Every year I go over my financial goals and revise them for the next year accordingly. To me this is of ultimate importance because I refuse to be the old lady who literally lives in her shoes (or a house built out of her shoe boxes), the girl with the expensive designer handbag without a dollar in it to buy her own drink or pay for her cab home.
I've been having quite a few money conversations with my friends lately and while everyone has been guilty of one money mistakes or the other i.e. overspending, not saving enough etc, there's no better time than now to get your money situation where you really want it to be.
That being said, below is a breakdown of how I categorize my finances and perhaps a guide for you to develop your own system if you haven't already. Having a well organized system in place will make it easier for you to accomplish your money goals.
How to categorize your finances
1. Day to day transactions
I use my checking account for my day to day transactions like paying bills, grocery shopping, eating out, gas etc. I also use this account to write checks and any automatic debits that I have set up. I don't save any money in this account.
If you use your checking account in a similar fashion (or plan to), it's a good idea to keep a cash buffer in it just incase an unexpected transaction hits. In addition, you'll want to track your spending very closely to ensure you are on top of your expenses.
2. Emergency savings
I keep my emergency savings in a separate account and it is kept liquid in the event I need to access the funds quickly. Similarly, your emergency savings should be easily accessible just in case of an emergency or unplanned situation.
If you don't have any emergency savings in place, set an initial goal of $1,000 especially if you have high interest debt to pay off. Once your debt is dealt with, the ideal amount of money to have saved for emergencies should be 3 to 6 months of your basic living expenses to help cover things like loss of income due to a job loss and any unplanned expenses that may come up .e.g your car breaks down, home repairs etc. Once you are get past the situation, you can then plan to replenish your emergency savings.
3. Short term cash savings
Your short term savings would be for things like buying a house, starting a business etc basically money you need in less than 5 years which you'll want to have in liquid or semi-liquid form and easily accessible (think certificate of deposits).
Note: Where you keep your emergency and short term savings is up to you but it's a good idea to set it up where you are not able to easily make transfers between these accounts and your checking account this way you are not tempted to dip into the accounts because they are convenient to access.
4. Retirement savings
Your retirement savings is for the long term to fund your future lifestyle when you retire. To avoid your savings from being eaten away by inflation and to allow it to grow over time, investing your money is the way to go.
In the united states examples of retirement accounts include the 401k, 403b, IRA etc. These account types have several tax benefits and are offered by many employers. You also have the option to set up your own retirement savings accounts on your own if you don't have access to an employer account or if you are self employed. Learn more HERE and HERE.
5. Other investments
Outside of your retirement savings, other investments types to consider include non-retirement investing in the stock market, investing in real estate or in small business. Having multiple investment types is a great idea to diversify your portfolio but you wan to be sure you do your due diligence and research any investment you choose to put your money in.
6. Splurge / Fun Savings
This is an account is where your fun money sits e.g savings for travel, shopping and other splurges however, while it's great to reward yourself, be sure to prioritize your main goals first i.e. if you have debt to pay off, saving for retirement etc. If you do choose to reward yourself or make expenses splurges, ensure that they are not at the expense of your financial goals.
Once you have your categories / accounts all set up, you'll want to tie them to your financial goals and your budget and start tracking your progress accordingly.
I'm curious to know your thoughts on categorizing your finances and how you do it, so leave a comment below!
Bola Onada Sokunbi