After living on my own for a couple years, I realized that a general sense of “check checking account, if it’s over a couple hundred, I’m doing well” and “when there’s extra, put it away” wasn’t giving me a clear enough picture of what I’m supposed to be keeping track of or considering when it comes to longer term financial decisions. Here are my learnings.

(Since I created this, I’ve taken another stab at looking at things at a higher overview and what it looks like to handle month to month budgeting - take a look here)

This breakdown roughly follows Brian Feroldi (who writes for The Motley Fool)’s recommended order of financial operations.

This is a collection of personal learnings, rather than a concrete set of advice to follow. I am not a certified financial advisor! Merely a civilian working towards financial literacy.

Manage a budget
Pay off high-interest debt
Invest for retirement (401k employer match)
Fill emergency fund
Max contributions (HSA, ROTH / trad. IRAs)
Pay off non-mortgage low-interest debt
Invest in a diverse portfolio, other if applicable (eg 529 for childrens’ educ, gold, real estate)

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living_within_means_color50_header copy.jpg — **Living within my means**

My monthly spending:

To budget is to be clear about what you need to cover the inevitable, and what gap you have between that and what’s left. Initially, I set a goal to save up an emergency fund, and once I had that, to treat it as “untouchable”. Then I set goals for expanding the $$ I could save in the gap (spend less or make more).

**What worked for me:**

Taking advantage of my bank’s automated categorizing lowered the friction of documenting.
I tried out to various apps like Mint to see what worked best for me. Turns out, an excel where I tracked my bank’s categories + adding other ad-hoc items stuck better.
Looking over a couple months helped me determine which category of spending I would change, vs kicking myself for spending more one month on treats.
I set a clear goal for savings. A tangible thing to weigh against the Joys of Life.

How debt works

- and why paying this off is a priority -

If I have a need for more money than I have, say for a car or a house, I can ask an institution to loan me that money. Now I have debt - meaning over time I am expected to pay back that amount, plus additional money that is the cost of the institution trusting me & giving me their money in the first place.

When I apply for a loan, the institution will tell me what it will cost.

Once I have received the money and used it, I begin to pay portions of the loan (called principal) + cost (the interest) back over that set amount of time.

If I reach the set length of time, and still have portions of my principal to pay, institutions may charge an increased cost (expressed as an increase in interest).

Banks make the increase in % very high for each month credit card charges are past due - this can mean that from one month to the next the amount of money I have to pay back increases by a lot.

Note the actual charges are not always as linear / simple as depicted here.

Building credit

When I apply for a credit card, loan, or submit an application to rent an apartment, institutions (and landlords) look at my credit score. The score is based on a look at my overall history with money:

Banks calculate your proportion of credit use at the end of the month - so if I see myself getting close to that 50%, I can pay my credit card balance mid-month
Every 6 months or so, I asked my bank to increase my credit limit - not to use more, but so that my proportion of use is lower. I did this until my use stayed below 50%.

nest_egg_color50_header copy-17.png — Saving towards larger goals

Starting with the long view

It’s worth it to start with my retirement savings because of the magic that is compounding. Take a look at what happens from Year 1 to Year 2: (ref)

Year 2’s return is larger, because I started Year 2 with a bit more than 2k. That means the money I invested did “work” for me - making me more money than what I originally put in. Over time, this adds up - take a look at the example shown here: (ref)

What accounts I use to invest for retirement

I checked with my employer to see if they offer a “match” for contributions to a 401k. A match means that an employer pledges to contribute up to a certain % of what I take out of my paycheck to put in my 401k (so if say I put 4% out of my paycheck every month, they add that same amount to my 401k, effectively doubling the amount I’ve saved)

There are additional options for saving for the long-term: Traditional and Roth IRAs (individual retirement accounts). These are accounts that you invest in through brokerages like Vanguard, Charles Schwabb, etc. Once I’ve filled my emergency fund, I try to put in as much as I am allowed (federal limits are set every year).

The difference is I pay taxes upfront with a Roth vs pay taxes later with a Traditional IRA. My income early in my career is likely less than what I will be spending in retirement, but I also do not know what the tax rate will be way in the future - therefore it is good to have a mix of both. (ref)

Note there are income limits for contributing to both 401ks and Roth IRAs (ref).

Options for investing towards savings goals

Now I start to look towards the closer-horizon goals (trips I want to go on, big purchases like an apartment). Here too I am looking for ways to make my money work for me, and investing in the stock market is a way to do that. Many talk about an “average return” in the market. This is made up of the average across all companies who are publicly traded on the stock market. There are a number of different types of accounts you can choose: (ref)

Stocks

I invest $ in 1 company. I win when the company does, but I also lose when its stock price goes down

Mutual Funds

I invest $ in a set of many companies Wins & losses of companies even out. These are offered for a low fee by investment brokerages.

Index Funds

Type of mutual fund, where the set is focused on a sector (tech, energy). Lets me focus in areas I believe will do well, with less risk than trying to pick single companies

Bonds

A government or company’s IOU for their loans and payments. Does not fluctuate much, which means I don’t have the risk of losing value in a short amount of time (but also will not grow a lot in value).

When I open up accounts, I can set what proportion of my money is in how “risky” of a bucket (aka how comfortable am I waiting out the slumps in hopes of greater gains over time). As I get closer to when I will want to access the money (say, to purchase a home or as I get closer to retirement), I can shift the proportion of my investments from more volatile accounts to ones that do not fluctuate as much. This way, I have a greater change of predicting what amount of money will be available.

In addition to the brokerages already mentioned, Wealthfront, Betterment are examples of “robo-advisors” where you can transfer $ and they will invest in various funds for low fees. Robinhood lets you invest in individual stocks. There are more options such as cash-equivalent accounts (CDs), real estate, gold that help weather the fluctuations of the market.

Paying off debt vs investing in the market

When I look at the assets I have saved up, a question that pops up is whether I should pay off large loans (like student loans, car loans), vs invest that amount in the market.

If my loan interest is less than what I can make in investment earnings in the market, it is better use of my money to invest it in the market. That said, the % I have saved in interest fees is a sure-fire saving - the market return is not guaranteed.

The benefit of having a diverse portfolio

Most articles you come across talk about returns on market investments as an “average” over years. (ref) But once you start taking money out, being mindful of the peaks and valleys take on significance. Financial advisors have a variety of strategies / approaches to this kind of thing - (such as investing in gold, which historically has retained value when the stock markets are down) definitely consult an expert for guidance! I first heard of this in a financial literacy workshop hosted by Fortis Lux’s Victoria Henning-Smejda.

Saving to self-sustain

The point of building up a “nest egg” is that you live off of the interest it generates every year, touching as little of the actual amount you put in as possible (this is how endowments work). The balancing act is in building up for the long-term while also saving towards the goals that pop up throughout the life we live pre-retirement.

That’s all for now - definitely download the full poster if this is of help to you. I find it easier to skim this in PDF vs scrolling down each section… but that’s just me.

I’m looking forward to learning more, and plan to share out as I go along - things like how life insurance works (and how some use it as an additional investment tool).

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Keeping finances in order

Am I living within my means?

How can I make progress towards savings feel real?

How can I make something that’s decades off feel real?

What does this look like in practice?

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