3 min read
There’s one metric in personal finance that is more important than any other: savings rate. This represents what percentage of your income you save. The higher your savings rate, the faster you can reach financial independence or whatever financial goal you happen to have.
In order to increase your savings rate, you first need to have an idea of where your money is flowing on a regular basis. Once you know the path your money takes from earning income to paying bills to making investments, you’ll be in a position to identify how you can increase your savings rate.
One helpful way to visualize your money flow is with a financial map. This is a simple “map” that outlines where your money travels on a regular basis.
Here’s my own financial map:
My financial map has three phases: income, expenses, and savings. I earn income, pay for my expenses, and save whatever is left. My goal is to get as much money from the green diamonds (my income) at the top of the map into the beige diamonds (my savings & investment accounts) throughout the map.
Here’s a detailed description of each phase in the map.
Phase 1: Income
Income streams, taxes, and 401(k) accounts
Every two weeks I receive a paycheck from my employer. First my 401(k) contributions are deducted from my paycheck, then I pay income taxes on the rest.
At the start of each month I also receive payments from my blog advertisement group and affiliate partners. I pay taxes on this income as well.
Lastly, I receive dividends in my brokerage account from a variety of sources including REIT’s, individual stocks, and index funds. These dividends are taxed at a marginal rate of 15%, since I’m in the $37,950 – $91,900 income tax bracket:
Phase 2: Expenses
Checking accounts and credit cards
Once I pay all my taxes to Uncle Sam and make my 401(k) contributions, my remaining income lands in my checking account. At this point, I pay off my credit card bills since I use credit cards for virtually all of my expenses. I use Fidelity’s 2% Cash Back card and typically some other rewards credit card solely to earn travel rewards points.
After I pay my bills, I only like to keep around $1,000 in my checking account since it earns basically nothing in interest. I transfer anything extra to my savings account that currently earns 1.25% annually in interest.
Phase 3: Savings
Savings and investment accounts
I like to keep around $4k – $7k in my savings account at any given time. When this account balance gets too large, I invest some cash in REIT’s, index funds, or on rare occasions individual stocks.
I try to invest on a regular basis to avoid the temptation of market-timing. Most of these investments are made through my brokerage account, although I do have a Traditional IRA and Roth IRA that I opened in my early years of college.
The Benefits of a Financial Map
Creating a financial map like this is helpful in understanding exactly where my money flows on a regular basis. It also ensures that I have a system in place that forces me to save a high percentage of my income.
My rules of thumb for maxing out my 401(k), only keeping $1k in my checking account, only $4k – $7k in my savings account , and investing the rest helps optimize my money flow.
I encourage you to make your own financial map so you can visually see exactly where your money flows on a regular basis. If you do make your own map and see that it’s more complicated than you thought, that could be a sign that you need to simplify your finances through consolidating accounts, closing certain credit cards, or moving all your investment accounts to one brokerage.
My favorite free financial tool I use is Personal Capital. I use it to track my net worth, manage my spending, and keep an eye on my monthly cash flow. It only takes a few minutes to set up and it makes tracking your finances simple and easy. I recommend trying it out.
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Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free, has no trading or maintenance fees, and even allows him to set up automated target-allocated investments.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite micro-investing app is Acorns, a free financial app that takes just 5 minutes to set up and allows you to invest your spare change in a diversified portfolio.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.