For a long time, I didn’t truly understand where exactly my money was going… even though I was tracking my spending through Mint and my net worth through Personal Capital (btw, this is a referral link) 🙈. All I knew were these two things: 1) my expenses were less than my income and 2) I was saving nearly $2000 each month. Since I was saving a pretty good amount of money, I didn’t think I needed to dig into the details of my cash flow.
But after reading The Luxe Strategist’s My Financial Map post last August, I became extremely motivated to make my own money map (complete with emojis, thanks for the inspiration Luxe!). Making a visual representation of my cash flow was super eye-opening and fun! It also brought back memories of when I would draw mass balances or make process flow diagrams for my engineering classes in my college.
For the first time, I actually knew where every single penny of my money was going. I was shocked to see how much of my paycheck was taken out for taxes! 😳 Although I thought I understood the U.S. tax bracket system, I didn’t realize just how much money I was actually paying in taxes. I also noticed that my rent wasn’t as large of a percentage of my income as I had thought, even though I felt like I was paying a lot for rent. Looking at percentages, rather than absolute amounts, helped put my financial situation into perspective.
Below is my illustrated cash flow from Aug 2017:
My money map is fairly simple since I don’t own a home or have any loans (e.g. car, student, etc…). After taxes, healthcare, and my 401k contribution, I was taking home 52.5% of my paycheck. 22.5% of my paycheck or 42% of my take home pay went towards my expenses (i.e. my rent, food, bubble tea, clothes, etc…). The rest, 30% of my paycheck or 58% of my take home pay, I was saving.
Nearly a 60% savings rate? That’s pretty good! But being an engineer, I immediately wanted to find the leaks in my money pipeline and figure out how to better optimize my cash flow.
Here are the four inefficiencies I identified:
Inefficiency #1: Contributing 10% of my salary to a Roth 401k
As you can see from my map, 36% of my paycheck was going to taxes (federal and state income) and other deductions (Social Security, Medicare, and CA SUI/SDI)! Because I was using a Roth 401k*, I was using post-tax money for my contributions. Therefore, my taxable income was my whole salary! 😳
Because I was only contributing 10% of my salary, I was not maxing out my 401k and taking advantage of the benefits of compounding. Since my savings rate was already so high, I could afford to bump up my contribution rate.
Optimization: Switch to a Traditional 401k and increase my contribution rate to 15%
By switching to a Traditional 401k, I now contribute pre-tax money to my retirement account. Because I increased my contribution rate to 15%, I am effectively lowering my taxable income by 15% and consequently, reducing my taxes.
*As I mentioned in this post, contributing to a Roth 401k has its advantages, especially if you expect to have a higher salary when you retire and you don’t live in a state with high income tax.
Inefficiency #2: Adding to my emergency fund that was sitting in my savings account with 0.01% interest rate
After paying my bills each month, I would transfer most of the leftover money (20% of my paycheck) to my savings account that had a 0.01% interest rate. Since I had already reached a comfortable amount of savings for my emergency fund, I didn’t need to continue adding to it. Instead, I could have invested the extra savings in the stock market and let my money grow.
Optimization: Stop adding to my emergency fund and transfer it to a high yield savings account
A few weeks after making my money map, I opened a high yield savings account with CIT Bank and only transferred over the amount that I felt was sufficient for my emergency fund. Since then, I haven’t added any more money to that account and have invested the extra savings instead. And because my high yield savings account has a 1.55% interest rate, my emergency fund is now making me some money ($61 so far)!
Inefficiency #3: Investing 10% of my salary in the stock market
When I would receive my first paycheck of the month, I would let the money sit in my checking account until the end of the month. This is when I would pay my rent and credit card bills. After paying my expenses, I would manually transfer some of the leftover money to my brokerage account (10%) and the rest (20%) to my savings account. In delaying the transfers to my brokerage account and keeping most of the money I saved in my savings account, I was missing out on opportunities for my money to grow through investing.
Optimization: Pay my bills earlier and invest more money in the stock market
Instead of waiting until the end of the month, I now pay my credit card bills twice a month* (once in the middle of the month and once at the end of the month). After each payment, I manually transfer nearly all of the leftover money to my brokerage account (25%) and invest it in index funds or individual stocks. The rest (4.3%) I keep in my checking account, so that I have some cash on hand for Venmo** payments or ATM withdrawals.
*Pro tip: Paying off your credit cards multiple times a month can help out your credit score because your reported balances are very low, if not zero.
**I connected my Venmo account to my checking account to avoid the 3% fee when paying with a credit card.
Inefficiency #4: Paying for transportation with post-tax money
For over a year, I wasn’t taking advantage of my company’s commuter program, which allows me to use pre-tax money to pay for public transportation. Instead, I was buying my monthly MUNI pass ($75) with post-tax money and consequently, I was missing out on reducing my taxes. 🤦🏼
Optimization: Use pre-tax dollars to pay for transportation
After seeing just how much of my salary was going towards taxes, I immediately enrolled in my company’s commuter program. Now, 1.4% of my paycheck is used to purchase my monthly MUNI pass, which means that’s another 1.4% that I’m not paying taxes on.
Here is what my current cash flow looks like after optimizing those four inefficiencies:
My current optimized cash flow. Click to enlarge!
– Since I now use pre-tax dollars for my retirement contributions and my transportation costs, I pay 6% less in taxes.
– Even though I’ve increased my 401k contributions from 10% to 15% and I’m using pre-tax money for transportation, my take home pay is basically unchanged (well, technically it decreased 0.7%).
There are still more ways I could optimize my cash flow. For example, I could automate the transfers from my checking account to my brokerage account instead of doing it manually, which takes more time (mostly because I’m lazy and/or I forget). I could also automatically invest my money in index funds instead of manually buying individual stocks, which again takes more time and is more stressful. Lastly, I could invest the remaining 4% that I am keeping in my checking account. Although I feel more secure keeping that last 4% as cash, I could invest half of it (2%) rather than all of it.
Mapping out my cash flow has allowed me to easily see exactly where my money has been going. It has also helped put my financial situation in perspective. With this visual guide, I was able to quickly find the leaks in my money pipeline and patch them up to reduce and/or stop my losses. I highly encourage anyone and everyone to make his or her own money map!
P.S. Stay tuned for a more in-depth post about my money map, where I’ll discuss my accounts and my credit cards in greater detail!
Have you mapped out your finances before? If so, did you identify any inefficiencies and how did you optimize them?