One common request from new GRS readers is some sort of central location where they can find a list of introductory articles to guide their progress. This is a great idea, and I’m working on it. Some of the GRS elves are working on a “Guide to Money” that will provide some of this info, but I envision a single page that collects all of the relevant articles for folks starting out.
In the meantime, folks like Ashley are hoping they can get some help now. Ashley writes:
I’m a new reader to the blog and just wanted to say thanks for presenting often overwhelming information in a digestible manner. As someone whose former financial philosophy was “ignorance is bliss”, GRS has played an integral part in my transformation from 30 year old faux-dult to real, live adult, at least in the personal finance category.
My question is this: What does a generally healthy personal financial portfolio look like? What are some must-haves for everyone and in what order should I work on getting them? It seems like a simple question, I know, but I’m picking myself up from living paycheck to paycheck and struggling with debt and I want to set some goals: savings, debt, retirement, investments (gulp). I realize it’s hard to generalize, but what do a good adult’s finances look like?
Ashley’s right: It is hard to generalize. Everyone is different, with different strengths, different weaknesses, and different goals. Still, it’s possible to make a few recommendations. There’s a core group of financial structures that I believe are important to everyone. And there are many ways to customize a “personal financial portfolio” (as Ashley calls it) in order address you own personal aims.
Building a Base
When I talk with people about how they should set up their finances, I generally recommend the following:
- Carry no debt — except maybe a mortgage. Though there are a handful of exceptions to this rule, I believe that most of us shouldn’t carry non-mortgage debt. We should avoid credit cards, car loans, and other consumer debt. Sure, that means we have to wait and save. It may mean that we drive used cars. (I drive an eight-year-old Mini Cooper!) But avoiding debt allows us to reach big goals while others are barely getting started with the small stuff.
- Build adequate emergency savings. What is “adequate” savings? That’s tough to say. When you’re just starting out — especially if you’re carrying debt — adequate savings might mean simply that you have $100 in the bank. But as time goes on, you’ll want to build a buffer in the bank. It’s an amazing feeling to know that were your job to vanish, you can still get by for six months before falling into debt.
- Fund your retirement. When you begin saving for retirement, you won’t have much. Plus, retirement will seem as if it’s decades away. Because it is. But just because you have 45 years before you’ll be eligible for retirement benefits, that doesn’t mean you shouldn’t start. The biggest factor in retirement savings is how much you contribute. The second biggest factor is time. If you start socking money away in a Roth IRA or a 401(k) when you’re just 20 years old, you’ll be light years ahead of your peers. (And that’s when you’re 35, not even when you’re 65!)
- Be insured. Some people think they’re above the law of averages, above forces of nature, and they choose not to carry adequate insurance on the important things in their lives — such as their car and their home and their body. But as most of us here can testify, bad things happen. And when they do, costs add up. You can mitigate the expenses by carrying adequate insurance, by which I mean the right insurance (and the right amount of insurance) for your circumstance. What type of insurance (and how much) is that? The answer’s different for everyone, but it’s not difficult to learn.
- Develop a budget — even if it’s just a loose guideline. When you have a budget, you’re telling your money where to go. You’re in control. Without a budget, it’s easy to lose track of what you’re spending where. A proper budget doesn’t have to be super detailed (thought it can be if that works for you). Instead, it simply has to guide your spending in a way that keeps you from losing control.
- Boost your income. There are two camps when it comes to increasing income: Those who think it’s irrelevant (or impossible) for their situation, and those who know it’s difficult but do it anyhow. I’m convinced that those who work to make more money, despite the obstacles in their lives, have more financial success.
These are some of the basics, though not all of them. These core skills and habits can help almost anyone get started on the path to prosperity.
Customizing Your Course
Once you’ve become accustomed to the basics, it’s important to customize your financial habits and structures to reflect your personal skills, goals, and psychology.
For instance, some folks are opposed to debt in all forms. These people avoid credit cards, certainly, and often try to avoid mortgage debt as well. Other GRS readers love credit cards. They never abuse them, never carry a balance, never pay any sorts of fees. And some are eager to carry a low-rate, long-term mortgage because they figure they can put that money to work elsewhere to earn a better return.
Another example is automation. For most people, automation is liberating. By creating a system whereby you make automatic contributions to saving, to your retirement plan, and to your bills, you take the weakest link — you — out of the chain. But for a few people, automation actually creates problems. For these folks, it’s important to do things manually.
So, you see, once you have a solid financial base, you begin to build a customized financial framework based on your personal needs. And these needs are determined by your goals.
Until you have personal financial goals, you can’t really know what’s “healthy” for you. Emergency funds are a great example. Some folks — such as Trent at The Simple Dollar — don’t feel comfortable unless they have sizable emergency fund, such as a year (or more) of monthly income. I, on the other hand, am okay with six months worth of expenses in savings. Based on my psychological make-up and my personal goals, this is plenty.
Reader Response
My own financial profile? Let’s see if I can summarize it quickly:
- I carry no debt, but I do use credit cards. I repay the balance every month and pocket the 1% cash-back rewards.
- I have six months of expenses in emergency savings.
- I fully-fund my retirement plans every year, meaning I fund them to the maximum that the law will allow.
- I invest in low-cost index funds instead of trying to beat the market through guesswork.
- I carry adequate insurance, but employ high deductibles to reduce my costs.
- I use targeted savings to pursue other goals, such as travel. By using multiple savings accounts, I’m able to save for the things I want without losing track of my larger goals.
- I use the balanced money formula to keep my spending on track. This isn’t a strict budget, but it’s a lose framework to guide my financial decisions. I like it.
There’s more to it than this, of course. That’s where you come in. Until I’ve had a chance to compile a beginner’s guide to personal financial mastery, Ashley’s best bet is to listen to the advice of GRS readers.
What do you think? What advice do you have for Ashley? Is there such thing as a one-size-fits-all starter financial portfolio? If so, what does it look like? How does it change with time? If not, then what do you think different people should do (and have) at different stages in life?
