Money management is not something you get taught in school. It is also a topic that some of your parents wouldn’t teach you because they don’t know about it themselves. As a result, it hurts working professionals financially by having them find out about setting up their finances deep into their career.
I had conversations about common money management topics with some software developers who were in the field much longer than I have and I was surprised when I find out that they don’t have their finances in order. I wasn’t asking anything personal like numbers, just questions about common types of retirement and savings accounts. It hurts to imagine how much money they left on the table by not having their finance straighten out. So, this leads to the topic of this post which is set up for financial success as a software developer. But realistically, you can apply what I am going to share to any line of work you do.
Disclaimer: I am not a professional in finance. None of the things shared in this post should be considered as financial advice.
Find out About 401k and Company Matching
Almost any company that you’ll be working for will have a 401k retirement plan. If you’re not enrolled in one or not sure if you’re enrolled, make sure you find out and enroll if you are not. What’s great with 401k is that companies usually incentivize you to contribute money into it by offering a match. For example, when a company says they’ll match 100% of what you put in up to 4% of your salary that means for the contributions that total up to 4% of your salary, the company will put that same dollar amount into your 401k. That’s free money at 100% return rate — you can’t beat that!
Contribute to Your 401k
Each company will have a different 401k plan, so find out about them when you join a company and start contributing. Now, I understand that some of you might not have much money to spare, but you should at least contribute enough to get the full company matching. Once you pass that point, you can turn your focus to something else.
It is important to note that money in your 401k is for retirement, which means you can’t touch it until much later. So, don’t contribute more money than you can afford. You can get money from your 401k if you really need it, but you’ll get penalized for it.
Create an Emergency Fund
If the next day you suddenly find yourself without any income for some time, will you be able to sustain your current lifestyle? If the thought of that makes you uneasy, then you need to create an emergency fund. An emergency fund is basically money you have stashed away for an emergency like no income for a few months.
So, where exactly should you have your emergency fund? It’s not a bed or a case full of money… you can do that, but there are better ways. One simple way to handle your emergency fund is to put the money into what is called a high yield savings account. Unlike the saving accounts that banks normally offer, this account gives you a much higher return per year for your money to sit in there. Even if you don’t gain capital, you can rest easy knowing that your emergency fund is keeping up with inflation.
Another question you might have is how much to keep in an emergency fund. It really depends on you. The recommended amount is it should be enough to last you 6 months with no income stream.
Keep Savings in a High Yield Savings Account
You probably have a savings account, but do you know how much interest you get from it? If you don’t, go find out and come back. So, I assume now you know how much interest you are getting. Now, go and find out how much interest you get from a high yield savings account.
You probably noticed that a high yield savings account offer a significantly higher return rate for your money. It should be pretty clear which one is the better option to choose.
Evaluate and Pay off Debts
There are good debts and bad debts. What you want is to keep the good debts and pay off the bad debts. An example of bad debt is student loan that is unsubsidized with an interest rate that is higher than 5%. An example of good debt is student loan that is subsidized with an interest rate of 3% or under.
Ideally, you’ll want to be debt-free, but if that’s not the case then choose to get rid of all the bad debts first. The good debts become a question of what you can do with that money if you spend it to pay off the debt vs how much more money you can bring in using it elsewhere. For example, for a 3% interest loan, you can either pay that off or use the money to invest in the stock market with an average return rate of 5% annually. Choosing to pay off the debt instead of investing that money means you’re making 2% less.
Start and Contribute to a Roth IRA Account
A Roth IRA account is a retirement account that is funded with after-tax money. So, that means your money grows tax-free in that account. It’s the opposite concept of a 401k where you pay the tax later; for a Roth IRA, you pay the tax now.
It’s easy to start an online Roth IRA account with a brokerage. I’ll leave it up to you to decide who to start an account with.
Keep Track of Your Spending
One of the simplest ways to better finance is to know where your money is going. It’s not enough to know that your bank account is not going to go below 0 after a spending decision. You need to know where exactly you’re spending most of your money. Sometimes, you just need to see it to realize how much you’re spending.
An easy way to see your spending is with an application like personal capital. Link in your accounts and see your net worth with a breakdown of each of the accounts you linked.
Build up Your Credit
Do you know your credit score? If you don’t, find out what your credit is. You want to have at least a good credit score that way you can apply for loans in the future. If you have an intention to make a big purchase say like a house then you’ll need a good credit score.
There are plenty of ways to build up your credit score if you do some research. However, there is a simple way to do so and that is to get yourself a credit card. Put a small reoccurring payment that you already have on the credit card and pay it off on time.
Invest Your Leftover Money
You contributed to your 401k, Roth IRA, emergency fund, and savings with some leftover money. You can either choose to spend it or invest it. In this case, let’s say you choose to invest it. There are multiple choices for you to invest, one is through a taxable trading account and another is real estate.
I am not going to debate which is better, but instead, say buying and holding index funds in a trading account is the simple and less involved option. One yields less profit but requires less work. The other will require more work upfront but has the potential to yield a higher reward.
If you want to invest in real estate but want to be really passive with it, you can try out crowdfund investment. You contribute money and that money gets invested into real estate without you having to do anything besides deposit money. Since this is hands-off, the profit will not beat out you actively finding and managing your own properties.
Finance Tools and Accounts I Have
I am someone that practices what I preach, so I want to share with you the tools and accounts that I personally have. I will also provide referral links to some of them and would appreciate it if you use them to signup if you’re interested.
For my Roth IRA account, I use Betterment and thinking about moving it into Vanguard. There is absolutely nothing wrong with Betterment, I am considering to move over to Vanguard mainly because I feel like I have learned enough to be more hands-on. If you’re a complete beginner, I would recommend going with Betterment first because you don’t need to know anything about investing. You just deposit the money and they will take care of everything else for you.
For my high yield savings accounts, I have Marcus and Wealthfront. So, why do I have two you might be asking? That’s mainly because the return for Marcus got lowered while Wealthfront got increased. When you’re reading this post, things will probably be different, but that’s why I have two high yield savings accounts.
For my investment accounts, I have M1 Finance, Robinhood, Betterment, and Fundrise. Betterment and M1 Finance are where I hold my investment for the long term (years). Robinhood I use for day/swing trading stocks. I use Fundrise to get my foot wet with real estate.
To keep track of my credit score I use Credit Karma. I mainly log in once in a while to make sure each of my payment listed are on time and not marked as late.
Lastly, I use Personal Capital to monitor my net worth and my spending. It really helps when you have all your finance together in front of you.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
You may have noticed that this post doesn’t really go into much details for each of the topic mentioned and that’s intentional. I simply want to bring awareness to things and have you go off on your own to do research. Also, if I talk about each topic in detail, it’ll just be way too long — each topic can be its own post.
How much are you already doing for your money management? Are there anything in this post that you were not aware of? Do you want to see more topics about finance?
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.