Managing Your Money, Step by Step

Managing Your Money: The Basics

When I talk to my young adult children about money, they often ask about things they've heard of through a friend or social media post, but don't really understand where some of these things fall into their holistic financial picture. For example, a post on building wealth through crypto may gain plenty of attention for its outlandish claims (usually with an AI-generated picture of a Lamborghini or a private jet), but seldom are these over-influenced "investements" the first thing a young investor just starting out should even consider.

My most recent conversation went something like this:

Daughter: "Dad, my friend bought bitcoin and made a ton of money. How do I buy it?"
Dad: "You don't...yet. First we make sure you've got everything else in order before thinking about advanced, and highly speculative, investments. Let's make sure you can pay for the oil change you're going to need soon."

Managing money works best when you handle things in a set order. Finish the basic steps before moving on to the advanced ones.

1. Know Where You Stand

Start by tracking two numbers every month.

Cash flow is how much money you earn each month minus how much you spend.

Net worth is the total value of what you own (home, car, savings) minus the total of what you owe (loans, credit card balances).

Checking these numbers monthly shows, unambiguously and dollarwise, whether your finances are improving or getting worse.

I track my net worth in a Google Sheets spreadsheet that I update every 6 months or so, or after a significant financial event like a bonus or large change in my investment portfolio. When I look at the graph I expect to see it moving to the right and up over time.

2. Pay for Essentials First

Your first priority is covering basic living costs: rent, groceries, utilities, and insurance. If these aren’t covered reliably, nothing else in your plan will hold up.

3. Build an Emergency Fund

An emergency fund is money set aside only for unexpected costs, such as a car repair, a medical or dental bill, or losing your job. Having it keeps a surprise expense from turning into debt or a financial crisis.

Start with a small goal, such as $1,000.

Over time, build it up to cover 3 to 6 months of living expenses. This is all circumstantial, depending on how stable your income is and how much you have in savings. There are many places to keep your emergency savings, but to keep it simple, make sure it is not sitting in your checking account where it is barely earning interest. A high-yield savings account or money market account are good places to start, as they pay much more than checking accounts.

4. Pay Off High-Interest Debt

High-interest debt, especially credit card debt, is the biggest obstacle to building wealth. The interest charges take money you could otherwise save or invest. Pay this debt off before focusing on growth.

There are two common ways to do it.

The avalanche method means paying off the debt with the highest interest rate first. This saves the most money overall.

The snowball method means paying off the debt with the smallest balance first. This gives you quick progress, which can help you stay motivated.

I personally avoid debt at all costs and haven't paid interest on anything other than my low-interest rate mortgage in probably 30 years. Of course this is not always achievable based on your own circumstances...but you can start by avoiding unnecessary purchases that you'd have to finance/pay interest.

5. Get Your Full Employer 401(k) Match

Many employers add money to your 401(k) when you contribute. For example, for every dollar you put in, they may add 50 cents or a full dollar. That is an immediate 50% to 100% return, which you won’t find anywhere else. Unless you’re in a serious financial emergency, contribute at least enough to get the full match. Leaving it unclaimed is, quite simply, money declined.

I've set my 401K to invest in the lowest cost (see the fees sheets) S&P 500 index fund...and then contributed as much as I could, almost always the maximum allowed. So, I get the match, plus invest in 500 of the largest companies in the US with very low fees.

6. Invest for the Long Term

Once your basics are covered and high-interest debt is paid off, start investing for the long term. Investments take years to grow, so patience is required.

Traditional advice is to diversify by spreading your money across different types of investments, such as stocks and bonds. If one company or industry performs poorly, the rest of your investments help limit the damage.

I think the decision to invest in bonds should be considered against your age, emergency savings level, income, job stability, and many other factors. I personally have avoided bonds in my investing career as my income and job stability have been high and I didn't feel I needed the 'smoother ride' that bonds typically provide. I chose to keep investing aggressively, as I did not plan to use any of the investment money for many decades in the future so the bond 'stability' during equity (stock) market downturns was less important to me. If I'm not going to use it then why keep it safe for 30 years just to make me feel better during a market downturn?

Summary

When you have extra money, put it toward these steps in order.

First, essentials. Make sure all your bills are paid.

Second, an emergency fund. Build a small savings cushion.

Third, the employer match. Contribute enough to your 401(k) to get the full match.

Fourth, high-interest debt. Pay off credit card balances.

Fifth, investing. Put money into long-term, diversified investments.

Following this order means you’re no longer guessing what to do with your money. You’re using a clear, repeatable system for staying stable and growing your wealth, deliberately and dollar by dollar.

This is what I tell my kids (while they're in their 20's and just starting out in the full-time working world). They are sometimes disappointed that these steps won't make them rich anytime soon, but I remind them that they can thank me in 30 years when they're thinking, "Wow, dad was actually right about this stuff."

*Disclaimer: The information provided in this article is for educational, informational, and entertainment purposes only and should not be construed as professional financial, investment, tax, or legal advice. I am not a licensed financial advisor, broker, or certified public accountant. Any financial decisions you make based on the content of this article are done at your own risk. The author and publisher assume no responsibility or liability for any financial losses, damages, or consequences resulting from the use or application of the information provided herein. Always conduct your own independent research and consult a qualified, licensed professional before making any financial or investment decisions.