How to Create a Money Management System That "Levels Up" Your Finances

This won’t come as a surprise, but I’m passionate about personal finance. But it wasn't always like that for me.   I used to have no clue about the basics of personal finance, such as budgeting, and retirement planning, let alone how to pull it all together and create a money management system that was easy to use and would help me achieve my financial goals. Over time I found a ton of great resources, like Dave Ramsey and r/personalfinance, which helped me create a system that worked for me.   Here's what I found out.

The secret is to get focused, organized and automated about how you manage money. Unfortunately, that’s not always easy in today’s world. We constantly have things dividing our attention and making it difficult to stay on task. That’s why so many factories and workplaces are built around repeatable systems to help manage day-to-day tasks.  The same principle applies to personal finance. 

Since there are a ton of things you can do to get your money organized, how do you do you get started without getting overwhelmed? The trick is to just use what you need when you need it, and then "level up" when you are ready. 

Money Management Mario

Leveling up

As I began my journey towards financial recovery, I started to notice some unexpected benefits along the way. For example, once I had six months of savings to fall back on, I started to perform more confidently at work. It’s amazing what you can do when your decisions aren’t driven by fear or desperation. This ultimately resulted in a promotion and pay increase.

It reminded me of some of video games I’ve played over the years, where you unlock new abilities each time you make it to the next level. The game gets easier over time as you add tools to your arsenal. This is also 100% true in personal finance. The more you “level up” your money management systems and money manger skills, the more easily you can get to the next level.

Don't worry...I won't go  overboard with the metaphor, but you'll have to indulge me a little!

So that brings us to what we’ll cover in this guide:

  • An overview of the system I use
  • How to build your own system, one level at a time
  • The value you will gain along the way
  • Tools you can use to make it all much easier

Let’s dive in!

The system I use

​A good money management system is really its own little ecosystem, with different pieces that all serve a specific purpose and work in coordination with each other. At the highest level, money all flows in and out from the exact same place, my primary checking account. From there it flows through different levels, each with their own purpose and benefit.

Money Management System

Once you maximize the benefit of one level, you can move on to the next. The beauty is you only focus on one thing at time, and once you have a level nailed down, you just build on it.  

Let’s take a look at what’s happening at each level.

Level 1: Establish a primary checking account to manage all income and expenses

Money_Management_Lvl1

What happens at this level:

​This is the foundation of your system. Think of it as the main pipe for all your income and expenses to flow through; every paycheck and bill should hit this account at some point. If you’ve tried to juggle multiple checking accounts and credit cards for this purpose, you know how time consuming and misleading that can be, since all those accounts likely update at different times on different days.

What benefit you get:  

​The benefit is simplicity. You’ll have one checking account to look at, and from there you can easily see when and where your money is going. If you’re married and using separate accounts, this is a great opportunity to combine them.

When you should level up:

Today.

If you have multiple bank accounts, figure out which one works the best for you and set it up as your primary. If you are married but banking separately, this is a great opportunity to address a common money mistake.  If you are using credit cards for expenses (and assuming you are debt free otherwise), consolidate your spending onto one card. Just make sure pay the entire statement balance every month to avoid interest fees.

Power ups:

Using a budget at this level will make it much easier to progress. It will let you start paying yourself first, which can quickly increase your savings rate.  If you want to go even faster, freeze the credit card (literally put it in your freezer in a block of ice) and use a tool like the envelope system to manage your budget.

Level 2: Save $1k in a resiliency fund. Connect this to your checking account for overdraft protection

Money_Management_Lvl2

What happens at this level:

​Now that your income and expenses are all flowing through one pipe, it’s time to establish a financial buffer known as a “resiliency fund.” This is a saving account, funded with $1,000, that is connected to your checking for overdraft protection. This will give you a little bit of a cushion while you’re working to get out of debt. If you need to dip into your resiliency fund, make sure to refill it ASAP. 

What benefit you get:

​Breathing room and time to think. When an unexpected expense comes up out of the blue, this account will allow you to roll with the punches so it doesn’t get worse.

When you should level up:

Once you’ve completed Level 1 and have saved up $1,000 to fund your account.  

​Level 3: Save 3+ months of expenses for your emergency fund

Money_Management_Lvl3

What happens at this level: 

It’s time to create an emergency savings account where you’ll save 3-6 months worth of living expenses, ideally with a different bank than where you have your primary checking and resiliency fund set up. This new account will be your emergency fund, and it should only be used in case of true emergencies, like a job loss. Some people define “emergency” a bit loosely, so putting this money in a separate bank is intended to make it a bit more difficult to dip into.

What benefit you get:  

​Peace of mind and confidence. Now you can weather some significant financial storms, which moves you from being in a defensive position. No one wants to get fired, but now it’s not the end of the world if that happens. Or if a family member gets sick, you can focus on getting them healthy instead of worrying about the financial impacts.

When you should level up:  

​As soon as you have your resiliency fund in place, you should focus on paying off all non-mortgage debt. Once you are debt-free, you should start saving for your emergency fund.  