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Ask the Readers, Basics
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Discover is a paid advertiser of this site. Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
SEARCH FOR RECENT ARTICLES
Fabulous post! I really think it’s important to look for ways to increase your income, decrease your expenses, and ramp up your savings.
For me, moving to a strict budget and using only cash for spending money has helped so much. I also felt a great sense of relief when I recently updated our wills and life insurance policies.
In 2012, I’m using the debt snowball method to pay off $25,000 in credit card debt. I’m a goal-oriented person, and it has been critical for me to make a plan and hold myself (publicly) accountable.
I’d suggest that Ashley keep reading GRS and other PF blogs, but that she also check out some of the great books on JD’s reading list. I think that before you can sort out your finances, you really need to sort out your priorities. For me, I’m motivated to pay off debt so I can travel more and retire early. But you have to figure out what will motivate you!
loading....
Yea credit cards are a great way to earn a little extra if you can control them,,
you can even set up a direct debit into your account after the 45 days – so you avail of the checking account interest..
Jack
http://jackfoley.net
loading....
The bigger question to me is where does a beginner start? There’s so many items on the list that many beginners would be overwhelmed.
I know this because I teach a personal finance class to high school students and they are daunted by the sheer volume of basic information they need to know to navigate the financial world.
What are the most important one or two things on the list? I have my own opinion, but I’d like to hear others.
loading....
I think that understanding marketing & advertising and being able to see through that is the first step for someone in high school. This age group is so preyed upon by advertising.
loading....
Not only for people in high school! Advertising and marketing attack us all –
loading....
The first step is to never ever carry a balance on a credit card. Never spend more than you earn. If that’s the only thing you ever do, you might not be set for retirement, but you won’t be digging yourself into a hole.
That was the lesson my father taught me, and while I was a complete newbie when it came to finances as an adult, I had no credit card debt when I started my transition from faux-dulthood to real adulthood.
Second step is to analyze every detail of your spending for a few months so your mind has a grasp of your inflow and your outgo. You may not realize lunches cost so much. You may think you’re earning a lot, but maybe it’s not enough to cover even the basic bills. Knowledge is power.
Third step is to cut spending where you don’t think it adds value. My expensive book habit adds value at about 10 dollars a week. My buying a lunch at cafeteria every day didn’t add value. I could’ve brought a lunch from home and still sat with my friends and coworkers to socialize. In my current job my coworkers don’t eat lunch at work in a social setting, so I say it’s worth it to go out to lunch with them once a week to keep my social network going strong.
Fourth step is to get some savings in the bank for emergencies. It’s difficult to figure out how much. I did 6 months of expenses, until I married my husband who works at the same company, which increases our chances of simultaneous unemployment, so we upped it to 1 year. When our daughter was born, our expenses went up, so we had to save more to still be at that 1 year mark.
Fifth step, after your current financial situation is solid, is to start thinking future. The most financially uncertain future is retirement. Usually the progression goes something like this 401k contributions enough to get full match from employer, IRA (roth or regular), then start increases 401k slowly to the max. I do it with my raises, so I don’t notice that more money is gone.
Sixth step is actually possibly fifth, and possibly fourth, getting enough insurance. It’s less important when you are young with exception of car and health insurance, but when you start having people rely on you, disability, life and other insurance might be worth considering. It’s hard to say what is enough, it’s a personal call for everyone.
After all that is done, the seventh and most vague step is saving just because. It can be for things like houses, or for retirement in case you plan it early, or that trip around the world you always wanted. Depending on how long term that goal is it may be starting to play with taxable investments like stocks, and funds or maybe just CDs, or maybe just a separate bank account called “Hawaii”. I firmly believe that anyone who gets to this step, has enough self control and confidence to look at the many resources available on the web and/or ask for professional assistance, in order to define which way is best for them.
loading....
I like your first step!! I am sometimes in awe at the “beginners” who have accumulated so much credit card debt…they’re not at the beginning of their journey at all, they’re knee deep by then! Nice list overall Tatyana:)
loading....
Great blueprint.
loading....
For me the beginner needs to start knowing what they have coming in every month and what they are spending every month. They need to take control of what they are spending and really look at it rather than avoid it, make excuses for it, or think it doesn’t matter. So for me taking that first month and really noting every dollar spent makes a difference.
Sure, you can hit some big gains out of the gate like raising a deductable on insurance, etc. But often we are stupidly nickel and diming ourselves to death and don’t realize it because we don’t really look.
As a simple example before I did this exercise I would have told someone I was only spending $15-20 a week at work for lunch out. But I was really spending $25-35 a week for lunch, then another $15 to $20 a week in drinks and vending machine snacks I wasn’t even adding to the mix. So I was fooling myself and spending more than double what I thought I was. Once you really have to look at what you’re spending, you’ll see the holes, both big and small. Do I still spend money out on lunch? Yes. Do I still spend money on the vending machines? Yes. But now I know the reality and take that into account in my spending.
But until you can find and see the holes, you have no real clue what needs fixing and how soon.
loading....
I agree, tracking expenses really transformed my financial life. I’ve been tracking spending to the penny for more than 10 years now and really feel that it helped me get to a 7-figure net worth. Seeing where the money went made me evaluate how important those expenses were to me, and I realized how much more I could save or invest with some relatively painless cuts. Not everyone wants (or needs) to take it to that level but even if you only do it for a month, it gives you invaluable data on your spending habits and your priorities.
loading....
To me, the most important thing is to see where the money is going.
loading....
IMHO, a beginner starts with picking up Dave Ramsey’s “Total Money Makeover”. He does a great job breaking down the general how-to-handle-your-finances idea into practical, logical steps.
Basic information:
Spend less than you earn. Write this out and post it where you’ll see it every single day. Everything else you need to know is based on this one idea.
To help you spend less than you earn, (1) keep an accurate record of all the money that you spend and earn, (2) shape that record into a budget/money plan that works for you, and (3) do not carry debt, ever, with the possible exception of a mortgage.
