Money management isn’t just for millionaires trying to become billionaires. In fact, if your net worth isn’t quite where you want it to be, knowing how to manage your wealth is one of the best things you can do to bring you one step closer. To get from A to B, you need to know exactly where you’re starting from and what route you’ll take.
Many people assume that they can’t manage their wealth effectively without a financial advisor. But while enlisting a professional for help is never a bad thing, there are so many more options today — there are robo-advisors, virtual net worth trackers, and internet guides like this one.
Whether you’re starting your wealth management process from scratch or you think you’re there already and just want to check that you haven’t missed any crucial steps, we’ll outline:
- Using your goals to guide your financial decisions
- Creating accounts to make wealth management easier
- Investing your money
- Tracking everything along the way
Feel free to skip to whichever point you’re at!
Consider your goals
You wouldn’t try to plan your schedule for the coming week without knowing which tasks you need to complete. Why would you try to manage your wealth without knowing how much you need or what you intend to use it for?
It’s impossible to give a universal prescription for wealth management since everyone wants something slightly different from life. However, we’ll cover three of the most common goals to see how they should affect your financial strategies: debt, retirement, and home prepayment.
The first step in your financial journey should always be to pay off your debt. Otherwise, one step further will always result in two steps back — maybe your investments bring in $500 in a month, but you have to pay $700 in debt.
Always make the minimum payments on your loans each month, and then follow the debt avalanche method to prioritize debts with the highest interest rate.
But there’s a caveat: not all debt is “bad debt.” A mortgage is debt, but most people would advise against overpaying it and tell you to focus on saving and investing instead. It all comes down to a comparison of interest rates: is the return on your investments higher than what you’re paying in interest on your loan? If the answer is yes, you might prefer not to overpay your lender and use the extra money for investing instead.
Few people want to work until the end of their days, but retirement isn’t something that happens by accident. You need to carefully plan out how much you’ll need in retirement to make it happen.
How? By knowing your annual expenses (bear in mind your retirement expenses will be lower if you’ve paid off your mortgage) and the age you want to retire. Then, many people use the 4% rule: if you withdraw only 4% from your retirement savings each year, the total amount you have should remain untouched.
Say you currently spend $24,000 a year. Multiplying this by 25 (because 100/4=25) gives you $600,000. Now, work out how long it would take you to save that up — that’s when you know you can afford to retire.
However, the 4% rule is just a guide and not a guarantee. You shouldn’t always rely on it, especially during a market peak.
If you’re in the process of saving for a home down payment, you’ll need to account for this in your wealth management plan.
As a general rule, you should only invest your money if you don’t expect to need access in the next five years — this is a long enough timeframe for the market to recover if it dips over the short term.
Therefore, if you plan to buy a house in less than five years, you should avoid putting money you might need to use into volatile investments like the stock market and cryptocurrencies. Consider something simpler like a high-yield savings account instead.
Naturally, debt, retirement, and home down payments aren’t the only goals a person might have. If you’re saving for something else, be it a wedding or your children’s college education, then you should also consider them in your plans using similar logic.
Organize your accounts
Now you know what your financial goals are, you can organize your accounts based on how you intend to use your money.
Below are the three key accounts that everyone needs.
Yes, (almost) all of us have a checking account — but not everyone uses theirs optimally. Storing the lion’s share of your savings in the same account you use for grocery shopping is a huge missed opportunity and also quite likely to confuse you.
To manage and build your wealth, you need to be far smarter.
Instead, leave just enough money in your checking account to cover day-to-day expenses and put everything else into savings or investment accounts (more on this later).
If you struggle with budgeting, you could consider having two checking accounts: one for basic living expenses (rent, loan payments, food, bills, etc.) and another for luxuries (like entertainment and trips).
This isn’t for everyone, but it’s a great way to ensure that you’re putting enough money aside to cover the basics each month while also indulging in the occasional guilt-free indulgences.
Once you’ve sorted out the basics of your finances, most people want to skip straight to investing. But what happens if your car breaks down, your insurance won’t cover it, and the only money you can readily access is what’s in your checking accounts for basic living expenses?
You’re going to need an “emergency fund” to cover these kinds of unforeseen expenses.
Most experts recommend having enough money to cover three to twelve months’ expenses, with six months being the most common choice. This way, even if you lose your job unexpectedly and need to live off your savings for a while, you should have enough time to find another job without living off ramen.
