How I Manage My Money
This post is about how I manage my personal finances, both theoretically and practically. If you’re new to personal finances I’d recommend this post to start building a mental map of this (unnecessarily complicated) space. Hopefully this gives you useful ideas that you can apply to your own situation!
The Goal
Before diving into the technical details, I wanted to set up what I’m trying to achieve when managing my finances. In short, my goal is to save more, utilize high-interest accounts as much as possible, and use automation to minimize human error. Let’s look at this piece-by-piece:
- Save More: The only way to build wealth is by saving more than you spend. This may seem obvious, but it’s worth stating explicitly. In alignment with this, I hope to mitigate lifestyle creep, and stay on the path to financial independence/security. This also makes me extra careful to only spend on the things that are actually useful or will bring me joy.
- High-Interest Accounts: There are countless posts on the power of compound interest (I even wrote one). That doesn’t make it any less magical, and more time only increases that magic. In alignment with this, I will try to move money out of low-interest accounts (e.g. checking) and into higher-interest accounts (e.g. high-yield savings, investments) as much and as soon as possible.
- Automation: This largely draws inspiration from 2 sources: (1) Behavioral Finance and (2) Ramit Sethi. (1) has convinced me that we make systematic financial errors because of a plethora of cognitive bias (my favorite is loss aversion). (2) has shown me a compelling way to mitigate these biases by setting best practices as the default. I’d recommend Ramit’s post on automating your finances for a more general framework of automated money management.
These are my core personal finance beliefs, and they’ll drive the majority of how I manage my money. However, other factors like risk tolerance (I’m generally risk-averse) and a time > money bias definitely come into play. This is to reaffirm the fact that personal finances is personal: my hope with this post is to serve as a template/inspiration, but that you’ll inevitably customize the details to fit your needs and situation.
The System
The purpose of my system is to take money coming-in (i.e. paychecks), and route that money to the optimal accounts (based on the principles in the previous section). Here’s a birds-eye view of how money gets to the right account in my system:
The boxes correspond roughly to accounts, while the arrows are either automated or semi-automated actions to move money from A to B. The arrows with blue annotations are automated, while the % labeled arrows are semi-automated.
Paycheck → Checking
We start with money coming into the checking account via direct deposit from my employer. I view a checking account as primarily a staging ground for expenses. I pay for most things using credit cards because of the points, and pay off the associated balance using the funds in my checking account. Since checking accounts have negligible interest rates, I only keep as much of my money in checking as is necessary to meet my expenses/prevent my bank from charging account fees.
Here are a few rules-of-thumb I’ve gone through when deciding how much to keep in checking:
- 1 paychecks worth.
- The most I’d be willing to spend on a single purchase.
- Average of my last 3 months worth of spending.
Checking ⇔ High-Yield Savings
This is how I maintain the high-interest accounts principle. To accomplish this, I have a high-yield savings account (HYSA) that’s also a sweep account [0]. Here’s how it works:
- I set a range ($MIN — $MAX) for how much money I want to be in my checking account.
- Any money in my checking account that’s above $MAX will get scheduled as an auto-deposit from Checking → HYSA.
- Any money that is below $MIN will get scheduled as an auto-deposit from HYSA → Checking.
This allows me to benefit from higher interest rates in HYSA sooner, while also making sure I always have enough in my checking account to meet my expenses.
High-Yield Savings → Savings Goals / Investments
To maintain enough money to meet my expenses (including large incidental purchases), I keep a minimum balance in the HYSA at all times. For me, I just picked a number I was comfortable with, but many of the heuristics mentioned for checking accounts apply here as well. As we’ll see in a few paragraphs, accuracy isn’t super important because manual intervention happens often enough to prevent disaster, and seeing the minimum possible balance in my checking account before making purchases has helped me be more intentional with my spending. 🙂
Similarly to the cash sweep, once I have money in excess of my minimum in the HYSA, I’ll move it to either a more meaningful (savings goals, charity) or higher-interest (investment) account. Savings goals are either short-term (e.g. travel fund) or need to be risk-free (e.g. emergency fund), and therefore would go into a similar HYSA as a sub-savings account. My higher-interest investments are for long-term goals (e.g. retirement), so deposits to this account are less liquid than savings goals [1]. This is meant to absorb any excess funds after I meet all of my savings goals, which also serves as my financial windfall plan.
I haven’t found a way to fully automate this, so I use a spreadsheet and a monthly recurring TODO to achieve this effect. That is, each month, I’ll put in the current balance of the HYSA, and any money above the minimum is assigned by percentages to the proper destination accounts, which I’ll use to schedule deposits accordingly. Here’s a template if you want to use it for yourself!
But wait, why not set-up auto-deposits to deposit directly into savings goals/investments from checking? Why the intermediary HYSA + manual intervention? Good question! I’ve tried to do this in the past, but decided to go with this approach for a couple of reasons:
- Less Need for Accuracy: When setting up auto-deposits, it’s crucial to accurately estimate your monthly expenses so that you don’t drain your checking account when you need to make purchases. Not only do you have to estimate your expenses, you also have to estimate your net-income [2]. While I still estimate my expenses to inform how much to keep in checking, I have a higher margin of error by storing reserves in an account that can detect/respond to a low checking balance.
- Flexibility: By allowing me to decide each month how much and where to deposit my excess cash, I can better adapt to changing life conditions. If I need to start saving for a new goal, I can just adjust the percentages in my spreadsheet. If I have an unexpected windfall/expense, I don’t have to adjust/cancel several auto-deposits to make sure that money makes it to the right destination. Having a manual process to take care of the parts of the system that are most prone to change is a good way to keep the system from becoming obsolete.
Measuring Progress
I like to track my spending to make sure I’m saving more than I’m spending as much as possible (i.e. the system is working). So as part of my monthly recurring TODO to fund my savings goals / investments, I’ll also check my budget-app to see the trends in my spending vs. income. I use Mint, so I’ll check the Trends page and see my net-income (income - expenses), net-worth (assets - debt), and which categories I tend to spend more on in a given period of time. Most budgeting apps will have a similar view.
Conclusion
And that’s how I manage my personal finances 💸! This is actually version 3 of my system, and a lot of what informed it came from good ol’ trial-and-error. Though the system will likely continue to evolve as my situation changes, I’ll likely stick to roughly the same principles. [3]
Hopefully this was useful to you! Thanks for reading.
Disclaimer: This post is for informational purposes only and should not be construed as professional financial advice. If you want advice, please consult a licensed financial or tax advisor.
[0] I use Betterment’s 2-way sweep because of the convenience of having everything in one account, but other brokerages/banks likely have this feature as well. You can also use a regular HYSA with a recurring TODO to manually sweep at regular intervals (e.g. on pay-day, every 2 weeks, etc.).
[1] I subscribe to a passive buy-and-hold investment strategy.
[2] Gross income - Payroll Taxes - Elected Deductions = the money direct deposited into checking on payday. I used to estimate this by averaging my paystubs, but the variability made me distrust the system and constantly check my accounts to make sure I was on-track. There might’ve been a better way to do this, but I didn’t want to spend time figuring that out!
[3] I didn’t go into depth on the money that goes into Elected Deductions (e.g. 401k, HSA) because the process/tools are out of my control. The only thing I control is how much gets put in these accounts. My rule of thumb is to max-out these accounts because of tax-efficiency, spreading out the contributions evenly throughout the year so my cashflow stays relatively stable month-to-month.