Learn the advertising techniques and manipulations used by both legitimate businesses and scammers, to avoid parting with money for something not in your best interest.
Last but not least, know thyself.
loading....
I think that the first step is to talk to your students about money. Have them consider: Why is money important (in the world and in their lives)? What does money mean to them? How much do things like houses and cars cost? Where do they see themselves in the future?
For a lot of teens, money is so abstract. Even if they work part-time, it’s hard to translate that into making short- and long-term goals. I’d suggest using a lot of visual representations (like charts and graphs) to show concepts like compound savings and credit card debt.
(And can I say that I think it’s fabulous that this course is offered at your school?)
loading....
For high school students?
Run them through college financing and immediate post-college scenarios. My thoughts about money before and during college were *totally* different once I graduated and entered the real world. In college, “you’ll have the rest of your life to work, don’t worry about it now” (said one of my profs) but says me, “in the real world, you pay for the choices you made in college.”
Talk to your students about how much college costs, the difference between going to a state school and a private school… talk to them about what student loan payments would be if they borrowed $X. Talk to them about what various entry level jobs pay, and what that truly means after taxes. Talk to them about what rent costs in various cities (NYC, DC, SF, LA, *ouch*). Talk to them about car payments and what not.
My honest to goodness thinking when I started college was, “I’m going to be an engineer. They’re paid well. Nobody would lend me money I couldn’t pay back. I’ll be fine.” And, uh, I graduated with $40k in student loan debt, and watch $15k in interest capitalize over the next few years.
loading....
Can we add, take care of yourself? It’s so important that we maintain balance throughout all of our goal attainment.
-Brian
loading....
This is sort of post that GRS is known for. Good to have you back, JD.
For Ashley …
I think that Ramsey gives some good advice for folks starting off, in Complete Money Makeover.
What I remember from that is something like this:
1. Get a thousand dollars — fast!
2. Payoff debt
3. Increase emergency fund to much, much more.
4. Invest.
5. Win.
In my opinion, a thousand dollars is great because you can solve a lot of problems very quickly. Granted, if you own a home or have high set expenses, this won’t cover a lot of these issues. So, you may want to adjust up.
Paying off debt is important because paying interest is terrible. Personally, I’ve got debt in the form of student loans — of the size of a small mortgage. I put 10% of my gross income towards this, and that’s been enough to let me feel good about it.
Increasing the emergency fund: I’d suggest something on the order of 3 months per dependent. For a family of 4 and one wage-earner, that means a year’s worth of expenses.
Last real step is investing. This is the totally scary part. If you have matching from an employer, make sure to put money towards that. After that, there’s a lot of variance — though, as a general rule, I’d say to get a target year index fund rothIRA (if eligible) with Vanguard (though, as JD points out, the particular company is much less important than funding it and doing so early), and put as much as you can towards 401(k).
If you aren’t eligible for a rothIRA due to a high income, then hire someone to help you.
Lastly, of course these steps can be done at the same time.
I’m still paying off debt while investing, for example. That’s OK.
In the end, do what works for you. I’m sure different folks here will suggest different ideas, and those work for them. This is largely what has worked for me — and I hope you can find what works for you.
loading....
Even folks who are not eligible for a Roth can do an immediate conversion from a Traditional.
loading....
Mom Of Five: I’ve heard that before, but I don’t know much about it. I’ve not had to think through how that works yet.
Thanks for the correction!
loading....
I read again how mortgage debt is to be avoided. You need to look that you can either rent where you live or rent the money for where you live (mortgage). You need to look at your housing needs, what there is in your market and decide which rent is best for you.
If you are lucky enough to be able pay cash for your housing, then you have a different set of decisions to make.
loading....
I’d like to second the point on renting versus renting the money to own. While I’m in favor of avoiding mortgage debt if you can, to me it’s again a point of running the numbers compared to your goals and what makes sense for you and yours. A mortgage is one way to get long term housing that gets cheaper over time if done right. Today, ten years after my last home purchase, I couldn’t get a two bedroom apartment in a reasonable area for what I pay for the mortgage, and I couldn’t rent a much smaller home for what I pay for the mortgage, escrow, and estimated maintenance. Ten more years down the road and I suspect my home will be cheaper to me than anything I can rent locally even if it isn’t paid off.
The money is leaving your pocket regardless, whether it’s for rent or mortgage. It’s about what you want, what your goals are, etc. so it being a good or bad deal is all relative to that.
loading....
My best advice – use a tool like Mint.com which gives you a ton of insight into how you’re spending money, and also how you’re saving it. This is especially important if you’re coming from the “ignorance is bliss” camp.
loading....
I agree with William that Dave Ramsey’s baby steps are a good one size fits all approach to financially smart living. I live a slightly off-path approach to it and it has been great for me.
I personally believe that debt should be avoided. I don’t have debt anymore. I’m okay with mortgage debt but am considering saving and paying cash for my first home, if I can do it. I just think it fits better with who I am and what I want to accomplish.
I do have credit cards, but I rarely use them and they’re paid off monthly if I do. I maintain a healthy emergency fund (6 months+) and it makes me feel very peaceful and comfortable. I also spend less than half of what I make. I think being able to live on as little as you can comfortably while continuing to increase your income little by little is important to financial success as well.
It’s all about paying attention and living a lifestyle where you always have your future and financial goals/hopeful outcomes in mind.
loading....
First, cut out all unnecessary expenses. This could eat up a large chunk of your budget, and you can easily avoid these expenses (magazine subscriptions, gym memberships, cable, data phone plan..) These are luxuries and can be added back in once your financial picture is a little rosier.
loading....
my suggestion is to start focusing on your net worth instead of income.
first step would be to figure out what your net worth is. tally up all your assets and liabilities, then subtract your liabilities from your assets.
next would be to build a REALISTIC budget that leaves you with an amount to save, so your net worth can increase. a lot of people have no idea how much they are actually spending. it might help to track your expenses for a month to get an understanding of how spend. from that you can start building a budget.
once you got that down you can start worrying about investing strategies, asset allocations, and increasing your income streams.
well, that’s my opinion….
loading....
