The Practitioner’s Beginner’s Guide to Personal Finance
Some people like to know all the whys and hows. Others want to be told what to do. This post is for the second type of people, especially those who feel a little guilty about their finances. Maybe you’ve been single for a few years, and you haven’t been paying much attention to financial matters. Today’s post will give you “just the facts, lady.”
Just like when you order a new computer, personal finance comes with two manuals: a comprehensive manual and a one-page “quick start guide.” This is a quick start guide to personal finance. Every other blog is a comprehensive manual. If you have questions, see the long manual.
#1 Find Alternative Insurance Locally
The worst thing that can happen to you and your family is illness or injury or even death. Insurance is available to protect you and your family from the financial consequences of these events. It is called disability and life insurance. These people will help you find it and will not rip you off.
#2 Find Out Where You Stand
You need to make two tables. A business may call this a Balance Sheet and Income Statement. A Balance Sheet has your assets (your home, bank account, retirement accounts, investments, etc.) on the left and your liabilities (debts such as mortgages, student loans, car loans, and credit cards) on the right. When you add them all together, it gives you a total value for yourself. Yes, it can be and often is bad.
An Income Statement is like a budget. It has your income sources on the left and your spending sources on the right. The difference between what you make and what you spend divided by what you make is your savings rate. Your net worth and your savings rate (not your credit score) are the two most important numbers in personal finance, so pay attention to them.
More info here:
Investing: That thing that rich people do
How to Build an Investment Portfolio for Long-Term Success
#3 Consider Getting Help
If those first two steps were too much, it’s time to hire help. These people will help you find a financial plan in place and help you implement it without bailing you out. If you’ve recently experienced sticker shock after finding out that financial advice will cost you thousands, consider our Fire Your Finances online course instead. You need a plan, and if you feel you can’t do it yourself, you’ll need to spend money to get it.
#4 Figure Out What To Do With Your Student Loans
At the very least, if you have student loans and aren’t sure what to do with them, book a one-hour consultation with Student Loan Advice, a White Coat Investor company. It’s hard for me to keep up with all the changes in student loan management. I don’t know how the average person will do without professional help.
#5 Go See HR
Your employer or partnership has an HR person who knows about any retirement accounts available at your employer. You need to get your hands on it and learn any programs you can find. This usually includes a 401(k) but may also include accounts such as a 403(b), 457(b), 401(a), or cash balance plan. You actually need to know how all these work. Request program documents, read them, and enroll in these programs. Pay close attention to how you get extra money from your employer, often called a “match.”
If you’re self-employed, you’ll need to open a solo 401(k). Honestly, it’s probably better to get a custom one these days. They are inexpensive, and better for most people than the “cookie-cutter” freebies at the big mutual fund companies and brokerages. These people can help you with that.
You can also open accounts that have nothing to do with your job, such as Roth IRAs and taxable accounts.
Your peers often use the following accounts to save for the future:
- 401(k)/profit sharing plan OR 403(b) and 457(b) from employer.
- Roth IRAs (backdoor funded) for themselves and their spouses
- A solo 401(k) for any moonlighting or self-employment income
- Taxable (non-qualified) merchant account.
- Health Savings Account (HSA) for health care
- 529s for each college child
Read about each of them. While you may not need/want all of them, you will be managing most of these accounts for most of your life. Get used to it.
#6 Fix Your Bank Status
Many unsuspecting people get nothing for their money. You need to open a high yield savings account or money market fund at a brokerage like Vanguard or Fidelity, where you can get something like 5% (varies over time) on your money instead of 0% like your bank is currently giving you. Five percent on $25,000 is $1,000 a year. It may not change your life, but it’s a kick in the teeth. Not getting it is leaving money on the table.
#7 Learn Something About Investing
If you’ve decided to go the DIY route, you’ll need to learn the basics of investing. That usually means reading other books. Here are the good ones. Meanwhile, you can start investing your money in mutual funds with names like the Vanguard Total Stock Market Fund, the S&P 500 Index Fund, or the Target Retirement Funds. None of this will be a “mistake,” and you can make fine adjustments later if you know more.
More info here:
The Nuts and Bolts of Investing
150 Portfolios Better Than Yours
#8 Remember What Really Matters
The problem with learning about investing is that you start to think that investing is the most important part of finance. Turns out that’s not true. The way to have large investment accounts is to put more money in investment accounts. You do that by earning more and saving more. So, take a few minutes to make sure you’re getting paid at least as much as the average person doing what you do. If not, negotiate for a higher income or change jobs.
Now, go back to that Income Statement. Is the difference between what you earn and what you spend at least 20% of what you earn? Maybe not, but it is necessary. That means it’s time to look at how you spend money and find out which parts of it bring you the most joy and the least joy. Go down the list and start cutting until you get the “savings rate” down to about 20%. It can help if you just put your savings on autopilot, and then you can use the rest without regret. You might be surprised how much you can save without affecting your sense of well-being one iota.
You can do this. White Coat Investor is here to help. The sooner you start, the sooner you start to succeed. No hobby pays better than paying attention to these financial things.
WHAT DO YOU THINK? Have you completed all those tasks? What else should be in the quick start guide?
