I was talking with a client the other day who is incredibly knowledgeable about personal finance. From our first conversation she named concepts like investing, rollover accounts, emergency funds, and long term planning. She has all the information and the smarts to figure out anything that she needs to successfully build her financial life with her goals, values, and priorities in mind.
However, like many women I work with, she does not have a money framework or a personal understanding of how money works in her life and how to make aligned actions and decisions as her life evolves.
This is where the money framework comes in. Think of the money framework as your operating principles, your underlying systems, thinking, and foundation that whether intentionally or not are driving your financial life.
On a very basic level, a money framework should include an understanding of four things:
- How money flows in your life and why
- Foundational practices to get you feeling financially well
- The different accounts that are available, their purpose in your personal finances, and how to use them to reach your goals
- What impacts your money framework internally (money psychology!) or externally (a life partner, roommates, etc)
How money flows in your life and why
Get a pen and a piece of paper. See if you can sketch out how money flows in your life from your gross income to every place it goes. Were you able to do it? What was challenging about the exercise, and why?
Below I’ve created a simple money flow for a person with one W2. What do you notice is the same or different between what you created and this flowchart?
At this point, you don’t need to know exactly how much goes into each category, the aim is to simply understand how your current system is working. Based on your observations, start to jot down some thoughts on what works well and what could work better.
Foundational practices to get you feeling financially well
There are lots of opinions out there in terms of the “order of operations” or in what order one should prioritize their financial milestones. I’d recommend tackling these financial milestones in the order below, but I encourage you to find personal finance experts who differ with what I say as well because there is not one right way.
- Cover all expenses – Get to a place where you can afford paying your expenses each month whether by earning more, spending less, or both. This includes covering any minimum debt payments and paying your credit card in full each month.
- Get the employer match – If you receive a match from your employer for a 401k account, for example, make your contribution the minimum that will still unlock the full employer match. Typically this is about 4% of your gross income. So if your gross income (not net/what you see in your bank account) is 5k/month, you will give $200/month and your employer will give $200/month. Meaning you will be contributing $400/month to your retirement investments!
- Pay off all high interest debt & Build emergency fund
- High interest debt is any debt more than 7-8%. This includes credit card debt, potentially student loans, etc. You can complete this step without paying off your entire mortgage (though hopefully your mortgage interest rate isn’t 7% or above)!
- Simultaneously, start building your emergency/rainy day fund. You will want to save around 3-6 months of living expenses (multiply your fixed expenses by 3-6 and that’s your goal!) I write about building a rainy day/emergency fund in this post, which may be the single most important thing you can do to significantly increase your financial well-being.
Once you have this foundation, you’ve built the skills and the confidence to tackle most anything. The key is to keep moving forward so do not reach into your emergency fund for a last minute vacation, that is not what it is for.
The next part of the money framework will help you understand a few different accounts, their purpose, and how and when to use them.
Different accounts, their purpose, and how to use them
| Account type | Purpose | How to use them |
| Checking account | Money to pay for your day to day life. | Money will flow to your checking account so that you can pay your rent/mortgage, credit card (in full!), etc on a monthly basis. |
| Savings account and/or HYSA | Shorter term and easily liquid resources. | This is where you will start your emergency fund. Setting up an HYSA will allow your emergency fund to earn interest. The hope is that you won’t need to touch this fund, but in case you do, it’s easily available (liquid) to you. *Hot tip* Choose one platform that allows you to have separate buckets or accounts so that you can save for multiple short term goals. |
| Investment Account (through a brokerage platform, not employer) | Long term planning, typically anything 10+ years in the future. | Your brokerage account can hold multiple different “accounts.” For example, a brokerage account can organize investments for your Roth, Rollover IRA, SEP, etc. So while these are all different investment vehicles, they all live under one username and password. |
| Investment Account through employer | Typically pre-tax retirement savings set up by your employer. | Like the investment account already described, this is for retirement savings. Do not plan to use this money until retirement age. In the case that you transition roles, make sure to rollover this money (it’s yours!) into your investment account through the brokerage of your choosing. |
Understanding each account’s purpose is critical in building your money framework. However, without understanding the internal and external forces at play in how you navigate money decisions, you may find yourself feeling stuck.
What impacts your money framework day to day, the internal and external forces we should all care about
This is the least tangible, yet potentially most important part of the framework to understand.
We all have external and internal forces impacting the financial decisions, big or small, every day, whether you know it or not! Without understanding these forces, it may be hard to navigate building financial habits, aligning your life with your values, or making necessary changes.
Here are some categories where I see internal and external forces playing roles in people’s confidence, decision-making, and long term wellness with money:
- Your values
- Social media and mass marketing
- Your priorities
- Your goals
- Peer groups (peer pressure, need to look a certain way)
- Culture of your city, your demographic, your age group, your sex and gender identity
- What you make and what you spend
- A life partner, roommates, family
While it is hard to quantify the impact of the external and internal forces that are at play in your financial life, even the smallest limiting beliefs, for example, can have compounding effects and have significant impact.
I used to avoid money decisions because I believed they were too complicated for me to understand. This led to me missing out on almost a year’s worth of 401k investing with my employer and the 4% match (money on top of my salary!) that they offered me. I can’t say the exact numbers here but it was at least hundreds of dollars that I missed out on. Hundreds of dollars may seem small, but with the compounding effect, I am actually losing out on over $26,000 by the time of my retirement.
My money belief impacted just a few months of potential retirement investing, and yet those few months mean I’ll have $26,000 less than I would have if I believed myself to be able to navigate my employer benefits.
Take a moment to think about the internal and external forces that affect your day to day financial life. How much do you earn and spend and why? Who influences you when it comes to money and what do you believe about it? How do you think those influences or beliefs guide you?
Like with anything, this is all easier said than done. But I promise that if you build a framework and foundation in your personal finances, you will gain the confidence, awareness, and the skills to navigate any financial situation.
I believe we can all get there especially if we are putting in the work day to day to build our money framework and update it to align with our current financial season.
With my utmost belief,
Your personal finance friend