I agree that keeping track of your net worth is a huge motivator. Shortly out of college I developed a spreadsheet (and graph) that tracks my month-by month retirement accounts, debt, home equity, other investments, and net worth. It really allows me to see the bigger picture and keep focused on both what I’ve accomplished and my goals.
loading....
Great post (and I good one at Simple Dollar today too!).
I’m very happy to see a reference to insurance in your list JD. Good insurance supplements your emergency fund and keeps you from being wiped out. How many pf horror stories have I read that began with an illness or disability that robbed someone of their entire emergency fund and started a debt spiral? Tons.
Short/long term disability insurance and adequate health insurance is a must for everyone’s personal finance checklist. I just wish it was more affordable for everyone. A tip: a high deductible / wait period for benefits allows you to self insure with your emergency fund and reduce premiums..
loading....
I think disability insurance is an indispensable piece of the puzzle. I just wonder what other GRS readers are doing as a work around if they or their spouses have professions that are generally excluded from disability insurance, like law enforcement, attorneys, etc. I have not done a whole lot of research in that area because we are still relentlessly attacking our consumer debt. I just wondered if anyone else has encountered this problem?
loading....
I honestly don’t understand the mantra of “automate as much as you can.”. Maybe I’m a control freak, but I would be checking and re-checking that the savings were allocated and the bills were paid, on time and in the proper amounts. If I’m going to do that, I’d rather just do the whole thing myself, as I gain flexibility and don’t lose time.
Automating your finances can devolve into “out of sight, out of mind,” which is how trouble develops in the first place.
loading....
For my own situation, I agree with this point. I only automate expenses that are the same every month (insurance premiums, netflix,newspaper subscription,etc.) and only on a credit card, not direct from checking (pts.!). Automating’s good advice for people who habitually pay bills late and incur late fees and interest because of it.
loading....
I double check everything regardless of whether it’s automatic or I pay it myself. I once had a bill not go through even though I paid it online. I check my bills and statements for errors as they come in, then check that the payments went through.
I think it’s a good idea to keep tabs on one’s accounts, period.
loading....
I believe in automating savings, but not paying bills. To allow the power company or others to deduct funds directly from your account is asking for trouble if there is a technical error, and they deduct $850.00 instead of $85.00 it could spell trouble. I have mint.com setup to remind me of upcoming bills, which is very helpful.
I DO automate my savings. Like J.D., I have multiple targeted savings accounts with the same bank, AND I have direct deposit, which is uber reliable. I simply decide how much I want to transfer each paycheck, and schedule reoccuring transfers from my checking to each savings account, leaving in my checking enough to cover my bills (determined from a budget, of course). I do leave a $500-1000 cash cusion in my checking though, just in case some of my calculations are off that month.
This way of saving makes it easy to do, and prevents any overspending. I also have my Roth IRA funds (around $100/week for my max of $5k a year) auto invested, so I automatically have dollar cost averaging and fund my Roth without taking a big hit at the end of the year.
loading....
I see your point, but user error is much more common then technical errors. The risk that the company will make a mistake like this is lower than the risk that I will forget to pay one of my bills and incur a fee.
It reminds me of how people “feel” unsafe in planes but are perfectly comfortable driving a car. They feel safer because they are in control, even though statistics say otherwise. I don’t have stats on bank errors vs. customer errors. However, I do work in IT and 95% of the issues we have reported to us ultimately turn out to be user error rather than system error. Bonus, if it is the company’s fault they will refund the fees. If it is my fault, they usually will not.
You could add one more layer of security and have your bills charged to a credit card rather than your checking account. That way you also have Visa’s protection, and can cancel the card if need be.
loading....
I see your point Andrew, personally I have automated most of our investments (pay yourself first principle) but for everything else I like knowing how much things are costing, it gives me a chance to think “why are we spending this much on xyz”
loading....
While I think GRS and this post contain important information for young people starting out, I’m amazed that student loans are continually overlooked as part of the financial picture. Student loans have surpassed credit card debt and yet this topic is rarely, if ever, addressed on GRS as part of the discussion.
Most young people starting out have significant student debt, unless they were fortunate enough to have parents who could pay for school. Americans who continued their education in grad school are saddled with even more student debt. What about GRS content and tips that could help the thousands (millions?) with significant student debt? It’s not always about credit card debt.
loading....
I know I faced a few challenges paying off my student debt from grad school. I wanted to get rid of it as quickly as possible, but I was also trying to get set up in my first apartment and I wasn’t going to
sacrifice setting up an emergency fund or start saving for retirement. (I used the tax refund towards debt repayment.)
I’d be tempted to write a post on this myself except that I know people would tear me apart for the advantages I had – like lower education costs and work opportunities.
loading....
Elizabeth: I’d happily help write this article. Or write it if you don’t want to be on the chopping block.
Though, JD is pretty good about not letting guest posts be torn apart…
loading....
Thanks! I’m tempted to brave the wrath of comments if my tips can help. I’ve had my share of disadvantages too, so perhaps that evens things out.
Not sure my advice could fill a whole post though — maybe J.D. would consider a post with a few of us contributing?
loading....
Yes, more content on the topic would be fantastic! The oft-repeated idea to “carry no debt” is unrealistic for the thousands of students who don’t have the luxury of free education. To better ourselves and our future, we must carry debt. I would love to see more student debt content about people who have a lot of it, who are struggling to balance saving with paying it off and who have succeeded in paying it off.
loading....
Well, there’s student loan debt and then there’s student loan debt. Amounts under $20k or maybe even $30k (depending upon career choice/major) is not crushing. But when kids start graduating with $50k, $60k and upwards of $70k in debt, that’s crazy. There needs to be a massive rethink among high school kids about how much a college education is really worth.