Power ups:  

​Some folks get a little antsy about putting so much cash in a saving account that only makes around 1% every year. While the point of this level is to not make money, you can do a little better than 1% by creating a CD ladder, which basically puts your money in higher return CDs. These CDs are then staggered over multiple years to increase your return and reduce the small penalty you’ll have to pay if you end up cashing them in.  

​Level 4: Contribute at least 15% to tax-advantaged accounts

Money_Management_Lvl4

What happens at this level:

Let the retirement planning begin! Assuming you debt-free and have your emergency fund in place, it’s time to crank up your investing. This could be through a number of different account types like an IRA, 401(k), 403(b), TSP, etc. You’ll want to get your contribution up to at least 15% of your income, if not more.  

What benefit you get:

​Comfort and confidence that comes with knowing you have a plan for the future. No one wants to have to work forever, though some may choose to because they love what they do. At this level you are putting a stake in the ground that says you will be able to retire someday. It’s a good feeling.

When you should level up:

Once you are out of debt and have an emergency fund in place. If you start sooner than that, you risk staying in debt longer and having to tap into your retirement in case of an emergency. 

Power ups:

​You’ll need to decide whether you want to use a Roth or Traditional retirement account. The primary difference between the two is when you pay taxes, either now or when you withdraw funds during retirement. If you have a 401(k) with an employer match, their contributions will always go into a Traditional account, so if you sign up for a Roth, you’ll effectively have both.  

Level 5: Set up goal-based savings accounts for vacations, house down payment, etc

Money_Management_Lvl5

What happens at this level:

At this level, you can open individual savings accounts for specific financial goals or purposes. Many banks will let you do this, so I’d check with whomever you have your primary checking account with. Each account should be for a specific short-term goal, like vacations, Christmas shopping or a down payment on a house. If you have a child and want to start saving for their college, this is also when you’d set up a 529 account for that purpose.

What benefit you get:

Stress-free fun! Vacations are awesome, but coming home to a pile of bills isn’t. Why not reduce your post-vacation blues by saving up a few thousand dollars a year so you can pay for your trip in advance? Same goes for the holidays. Christmas shopping is a lot more fun if you’ve already set aside money to pay for all of those gifts.  You'll also likely see that your credit score has started improving from all of the financial success you've been having.  

When you should level up:

Once you are contributing at least 15% of you income to retirement investing, and assuming you are debt free.

Power ups:

​I can’t stress enough how easy this is if you have a bank that allows you to open multiple savings accounts. I use Capital One 360, and they let you open up to five.

Level 6: Open a brokerage account to pile up cash in ETFs

Money_Management_Lvl6

What happens at this level:

It’s time to start dreaming big! For me, this means building enough wealth that I get to choose what I want to do and when I want to do it. The first step in that is creating a war chest of money to invest in other wealth-building assets. I use a brokerage to invest in no-fee ETFs that index the S&P 500. Because I’m a personal finance nerd, I also have a robo advisor that invests for me as well, so I can see how my personally picked investments perform as compared to the robots. I suggest not touching anything in this account for at least  years. That way your money isn’t as impacted by the volatility of the stock market. 

What benefit you get:

An ever increasing net worth and the options that it brings. This is really what wealth provides...the more money you have, the more options are open to you.

When you should level up:

As soon as you are done with Level 4 (retirement planning), you can technically go directly here. That said, I would encourage you to not skip Level 5--you’ve made it this far, so enjoy your life and treat yourself to a little stress-free fun.

Power ups:

There are a ton of no-fee ETFs that can help you save a bunch in the long run. I’ve used iShares from Blackrock myself. It also wouldn’t hurt to use a robo-advisor if you want to be hands-off here. If you’re looking for some options, personally, I’ve really enjoyed my experience using Wealthfront.

Level 7: Invest opportunistically in income-producing assets and reinvest the gains

Money_Management_Lvl7

What happens at this level:

Diversification, diversification, diversification. This is when you start really getting into the coolest parts of personal finance, building passive income streams that may provide financial freedom some day. In my case, I diversify into three different streams: real estate, dividend investing, and a small business.

I fund these directly from the war chest I created earlier. Any income produced gets reinvested or flows to the top and gets deposited in my checking account, closing the loop on my money management system.

What benefit you get:

For me, early retirement is the big dream, so this level is focused on making that happen by creating enough wealth that I can pursue it. You may have other big dreams in mind, which this level can help you make a reality.

When you should level up:

Don’t rush to do this. Take your time piling up cash in your war chest, and be very opportunistic in how you spend it. If you want to buy a rental property, pay cash and wait until you see a steal. Because you’ve already built up the funds, and you’re already saving for retirement, you can afford to wait for just the right opportunity.

​Conclusion

So, there you have it. That’s the money management system I use, and how I built it level by level. From start to finish, it took me about three years to get to Level 7, which felt like it went by in a blink of the eye once I got rolling.  

What other “levels” do you have?

How else have you made managing money easier for you? Leave a comment below!

About the Author

Hello, I'm Ryan. Besides writing about personal finance my other passions include spending as much time as I can with my amazing family, running around my neighborhood, and continuing to refine my skills as a product manager. You can also follow me on twitter @TMPF_Ryan.

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