MyMoney Five & Your Personal Financial Health

MyMoney Five & Your Personal Financial Health
••• designer491/iStock/GettyImages

There’s a thrill that comes with earning that first big paycheck or bonus. The first thought most people have is to celebrate. And that’s fine, but keep in mind that as your income increases, so does your responsibility. You must start planning. That’s the only way to ensure your current and future financial health. The good news is that the MyMoney Five principles can help you develop a plan.

MyMoney Five Principles

You can’t build a house without a strong foundation. The same can be said about your financial future. It needs to be built on bedrock. The MyMoney Five principles help you build that strong foundation:

  • earn
  • save & invest
  • protect
  • spend
  • borrow was established by the Financial Literacy and Education Commission (FLEC), which operates under the U.S. Department of Treasury. The MyMoney Five principles spell out what you need to do for your financial well-being.

Look at these principles as a road map to help you better understand your finances and achieve your financial goals. MyMoney gives you proactive steps to take to ensure that your finances are in order.

By controlling your finances, you are better equipped to weather another economic downturn due to a national or worldwide crisis.

Earn and Understand Salary

The first principle on the MyMoney five list is earn. It’s important to maximize your current earnings. You earn a salary, but there's more to it than just being paid a wage.

Consider your benefits and take full advantage of the benefits your employer is providing in your compensation package:

  • overtime
  • 401(k)
  • health and medical

For instance, if you are an hourly employee and need additional income, ask about overtime pay. If none is available, make sure you are efficient when working at completing your job on time. At that point, you can secure a second job. This maximizes your time and earning potential.

If offered, participate in your employer’s 401(k) plan. Does your employer match a percentage of your contribution to the plan? If they do match, by not participating you’ll end up throwing money away. For example, if an employer will match the first 3 percent of your contribution and you don’t’ bother to participate with even the minimum, you leave money on the table.

That’s because if you contribute 3 percent of your income and they match with 3 percent, you now have a combined contribution of 6 percent. You just gave yourself a 3 percent raise towards your future. By not participating, you end up saving nothing.

Knowing Your Paycheck Helps

It’s important to know the details and reasons behind your paycheck.

Your paycheck doesn’t always reflect what you earn. That’s because there are withholdings from your check. Some of these include taxes:

  • income
  • Social Security
  • Medicare

You may also have other deductions taken out of your pay. For instance, if a health insurance plan is available, your employer will withhold your portion of the premium from your paycheck. In addition, you might have other deductions like life insurance or disability insurance.

As a result of these taxes and other deductions, there are two versions of your salary. The first version is your gross income. This is the amount your employer has agreed to pay you.

The second version is your net income. This is what you receive after all the deductions and taxes have been withheld. This is referred to as your take-home pay.

Be aware that by taking advantage of a 401(k) plan, there is an added benefit. Your contribution is pre-taxed. This means that it’s income that you are not currently being taxed on because it’s for retirement. So it defers the tax years down the road.

Monitor your paystub. It’s an invaluable tool when it comes to tracking your income and withholdings.

Read more​: How to Check Your Paycheck

Save & Invest for Financial Goals

Save & invest is the MyMoney Five second principle to secure your financial health. Although they’re both vital elements, it’s important to know that investing and saving are two different animals. To reach your goals, you must know the difference between them.

Saving is the act of socking away money in a bank or credit union account. Typically, it is used to reach a short-term goal such as a rainy-day fund or a down payment for a big-ticket item. This is usually a gradual process.

With savings, you have immediate access to your funds and you're not risking your nest egg. But there is a downside. Savings doesn’t increase your money by that much because the interest rates paid are low. That’s why it’s a short-term proposition.

Investing is a long-term goal; it's taking your money and making it grow. You do this through buying assets:

  • stocks
  • real estate
  • mutual funds

The motivation for investing is the potential for higher returns. You can earn more profit by investing than with a savings account. But although this sounds great, there are a couple of downsides.

There is low or no risk when depositing money in a federally protected savings account. With investing comes the higher risk of losing your nest egg.

Additionally, in an emergency or urgent financial crunch, you typically can’t access funds from investments quickly.

Both saving and investing are viable strategies. With a well-thought-out risk strategy, this combined approach will help you reach your financial goals.