And most kids, with some hard work and perhaps some lowered expectations about where they’ll actually attend college, can come in well under $30k of debt.
loading....
I agree, a post about different ways people have paid down/off student loan debt would be really valuable. I think it would also be good to see posts featuring ways to avoid at least some student loan debt too. As Mom of Five points out, there’s student loan debt and then there’s Student Loan Debt. It might be that a student could find ways to reduce costs and graduate with less than $20K in student loans, vs. another student who didn’t work to reduce costs and graduates with $70K in loans. I think sometimes people get caught up in black and white thinking: no student loan debt at all vs. it’s inevitable so charge the whole thing. Maybe the former isn’t possible but there’s a third way that could replace the latter.
loading....
I read “somewhere” that the part of the brain that processes the long term consequences of our actions isn’t fully developed until we’re in our mid-twenties. That means when students are making their decisions about what to study and how much debt to accumulate, their brains aren’t even really old enough yet to fully comprehend the consequences (to say nothing of the lack of life and financial experience they have when making these $50,000 decisions). I definitely remember my student loans feeling more like monopoly money than real soon-to-be hard-earned cash.
That said, I don’t have any good alternative…
loading....
I agree, this is a topic that should be explore more on this site.
I graduated with almost $50K in loans(!) but managed to get that down to about $20K after three years. What helped the most was asking Sallie Mae to charge me a higher amount per month. I ran my budget, figured out how much I could afford to pay, and then called Sallie Mae and told them to make that my monthly payment. This has worked great for me. If I just tried to force myself to pay more than the amount due every month, I would probably always come up with an excuse. But, if it’s a bill I have to pay, I have no excuses.
Of course, their payment plan still wants me to take 10 years to pay it off, and I love looking at how they project my payments to be $30 a month for years and years toward the end of my loans.
loading....
Good idea, Bree. For me, student loans are a blind spot because I never had them. I don’t know much about them. And my friend Sparky, who was the source of student loan guest posts longer ago, is no longer with us. Judging from reader reaction, though, this is a topic we should cover. I’ll look for somebody to do so! Thanks for the suggestion.
loading....
Check out this guy: nomoreharvarddebt.com. He’s working to pay of his debt and his blog is great.
loading....
J.D. – you mentioned you max out your retirement accounts each year. The IRA contribution limit is just $5K. As a self-employed person, what else do you have set up for contributions, since I’m pretty sure you don’t have a 401(k)?
loading....
I have a solo 401(k) that I max out each year depending on how much I make. Some years I’m able to contribute more than others.
loading....
I agree that the Dave Ramsey Baby Steps are great! I too was overwhelmed when I saw all the stuff that I had to do. Everything seems so urgent but you can’t pay down all your debt and also build a huge emergency fund at the same time. The Baby Steps gave me a bit of a bearing of what to do when- for a ‘list’ person like myself they were invaluable.
I also like the comment about looking at your net worth. After putting a bunch of money into RRSPs this month, it can be easy to look at my bank account and feel a bit discouraged because of the much smaller number. If I focus more on my net worth however, it is a much more encouraging picture!
loading....
Though personal finance is best on a one-to-one level, your Building a Base points are great advice that should apply to almost everyone.
Lately I’ve been interested in the Permanent Portfolio (25% of your money in each category of stock index, long term gov’t bonds, gold and cash).
loading....
For me, having an emergency fund has been really important, both financially and psychologically. Knowing that if something comes up, you won’t have to go into debt (or add to debt you already have) is a huge relief.
When my husband’s brother died suddenly of a massive heart attack (at 47) a year and a half ago, being able to easily cover the cost of plane tickets to get to their parents and the funeral made a difficult time much easier. Dealing with the shock and grief was enough without having to worry about how we were going to pay for the trip.
I agree with Dave Ramsey that $1,000 is a good starting point. That will cover most car repairs, medical co-pays, housing repairs. . . and plane tickets. Eventually, it’s good to have more and to even set up targeted savings for expenses like those above, but $1,000 is a good place to start.
The very next thing I’d do is track spending, to see where your money is going. Then, cut where you can, and make an aggressive plan to get rid of any debt you may have.
loading....
All of this advice is great, with the caveat that you probably can’t implement it to greatest effect until you sit down and really think about your financial goals and how those serve your life values.
For me, aggressively getting out of debt and saving as well has been a hard balance to strike. I’m currently saving about 25% of my gross income either in a 401(k), a Roth IRA, or liquid savings.
But my student loan is the bane of my existence, so I’ve got a plan to pay it off by the end of the year (finishing off with a large payment from savings, assuming my life/job is still stable). It’s a comparatively low balance with comparatively low interest, and that money could be better off being invested, but once the burden is gone I think I’ll make life decisions very differently, and you can’t put a price on that kind of psychological freedom. It’s an investment of an entirely different type with as much or more value than potential future stock returns.
The real sacrifice was realizing I needed to stop buying physical things in order to achieve both of the conflicting goals above. Deciding to spend a year without buying objects I don’t need (more clothes, more toys) gave me the freedom to skim from my budget and apply it toward the goals I actually value. Keeping the larger values in mind is what carries you through the harder financial decisions and keeps you motivated to follow through in spite of setbacks. It keeps you from feeling deprived–you remember that you’re in control of your situation.
loading....
My husband’s and my student loans are also the bane of our existence. When we graduated in 2010, we had 110k in law school and grad school debt. Now it’s down to 92k and that with major cuts and hustling for extra income. Sometimes I feel like we are never going to have it all paid off, but I keep telling myself “just keep swimming, just keep swimming” and it keeps me motivated. How do you eat a whale? A. One bite at a time.
And yes, I got that quote from Finding Nemo. Lol
Best of luck! I hope you achieve your goal and have it paid off by the end of the year!
loading....
$18k is an enormous accomplishment! When you feel discouraged, look at what you’ve already achieved. I would never have managed that amount in such a short time.
The patience is tough–it’s one of my biggest struggles in planning and seeing things through, for sure.
