No one is perfect, and that’s especially true when it comes to financial management. It can take some time to learn the best strategies for your own financial picture, and achieving success in this realm is usually more of a marathon than a sprint. By acknowledging possible imperfections and allowing yourself a little room to learn, however, you can keep your personal finances truly personal. We took a look at how one of our own team members here at The Dime learned and put in place best practices for money management through a little trial and error. Read on for his personal account.
18 months ago, I found myself roughly $20,000 in debt from credit cards and student loans. Oof. Enter Dave Ramsey and his “envelope system” tool to money management. I took this well-known tracking idea and tweaked it a bit to fit my personal spending habits (read more about that here), opening 11 checking accounts (yep, you read that correctly) to give me a better way to monitor how much I spend each month.
Since then, I’ve managed to reduce the number of accounts I have from 11 to seven: six savings-based accounts and one money market account, which I’ve found to work better for me than a run-of-the-mill checking account. By still allowing me to write checks and link to instant payment apps like Venmo, the money market account takes care of most of my checking account needs while allowing me to accrue a little bit of interest, too.
Because I don’t use a regular checking account, I make 99% of my purchases on a credit card rather than a debit card. The thought of that might make those who are currently in debt cringe: shouldn’t someone like me, who’s previously been in debt, stay far, far away from credit cards? Well, not entirely. By keeping a close eye on nearly every penny coming out of my wallet for the past three years, and choosing to buy only items I really need, I’ve gotten pretty good control over my spending habits. My debt forced me to adopt a better way to spend my paycheck, which in turn has given me the freedom to learn to use a credit card responsibly. My strategy is actually pretty simple: I spend less than I earn, and I don’t carry over a balance month-to-month.
Now onto the savings accounts: proof that Mr. Ramsey’s envelope method has some longevity to it.
Savings Account 1: Emergency Fund
My top priority right now is saving for an emergency fund, which, according to many financial experts, should cover about three to six months’ worth of expenses. An emergency fund ensures that you’re able to maintain your financial health during whatever financially-catastrophic event(s) might come your way (hail damage, anyone?). It’s easy to think that an emergency fund should fall by the wayside while you’re in debt, but this isn’t necessarily the case. I was only maintaining $1,000 in an emergency account prior to my financial makeover, and in the event of an emergency, I don't think I would have had the funds to carry myself without going further into debt.
Savings Account 2: Charity
Each month, a percentage of my paycheck gets deposited into my charity fund account. I’ve chosen two organizations that I love to support, and I use this account to donate to them monthly. It also gives me the flexibility to donate to causes for friends and family without feeling strapped (I can’t be the only one who has received many a GoFundMe donation request). Oh, and charitable giving is tax-deductible: win for me, and for society.
Savings Account 3: Gifts
There’s nothing like the holidays to make you want a raise. I’ve created a special savings account for gift purchases primarily for that reason—and, it’s helped me avoid spending more than I’m making each month during the financially-demanding holiday season. For this account, I’ve chosen a flat dollar amount that I’m comfortable setting aside (rather than a percentage) that gets deposited automatically.
Savings Account 4: Money Saved for My IRA
Take it from me—before you put money into an IRA, deposit it first into a special savings account that will accrue additional interest. I’ve been able to maximize my savings efforts with this strategy, and now I periodically transfer money into a savings account designed specifically for this purpose. Because I didn’t begin this practice until I was able to pay off my credit card debt, this is my newest savings account; needless to say, I’m still learning the ropes.
Savings Account 5: Mortgage/Rent
Ever worried that you’ll be late on rent or mortgage payments? One of the best solutions is to designate a savings account for these expenses. For me, knowing that I can over-spend without worrying about whether I’ll be able to afford rent has given me serious peace of mind.
Savings Account 6: My Primary Account
After all my other savings accounts’ needs are met, a final direct deposit is made into my primary account. I use this to pay off my credit card, and the system works pretty well for me.
As I say, take what you want, and leave the rest. Through trial and error, we all find a method of keeping track of money that works for us. If you’re struggling to stay afloat, try something new. I recommend taking from many places and creating your own individual system to your needs. The patchwork of different methods you put together may be what finally brings you the financial balance you are seeking.
(Hey, we said we were getting personal.)