How to Set Up Your Finances: A Step-by-Step Playbook

Jul 17, 2024

How to Set Up Your Finances: A Step-by-Step Playbook

Introduction

  • Goal: Help millions become rich by setting up finances
  • Steps to manage spending, investing, and saving guilt-free
  • Key takeaway: Automating money flow for effortless management

Step 1: Conscious Spending Plan

Key Concept

  • Conscious spending over strict budgeting
  • Allocate funds based on personal values and cut costs on less important things

Case Examples

  • John: $221,000/year on dining out
  • Lisa: $5,000/year on shoes
  • Julie: $40,000/year salary, saves $6,000/year

The 4 Buckets

  1. Monthly Fixed Costs
    • Basic living expenses
    • Should be 50-60% of take-home pay
    • Example: Sarah's $5,000/month salary, $2,500 on fixed costs (50%)
    • List includes rent, utilities, phone, groceries, debt payments
    • Add 15% buffer for missed expenses
  2. Long-term Investments
    • Invest at least 10% of take-home pay
    • Example: Sarah invests 10% ($500/month) into Roth IRA
    • Consider salary increases and unexpected income for additional investments
  3. Savings Goals
    • Allocate 5-10% for short and medium-term goals (1-5 years)
    • Example: Sarah saves 8% ($400/month) split between vacation and emergency funds
  4. Guilt-Free Spending
    • 20-35% of take-home income
    • Example: Sarah has 24.5% ($1,225) for guilt-free spending

Step 2: Beat the Credit Card Companies

Five Commandments

  1. Pay Off in Full with Automatic Payments
    • Use snowball method or highest APR approach
    • Set automatic payments to avoid manual tracking
  2. Negotiate Lower APR
    • Call credit card company to lower your interest rate
  3. Get Annual Fees Waived
    • Call before annual fee kicks in, ask for waiver or points bonus
  4. Keep Main Cards for Long Time
    • Maintain long credit history for better credit score
  5. Use Secret Perks
    • Ask for full list of credit card benefits annually

Step 3: Setting Up Your Automatic Money Flow

Importance of Automation

  • Automate finances to save time and make profit
  • Spend one hour per month on financials

Account Setup

  1. Checking Account
    • Central hub for all financial transactions
    • Recommended: Schwab Investor Checking (no fees, ATM reimbursement)
  2. Online High-Interest Savings Account
    • Short to mid-term savings (1-5 years)
    • Recommended: Capital One 360 Savings, Ally, Marcus by Goldman Sachs

Linking Accounts

  • Link checking and savings accounts
  • Automate transfers according to your spending plan

Automatic Money Flow

  • Allocate money based on percentages from paychecks
  • Example allocation based on $100: 60% fixed costs, 10% investments, 10% savings, 20% guilt-free spending

Finance Scheduling

  • Align bills and automate payments

Step 4: Simple Investment Strategy

Long-Term Investing

  • Investing is the path to wealth, not just for rich people
  • Use target date funds as simple investment vehicles

Ladder of Personal Finance

  1. Employer 401k Match
    • Contribute to get 100% match
  2. Pay Off High-Interest Debt
    • Focus on paying high APR debts first
  3. Maximize Roth IRA
    • Contribute up to the limit
  4. Maximize 401k Contributions
    • Contribute above the employer match
  5. Health Savings Account (HSA)
    • Possible investment account
  6. Regular Taxable Account
    • For high-income investors

Target Date Funds

  • Choose based on retirement year
  • Example: Fidelity, Vanguard, Schwab options

Conclusion

  • Follow the four steps for financial success
  • Automate financial systems, spend 1 hour/month on finances
  • Grow savings and investments automatically for a rich life