One thing, too, that I love to look at is an amortization sheet that shows how each of my contributions brings the interest I pay down, down, down. It’s nice to see that little trickle-down and realize my daily actions do add up over the long haul.
loading....
Great tips on all fronts. It’s important for beginners to know the basics such as these — they’ll be a great base for more in-depth knowledge later.
loading....
Sometimes getting a loan at low interest helps even if you otherwise had money to pay it off fully. I recently bought a new car with 0% financing. I am paying automated monthly payments from my bank account.
I had money to buy the car with cash. But, rather I decided to put the money in investment and earn interest/dividend.
So I am paying at 0% and earning at a healthy rate. Liked the article and the other comments came is so far.
loading....
I think the most important thing is having one or two thousand dollars in cash to cover large-ish expenses – deductibles, computer crash, etc.
After that, eliminating debt (to free cash flow, peace of mind, and financial independence).
What comes next is personal preference: retirement, building emergency fund, short term goals, etc. In the end the right choice is what makes you feel financially secure. For me, that’s maxing out my Roth IRA even though times are slim. My major goal is to retire early, so this makes sense for me.
loading....
Ah, but what about “money is more about the mind than it is about the math”?
Honestly Ashley, I think you’ve made the biggest change (step 1, if you will)–realizing that you want to do this. That makes a lot of the other stuff easier.
The second thing I would recommend is to spend a month and track every penny you spend. If you spend all on the same account, you can use that.
The third thing is… analyze what you spent money on! Sometimes I don’t see this step. Once you see that, you can figure out where your weaknesses and leaks are. It was such a shocker to me when I discovered I BLED money eating out (after spending lots buying food for home). I actually ended up splitting my food budget into a separate account to stop it.
I don’t want to list out too much stuff and overwhelm you. GRS is a valuable resource. You seem to be a little farther off from the stuff JD is describing (debt repayment can take a bit), so it may not be as useful as some other articles. I’d say look at the articles on the “stages of personal finance” (specifically “A Candle in the Dark” from 3/8/2009) and the “core tenets of Get Rich Slowly” (starts 9/28/2009). It’ll give you a better idea of where to start than I can describe, in smaller bits for you to digest. We all have to start somewhere–I started my realization in debt, too.
Feel free to link up those articles if you want JD, I just wasn’t sure how aggressive the spam filter is.
loading....
I think this is even more basic than the original poster’s request, but one of the best things I ever did when I was starting to get my financial footing was:
- figure out my monthly bills
- set up a dedicated bill-paying account
- transfer half of the bill payment amount into the bills account each paycheck (with some padding to account for the ones that fluctuated)
- key bit: it took a while, but I got it so that by midmonth, I had all the money I needed to cover the next month’s bills. No more scramble to deposit and pay my rent check. I could automate my rent payment without worry. That gave me some serious mental space to look at the rest of my financial picture and make more changes!
loading....
I too am always in a position to pay my mortgage, heat, electric, etc a couple of weeks ahead of time. It has become a habit that has served me well over the years.
loading....
There is no one-size-fits-all, but I think there are certain things that apply to everyone.
First is emergency savings. Whether it’s $50 or $50,000, some sort of cushion is essential. The specifics depend on your personal needs and psychology.
Second, avoid debt. Beginners should probably avoid ALL debt; once a person is more experienced & more comfortable with money, things like mortgages and credit card rewards can be useful. YMMV.
Third is plan for the future. Whether or not you expect to retire, chances are that late in life you will want out or be forced out of work. Saving for that eventuality is much easier if you start now. How you save, and how much, is a very individual thing.
Those are the basics. And if a person is inclined to learn from reading books, good choices include Dave Ramsey’s, Ramit Sethi’s, and of course JD’s. All good places to start.
loading....
For me the real first step was getting rid of the Horatio Alger mentality that “the future will always be better,” which is what enabled my debt habit. Because hey, I’ll have more money tomorrow! Charge it today!
Yes, I did track my expenses to the penny, I always knew what I had in my checking account, and I paid my bills religiously, but I didn’t mind spending my whole paycheck because l would always be able to pay it “later”. Because hey, I have faith in the future!
Of course, as soon as I hit a bump on the road one complication lead to another and I was suddenly in the weeds.
Children: the future is uncertain. Don’t be suckered by 10% interest that becomes 16% that becomes 29%. The vultures *will* eat you if they get a chance.
loading....
Yeah, I remember those days…
My first job out of college wasn’t a “real” job. Barely paid above minimum wage, and I was using that as a bridge to the next one. Lived paycheck to paycheck, didn’t even bother with the 401k. My first few years (and jobs) out of college were like that, while I was figuring out what I wanted to do with my life.
I had two “aha” moments financially. The first, while at the second “bridge” job, was “Dude, you’re in the real world now. Start acting like it.” I can’t say I did anything different, but I realized I wasn’t living in fantasy land like my overpriced college wanted me to believe.
The second one came at the next “bridge” job. I got paid decently, but had the ability to work a lot of overtime. So I did. Once I got some credit card debt paid off, I was able to pay off my car early. (That was seven years ago; I still drive that car.) But the “aha” moment was that I was no longer living paycheck to paycheck, and actually had to *think* about what to do with my “extra” cash. I started a 401k at that job and invested in a Roth.
I realized I was dong alright when my choice about what to do with extra cash was pay down my student loans or invest it. The stock market was going like gangbusters, so I chose the later. I ended up leaving that job with $20k in retirement accounts when I went to grad school. But I’m still sitting on $80k in student loans.
If I had to do it over again, would I have paid off my student loans at the expense of my retirement accounts? That’s strictly a numbers game. Of course, I made those choices right before the stock market tanked, so those returns have been flat. I’d have been better off paying down the student loans.
loading....
Unless you sold while the market was down, you don’t really know that: you’d have to hold those stocks until you actually need to sell, and then evaluate the return over however many decades.
loading....
