again, it's better if it's less.
Taking on housing costs that are too high is a common cause of personal-finance troubles, von Tobel says. Indeed, an excessively large mortgage "can ruin a person's finances for the next five, 10 or 15 years," she says. So opt to buy that smaller house or rent the apartment in the less-cool neighborhood if it means you can stick to the 30%-and-under rule -- which will give you more financial wiggle room and security in the long run, she says.
• Pay Debt, Save For Retirement, Build An Emergency Fund -- 20%:
About 20% of your budget should go toward longer-term fiscal goals. If you have debt, whether it's from credit cards, student loans or something else, make paying it down a high priority, she says -- but not the only one. (More on debt below.)
Some of that 20% should be put toward building an emergency savings fund that could cover at least "nine months of what your life costs you," she says. That's not a number picked out of the air: On average, a well-educated person who loses their job will take about nine months to find a new one, von Tobel says.
If you can build a bigger cushion, all the better. Stash that money away in a high-interest savings account. "It's the thing that lets you sleep better at night," she says.
But make sure you're actively saving for retirement. If you're company has a matching 401(k) plan, make sure you're "taking [full] advantage of that first -- it's like free money," von Tobel says.
Additional money should be funneled into a retirement account, preferably a Roth IRA, she says.
If your employer doesn't match 401(k) contributions at all, von Tobel suggests you flip the equation: Max out contributions to your Roth IRA first -- the limit in 2012 is $5,000 a year -- and then focus on your 401(k).
Whatever is left over should go toward the big goals, such as saving up for a home down payment, or putting aside cash for your children's college tuition, she says.
Check out LearnVest's "Start Saving for Retirement Now" link to help you find a retirement account that fits your needs.
If you happen to be happily debt free, put that portion of your money toward savings.
• Choices: 30%:
The final 30% of your budget should go to what should be considered "choices -- eating out, travel, shopping, a housekeeper," von Tobel says.
3. Slay Your Debt
It's no secret that debt can wreck havoc on your financial stability. So if you're carrying a big balance on credit cards (and many of us are -- the average American woman has $9,000 sitting on her plastic, von Tobel notes) pay it down." In order to have a great credit score, the total amount you owe should never exceed 30% of your available credit," she says.
Money gurus advocate several strategies for how to organize your paydown. Von Tobel's is straightforward: Tackle the debts with the highest interest rates first, and work your way down.
• Know Your Credit Score
Understand that one of your most important numbers is your credit score, which is how lenders evaluate your financial responsibility and health, von Tobel says. You can check your credit score for free on CreditKarma.com. Never pay a fee to check your credit score, she says.
• Rethink Your Credit Card Use
Be judicious about pulling out the plastic. Von Tobel recommends this simple rule of thumb: "Don't use credit to fund parts of your life that you can't afford."
Know the difference between good debt, such as student loans, and bad debt, which includes credit card balances, von Tobel says. Prioritize paying off bad debt.
Own no more than three credit cards, she says. And don't be tempted to sign up for a store credit card just to get 25% off that cool top you've been ogling. As a general proposition, store cards "are one of the worst things" you can sign up for, she says. They have significantly higher interest rates than general-purpose credit cards -- about 20% and up -- so stay away from them.
4. Get Insured
Having the right insurance is more than just a matter of health insurance: You should have a renters or homeowners policy that will make you whole in the event of catastrophe. Don't just hope that floods, fires and other disasters won't happen to you -- get protected. And if you're driving around without car insurance -- even in one of the few places in the U.S. where it isn't mandatory -- get yourself covered, soon.
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