You should be able to instantly access your emergency money whenever you need it — so no savings accounts that make you lock your money away for x months or give a notice period before withdrawing.
Assuming you want to retire, your best bet is to open a dedicated retirement account, which allows you to take advantage of tax-efficient solutions. These are the most common accounts:
- IRA: Contribute up to $6,000 a year (or as much as you earn), use the contributions as tax deductions, and pay tax on withdrawals in later life.
- Roth IRA: Save the same amount as an IRA, pay tax upfront, enjoy tax-free withdrawals in later life.
- 401(k): An option many employers give where retirement savings are tax deductions, and your workplace may offer matched contributions.
There are also some other retirement account choices for those with more specific needs, such as business owners or the self-employed.
If you have other specific financial goals — like saving for a home prepayment or wedding — then you could consider setting up dedicated savings accounts so you know exactly what you’ll be using for what.
Some people find it overwhelming to have too many separate accounts with different banks, but others find it helps them to organize their finances more easily. Besides, we have an easy way to keep on top of everything — keep reading to find out what it is.
It’s risky to start investing before you’ve built up a solid emergency fund, but once you’ve ticked this box, it’s time to think about growing your wealth.
Paying into retirement accounts and buying a home both entail investing, and most people don’t explore anything else. But given the restrictions about when you can withdraw money from most retirement accounts and how much you can deposit, many people like to invest in other ways too.
Here are some ideas to get you started.
Stock market investments
The gold standard for low-risk, long-run investing is a diversified fund like the S&P 500. This has achieved an average annual return of 10%, and with decades of past performance to go by, statistics suggest that we can expect something similar in the future (of course, there’s never a guarantee).
There are many other ETFs and mutual funds of a diversified range of assets — but make sure you do your research first.
Once you know what you want, you can invest through traditional brokers (like Fidelity and Charles Schwab), or trading apps such as Robinhood.
Or, you might be interested in going beyond the usual and investing in alternative investments. Most people don’t want to invest more than a small percentage (5 to 10%) of their wealth into alternative investments since they carry more risk, but you by no means have to follow this rule of thumb.
Examples of alternative investments include:
- Peer-to-peer lending
- Precious metals or collectibles
Keep track of your portfolio
Once you’ve figured out your goals, organized your accounts appropriately, and started investing, you’ve done the hardest part of wealth management (and the one that many people put off endlessly).
Now, you can enjoy the fruits of your labor by tracking your portfolio over time and using what you learn to educate any future rebalancing decisions. This used to require complex calculations and formulas on Excel (or worse, pen and paper), but fortunately, the world has moved on.
At Money Minx, we offer software that allows you to track all your accounts, and manage your wealth, in one place — perfect if you feel overwhelmed about all those savings, investment, and retirement accounts you just set up. And unlike many other wealth trackers, you can add thousands — 21,000, to be precise — of different accounts to your profile, spanning crypto wallets, mortgage institutions, and loan providers.
Anything you can’t find, you can add manually (or just opt for manual additions for privacy reasons if you prefer).
Here’s a snapshot of how it works.
Find out your net worth
After you’ve added your accounts, you can check your net worth, how it’s changed over time and the performance of each of your accounts over a set period. There are even projections for the future, so you can see when you’ll achieve savings goals or your retirement numbers.
In addition to the advantages outlined above, this can be a great indicator of which assets you might want to invest more in or which debts you need to prioritize tackling. But remember that, just because something has performed well last month, it doesn’t mean it will perform just as well this month.
Often, the opposite is true.
Check your allocation
Finding the right allocation of assets is one of the hardest parts of building a portfolio, and something people have traditionally relied on financial advisors to help with.
On Money Minx, you can check your current allocation (in our example, we have 100% cash) and how it’s changed over time. This way, you can rebalance appropriately. For instance, if you’ve decided you only want to invest 5% of your portfolio into cryptocurrency but your bitcoin skyrockets in value and you suddenly have 15% of your portfolio in crypto, you might opt to resell.
You can also see how similar investors are allocating their portfolios.
Work your way to wealth
When you manage your wealth, you’re in full control of your finances and reaching your money goals.
Like the idea of enlisting technology to help you out? You can get started on Money Minx for free and access all the features outlined above. Or, if you’d like to take your money management one step further, consider upgrading to Pro to get tailored insights from our AI tool to aid your wealth management (along with a host of other features).