This post is perfect for those who are just looking to start out with managing their finances and getting themselves to a stable place. I will definitely point friends who are looking for some simple financial guidance to this post.
loading....
I ran out of goals.
In the last year I bought a house, had a child, got a new job, refinanced the house, and now I bought a car. I did take out a loan for a portion of the car. My goal now is to pay it off in 6 months (I had 1/4 of the money already after 3 days — I sold the old car. Helpful hint: I sold the car on craigslist for about $4,000 more than the dealer would offer me as a trade-in), it will give me some sort of financial goal to work towards, because otherwise I sort of ran out of them. I have a 401k with… let’s check… $52,234.65 in it. It’s not a ton, but I’m only 30. I carry a million dollar life insurance policy on myself. The only debt I have is the house (and now the car). The base salary at my new job is about 12% higher than my old one (but there’s not really a chance at an annual bonus like I used to get). Was buying the car a great financial decision? Not really. But it was not really that bad either, especially considering the rest of my scenario. I mean, the difference between my old mortgage payment and the new one (post refinance) is almost the whole car payment, so I’m sure I can manage. Saving to pay off the car will keep me from wasting money on toys (like cameras and surfboards), as I’m apt to do.
I start the new job on Monday, so that should be exciting.
loading....
I know everybody is different so this may not apply, but if I was in a similar position I’d make financial independence my next goal. If you love what you do there’s no reason to ever retire, but financial independence is always nice, no need to wait till you’re 65, it gives you leverage at work and in business and it works better than life insurance to protect your family’s future.
loading....
I think you mentioned on another post that you’re starting to budget part of your salary for charity — sharing the wealth could be a worthy goal too
Congrats on your success!
loading....
I expect when most people reach this point money becomes one of a few things:
1) A means to financial independence
2) A means to an ever increasing standard of living
3) A means to contribute to a cause they are passionate about
4) A way to “keep score”
I think any of those are valid, but that is definitely the point where one-size-fits-all advice breaks down. For me, it is #1. If I liked working as much as you seem to, I would probably opt for #4 (may not make me look good, but its true).
loading....
Our current goal is to live on a lower percentage of our income each year.
It makes me happy because I see it as steps toward financial independence/early retirement. It makes my partner happy because in his heart he’s Scrooge McDuck, wanting to swim in his massive pile of gold.
loading....
I’m in a similar position to you. In the last two years, I started a job that I love, bought a car, and bought a condo. I’m two years out of college and I have $40,000 in retirement savings. I don’t spend too much. I save ~50% of my net paycheck income and all of my bonuses.
Like El Nerdo suggested, I am striving for financial independence. My goal is to not need to invest more towards retirement after I have kids, to be able to just live off of my monthly cash flow. And if I don’t have kids? There will definitely be some lifestyle inflation, so long as it stays within my monthly cash flow. My savings level is going down a small bit with buying a condo versus continuing to rent, but my income has gone up each year for the last few years.
loading....
I know a lot of people are big on the “financial independence” thing, but that in itself has never held a lot of appeal for me. I generally enjoy my work, so I’m in no hurry to stop working. I could see doing something like working part of the year, say 8 months a year, or three days a week, and taking the rest of the time to do something else, but that would be a ways down the road. Paying off the house could be a goal I could have – it’d definitely open up a lot of opportunities (at my current salary, if I didn’t have to pay for housing, I could probably support my whole family on about 15% of my gross income, assuming the car was paid off. Except for the mortgage my expenses are fairly low). It’s not clear that paying off the house early is actually financially prudent, though – I mean, I just refinanced at 3.875%.
It’s not a bad position to be in, I can sit here and build up savings for a while while I wonder what to do with it and decide later. I’ll pay off the car first. So far it’s been less than a week and I’ve already put aside about 40% of the whole loan. That’s not sustainable, since it was two big chunks at once – the sale of the old car and a refund of money I’d contributed to the ESPP at my old job, but still, I think I can pay off the whole thing by the end of the summer. Then what? I’ve got till the summer to decide.
And yes, I started contributing 1% of my gross income to charity each month this year.
loading....
For me, financial independence doesn’t mean “not working.” Not working is ridiculous and… boring. Financial independence means “working in whatever the hell means the most to me without immediate concern for money.”
Of course one may argue that not having to work for a living breeds degenerates, and I’d agree with that if you raise spoiled entitled brats, but if you have some sort of larger life project, if your hobby could leave you quadriplegic some random weekend, if you’d like some day to launch a business without fear of ruin, if a bad batch of homemade beer could cut your IQ by 20pts. and derail your career, if you want to take a sabbatical and pursue research, or any other number of possible things that you can think of but I can’t,.. then setting up a family trust is a potent, potent tool. I don’t think the guy who invented the RED camera did it for the money– his shades business netted him $2 billon! He did it because he wanted! And the world is better for it.
I love work, it gives my life meaning, but do I want to be an employee all my life? That’s the real question about financial independence. And then of course, the ability to provide for my family in perpetuity even if I went mad (it’s been known to happen).
loading....
I would have to agree with all of your advice. I personally would stress that a budget is imperative. For the first 20 years of my adult life I also lived by the ‘ignorance is bliss’ rule and suffered for it. About 15 years ago I came upon Dave Ramsey and YNAB and they changed my monetary outlook. I’m sure everyone that reads any kind of financial advice knows who Dave Ramsey is, but YNAB is an excellent budget software program. You Need A Budget, or YNAB, is also a website full of advice about budgeting. I would highly suggest looking into this information if you are just beginning in the money learning area.
loading....
This has been my plan for retirement for the past few years now. What I had done is went to some simple retirement calculators and plugged in exactly what I wanted when I want to retire. This way, I knew where I would have to be each and every year in order to make those goals. Hypothetically, I would put returns of 8%, 10%, etc to see how I match up.
Now, with these goals, I have a white board in my office and I make it a habit to invest X amount each month to ensure that I’m up to part. I’ve found that not only writing your goals down helps, but having a game plan helps as well.
loading....
