Ask the Readers: Basic Financial Frameworks?

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?

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Earn Save Live
Earn Save Live

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… Read more »

jack foley
jack foley

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

Marsha
Marsha

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.

Jan
Jan

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.

Andrew
Andrew

Not only for people in high school! Advertising and marketing attack us all —

Tatyana
Tatyana

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… Read more »

MelanieL
MelanieL

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:)

El Nerdo
El Nerdo

Great blueprint.

getagrip
getagrip

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… Read more »

Kiernan
Kiernan

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.

Mom of five
Mom of five

To me, the most important thing is to see where the money is going.

Laura
Laura

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,… Read more »

Earn Save Live
Earn Save Live

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… Read more »

Dan
Dan

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… Read more »

Brian @ Progressive Transformation
Brian @ Progressive Transformation

Can we add, take care of yourself? It’s so important that we maintain balance throughout all of our goal attainment.

-Brian

William
William

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… Read more »

Mom of five
Mom of five

Even folks who are not eligible for a Roth can do an immediate conversion from a Traditional.

William
William

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!

KP
KP

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.

getagrip
getagrip

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… Read more »

Kay
Kay

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.

Kraig @ Young, Cheap Living
Kraig @ Young, Cheap Living

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… Read more »

MoneyforCollegePro
MoneyforCollegePro

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.

somedude
somedude

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… Read more »

Heather
Heather

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.

Adam P
Adam P

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… Read more »

DreamChaser57
DreamChaser57

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?

Andrew
Andrew

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.

Betsy
Betsy

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.

Elizabeth
Elizabeth

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.

Brian M
Brian M

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… Read more »

Des
Des

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… Read more »

PFM
PFM

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”

Bree J.
Bree J.

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… Read more »

Elizabeth
Elizabeth

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.

William
William

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…

Elizabeth
Elizabeth

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?

Bree J.
Bree J.

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.

Mom of five
Mom of five

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.

Laura
Laura

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… Read more »

Des
Des

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…

Erin
Erin

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… Read more »

J.D. Roth
J.D. Roth

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.

NoTrustFund
NoTrustFund

Check out this guy: nomoreharvarddebt.com. He’s working to pay of his debt and his blog is great.

Kristen
Kristen

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)?

J.D. Roth
J.D. Roth

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.

Marianne
Marianne

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… Read more »

John | Married (with Debt)
John | Married (with Debt)

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).

Beth
Beth

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… Read more »

Bess
Bess

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… Read more »

JC
JC

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… Read more »

Bess
Bess

$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.

Christa
Christa

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.

SB @ One Cent At A Time
SB @ One Cent At A Time

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.

Katie
Katie

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.

Ash (in US)
Ash (in US)

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… Read more »

bethh
bethh

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… Read more »

Jan
Jan

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.

Ely
Ely

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… Read more »

El Nerdo
El Nerdo

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… Read more »

Dan
Dan

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,… Read more »

Rosa
Rosa

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.

Kelsey @ Zero to One Million Challenge
Kelsey @ Zero to One Million Challenge

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.

Tyler Karaszewski
Tyler Karaszewski

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… Read more »

El Nerdo
El Nerdo

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.

Elizabeth
Elizabeth

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!

Des
Des

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).

Rosa
Rosa

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.

Leigh
Leigh

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?… Read more »

Tyler Karaszewski
Tyler Karaszewski

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… Read more »

El Nerdo
El Nerdo

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… Read more »

John
John

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… Read more »

Hannah @ HMII
Hannah @ HMII

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… Read more »

Krista B.
Krista B.

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.

Steven Trevino
Steven Trevino

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

More Than A Mom
More Than A Mom

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… Read more »

Margo
Margo

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… Read more »

Jason
Jason

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… Read more »

Barb
Barb

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… Read more »

Matthew I
Matthew I

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… Read more »

B Smith
B Smith

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.

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