Protect Your Finances

MyMoney Five’s protect principle reminds you that your finances must be secured. This includes purchasing both health and disability insurance. Evaluate your needs and act accordingly,

You work hard for a paycheck and having it stolen through identity theft is disastrous. Be vigilant. Make sure you check bank statements and credit card bills. Look for discrepancies that could indicate fraud and report them to your bank or credit card company immediately.

Keep financial records in order. Always make copies of important records and reevaluate any changes in your life that could influence finances negatively.

Spend Wisely

Not paying attention to MyMoney Five’s spend principle can wreck your financial stability. It’s vital to manage your funds to meet your financial needs. This includes both long-term and short-term goals. It all starts with a budget.

Make a weekly budget, and don't deviate from it. One way to develop a budget is to track your everyday spending. Write down what you spend daily for a couple of weeks. This will give you the information you need to set the budget you can live within.

Once you have the budget, ignore the temptation that doesn't fall within the budget. Don't be distracted by that 20 percent off coupon on shoes you don't need. It may look like a deal but, it’s blowing your budget.

Even when you know what your budget is, it can be difficult to continually track it. But there are different techniques to monitor and keep your spending in check.

MyMoney Five earn provides a worksheet that lets you track everything from your weekly groceries to monthly rent and car payments. You can write down everything in one place and have it available to check periodically. It lets you know you’re staying on track.

Setting up an excel sheet with your expenses, savings and investing is also a good solution. And there are numerous budgeting programs available that can help, which include:

  • Simplifi. From the creators of Quicken, this budget management app allows you to track your bills and keep an eye on your spending in under five minutes. It also has security methods for your data.
  • Mint. This free app from Intuit and for both iOS and android tracks your spending budgets and net worth. It also alerts you when there are opportunities to save.
  • PocketGuard. This app for both iOS and android shows you what spendable income you have each month. It allows you to link your accounts. It has SSL 256-bit SSL encryption for your data.

Also check with your bank or credit union. Many have online banking that includes personal budgeting tools that are automatically based on your banking activities.

There are times that you need to make that big-ticket purchase. Choose wisely. Shop around instead of buying the first item that you see, and ensure that it’s a good value.

The bottom line to all of this is to live within your means. By tracking both your income and expenses, you set yourself up to meet your financial goals.

Read more​: Daily Budget Plans

Borrow Prudently

MyMoney Five’s final principle is borrow. This is one where you must be vigilant and make the right choices. It’s easy to dig yourself into a hole.

The average millennial has over $78,000 worth of debt. This is mainly because each millennial borrower is burdened with an average of over $38,000 balance in student loans. So, as a result, some people are already starting out in the hole once they graduate.

Keeping your debt down is one reason why you really need to be careful about overextending your credit. For instance, just because you are approved to borrow $400,000 on a house doesn't mean you should. Think about it and run the numbers. Then, look for a home and a mortgage payment that will comfortably fit into your monthly budget.

Credit cards can be great when you need to make a big purchase. But they come at a price. It's not free money, and the longer it takes you to pay the credit card balance, the more interest it costs you. In fact, credit card interest is one of the highest rates of interest you will pay for borrowed money. So, when applying for a credit card, make sure you shop around for the best interest rate. And remember, to pay more than the monthly minimum. That way, you can pay off the balances in a timely manner and save.

If you are prudent in how you borrow, and make your payments on time, you will build up your credit score. A high credit score will earn you the lowest interest rates. This keeps more money in your pocket to apply toward your financial goals.

Life Events Shape Finances

You can't always plan what's going to happen. Life can sometimes throw curveballs. A spouse may lose a job or an unplanned pregnancy might occur. Even the planned events like changing jobs or going to college have their share of financial surprises.

Having your finances in order will make these changes go a lot smoother. If you’ve always kept your credit score up and kept debt down, a job loss won’t hit nearly as hard. You'll also have the credit score to let you borrow for that education or even a new home when your family expands.

With sound planning, life events, both adverse and happy, don’t have to disrupt your financial goals.

In Conclusion

MyMoney Five is a tool that helps you plan, work for and maintain your financial health. By following these fundamental five principles, you can confidently go down the financial road with a lot fewer bumps.

Knowing everything about your finances helps you manage your money on a day-to-day basis. But more importantly, it lets you make informed financial decisions that empower you to grow money. This goes a long way in meeting your financial goals.