I think you covered all the bases. I know I have automated my finances and I sleep much better at night. It has taken away the stress of always worrying about my money. I still have to work at eliminating all the debt, but I am happy to at least be moving in the right direction.
loading....
Hi Ashley & All!
I think an excellent starting point is Trent Hamm’s (The Simple Dollar) “Everything you needed to know about Personal Finance on One Page”.
It’s available for free as a .pdf:
http://www.thesimpledollar.com/onepage/
JD’s “Your Money: The Missing Manual” is also a great intro: http://www.amzn.com/0596809409
loading....
I have a priority question. I have insurance, RRSPs, RESPs, and currently 3 months of expenses saved (adding to it monthly).
I have put my husband and I on a monthly budget that uses a percentage of our income to designate it to appropriate expense categories (e.g. house is no more than 35%, etc.) and I have been diligent about tracking it weekly and updating him so we can spend within the budget.
My question is about TARGETED SAVINGS VS PAYING BACK A LINE OF CREDIT. We have, in addition to our mortgage and one car payment, one loan that I would like to pay off in the next 2 years. If I maximize the payments to this loan I would not have any targeted savings (e.g. my husband will be needing a car at least within the next 6 months, if his lasts that long). We would also like to go on a “big” family vacation for which we have no savings. What I have been doing in the past is A) no destination family vacation that costs more than a few hundred dollars and that can be paid off with no interest accrued and B) for unexpected incidentals (e.g. a new car) I change the Line of Credit payment to the minimum and use the amount I would have paid to it to pay for the incidental. What are your thoughts on this approach and do you have ideas on how I can continue with my goals as I have set above?
Thanks!!
loading....
Everything about the actual dollars and sense has been said.
I’d like to add one thing on the ‘soft’ side – as a financial adult, you should have developed relationship capital that you can leverage before you touch your emergency fund. Your relationship capital is strongest if you build it before it is needed, and you’ll know because people offer help before you even ask.
Snowstorm leave you stranded? Who offers you a sofa or spare bedroom? Or do you pay for a hotel?
Cost to give: an hour of cleaning.
Value to receive: $150+/night.
Moving? Would a neighbor volunteer to help you for an hour or two? Would a friend offer a full afternoon?
Cost to give: free.
Value to receive: $50/hour for professionals
Get your first apartment? Friends that are moving in together with their fiancees could have duplicate household goods they can’t use and you really can.
Cost to give: a very small amount of foregone tax write-off (as opposed to donating)
Value to receive: $30 for dishes, $40 for wine glasses, etc.
loading....
We have been following the general steps from Dave Ramsey’s Total Money Makeover. I think they are absolutely fine for someone looking for a general “howto” to get stuff in order.
I know there is some (valid) criticism of his investment advice and more sophisticated folks talk him down all the time — but realistically, by the time you get well enough out of the debt hole you’ve likely dug already, it’s probably been at least a year, maybe two or three — and you’ve been thinking a lot about your money. So when it comes time to invest, maybe you are ready to knuckle down and learn a lot, or you say “I realize I’m OK with not knowing every possible thing about investing, so I’ll hire out that skill”, and find someone who is qualified to help you.
My wife and myself both have Master’s degrees (she a MBA, me an Engineering degree) — so we aren’t afraid of numbers. But we realized that we were never “getting to” keeping up with investing — so we use both a financial planner and a CPA. It’s been one of the best things we’ve done. Both of these professionals have returned many times more than their fees over the years.
loading....
While I agree with much of this advise, two things. I simply don’t see mortgage debt as a terrible thing for many people. I just scanned through the comments so others may have mentioned this. i could not possibly rent my house for what my mortgage payment is. Few people have the wherewithal to pay cash on a house starting out. Whiel I believe a good downpayment is always advisable, paying cash for the a house in the real world is not too realisic. and when it comes to making extra house payemnts, I would suggest that would be the last thing one worries about, after funding everything else.
I’d also suggest that quality of life is as important as not more important than financial sucess (yes, I realize that this is a finance blog), and that for many people, the effort required to increase financial sucess is not worth the cost in personal relatonships. Is it better for dad to have a second job and increase his income by half, or is it better for dad to be at home after dinner with mom and the kids every nite.
In other words, at some point, being content with where you are financially can both be a good thing, as well as freeing.
loading....
This is a really good question, and a good excuse for me to crystalize some of my thoughts on the best way to do this. I’m not going to talk about making money, but any way you can increase your income will make the rest go faster! It’s worth noting that after the first two, these are things that are going to be done progressively. You’re not going to pay of your consumer debt in one shot, and you probably won’t max your IRA in the first year you contribute. Just keep increasing it until you can move on to the next step! Anyway, here’s my plan:
1) Make your minimum payments on time. If this is a problem, then working with the lenders to adjust payments (or even considering bankruptcy) counts for this.
2) If your employer offers a 401(k) match, contribute enough to get it. This is *very important*. The other advice here is flexible based on your needs, but this is mandatory.
3) Have at least a small emergency fund at a local institution (bank/credit union). Once you get to the point where this relatively large (e.g. if you need more than $1000 in it), consider also using an online savings account.
4) Make sure you have what insurance you need. Others here hove covered this better than I could.
5) Pay off consumer debt, using whatever method works for you.
6) Contribute to an IRA. For most people this should be a Roth. Since the contributions can be withdrawn at any time, this is a good idea even if you’re thinking about deferring retirement savings for some other goal (e.g. buying a house.) It’s probably best to start out in Target Retirement Date funds for this.
7) Once you’ve maxed your IRA, decide how much you need to save annually for retirement, and increase your 401(k) contributions until they (plus the IRA) meet that goal.
9) Save for fun stuff! Vacations, remodels, hobbies… once you’ve made it this far you’re free to do anything you want!
loading....
My three keys are:
Live debt free
Spend less than I make
Constantly work to increase my income
I can thank my wife for #1 and #2. #3 I accomplish my increasing my (day job) income and growing my side businesses.
loading....