For most people personal finance is boring and frustrating. I find the optimization aspect of it fascinating (though I’m not a financial expert), so I wanted to share some best practices/good ideas I’ve gathered from reading and trying various services — I’ve prioritized these based on where I think someone should start, and then work their way down.
Don’t wait to become an expert to make progress in personal finance — learn enough, move forward, and improve later!
When I got my first job out of college, a friend of mine told me to max out my 401k contribution so I never got used to making that money (because it never landed in my checking account — it went straight into the 401k), which (if you can afford it) was such amazing advice! I got a cheaper apartment, and never got used to that money, and every few months when I checked my balance, it just kept growing! (Thanks Steve!)
Early in my career as a software engineer, I was accumulating my savings in my checking account, not investing anything, and not investing in an IRA, because I was “too busy” (ah, the joys of thinking you’re busy early in your 20s!), until a friend of mine who worked in the finance industry verbally shook me and told me to get some money invested (Thanks Scott!)
Here’s my prioritized list:
- Know where your money and debt is: You can use a tool like mint or Personal Capital to track your money, but I like just using a very simple spreadsheet to keep track of where your accounts are (keep it on an encrypted laptop or in a secure cloud, like Google Sheets, with MFA enabled) and how much is in there, including debt (e.g., student loans, credit cards) — you don’t have to update it constantly, but you should know where your money is. I recommend monthly, but you could do quarterly or annually.
- Know much money you spend each month: You could make a super-complex budget (which works well for some people), but I’d start by just knowing, if you add up all your costs such as costs that come out of your checking account and credit cards, etc.
- Spend less than you make: If you’re spending more than you make (other than being in a life phase like college), try to reduce costs (e.g., get a cheaper car, a cheaper place to live) and/or increase income (e.g., get a better job, start a side hustle) — focus on the big things that move the needle, not one less Starbucks a month
- Learn Finance Fundamentals: You can read book (I love Ramit Sethi’s book I Will Teach You to Be Rich, which sounds scammy, but is actually great, and his irreverence makes it actually fun to read), watch something educational (I enjoyed the Netflix movie Get Smart with Money), talk to some friends who are good at personal finance, follow some blogs (These two are great: Ramit’s Money Rules and Meet Mr. Money Mustache) — just do something that works for you to build your foundation of understanding
- Draw your Money Flow: Yes, this sounds ridiculous, but draw a picture (or make a list/spreadsheet if you prefer) of how your money (If you’re an engineering, don’t get stuck here over-engineering — draw a picture, move on (you can iterate later)) — there’s an example below this list
- Save an Emergency Fund: Dave Ramsey’s Baby Steps are great, and #1 is to save $1,000 for a rainy day, which is great advice!
- 401k Free Money: If your company offers a 401k, enroll and contribute enough to get the company match (free money!) or more — if you can, it’s great to max that out early if your career to let that money grow tax-free
- Automate!: Get out of the habit of doing anything manually if you can — setup automated billpay for bills, schedule contributions two 401k, and other savings/investing (see below) to happen automatically, so you don’t forget, and then monitor your accounts occasionally to make sure the system is working (Check out this great Ramit blog post on the topic). You will need to make some tweaks, such as moving money back into your checking account, when you have unexpected costs.
- Setup IRA and/or 529: Open and setup automatic contributions to a Traditional IRA account (I recommend Betterment, which is a robo-advisor, meaning it automatically picks index funds and rebalances them, which is convenient). If you have one or more kids, open a 529 Plan in the state you live in, so you can contribute to your kids’ future education costs and get a state tax write-off (assuming your state has income taxes) — if your kids go to private school, note that you can put some money in, and take it out right away to pay for K-12 education (but leave some in to grow to pay for college).
- Get a Will: If you don’t have a will (estate planning) for what happens when you die, get a will! You can start with a simple $129 plan (see Start with a Simple Online Will), as your wealth grows, you’ll want to work with an estate attorney to draft one — it’s easy to think you won’t die anytime soon, but if you do, it’s very messy and expensive for your family if you don’t have a will
- Have a Death File/Binder so your family/key friends know what to do when you die. Here’s a great Death File blog post about how this works — think about things like how your family will access key accounts, such as setting up emergency access on your password manager.
- Setup Investing: If you have 401k and IRA going, setup a personal investing account and automate contributions into that — I recommend Betterment and using their Core fund with their default settings they show, when you put in your age, to keep it simple. Automate weekly or monthly contributions. NOTE: Be careful of expensive fees here: Don’t “hire” a financial advisor early in your path — many charge fees that don’t sound significant, but add up significantly over the years (see Ramit’s advice is not to consider a financial advisor until you have at least $1 million in investable assets). Watch out for expensive insurance products, like life insurance — you often don’t need that, and the fees are significant.
- Know Where you are in Retirement Progress: Assess where you are and where you want to be to retire in the future. You can use a free tool such as Personal Capital’s Retirement Calculator or FI Laboratory, or you can work with Excel to run the numbers, with assumptions such as needing to have invested assets of at least 25x your annual cost to live (see Mr. Money Mustache’s How Much Do I Need for Retirement?)
- HSA: Health Savings Accounts (HSAs) have a huge tax advantage, if you can afford to set one up and fund it (and your company offers one). If you can, setup a HSA, automate funding it to the max, and (crazy talk, but some can afford this) don’t use the money until your 65 — just keep all your medical receipts, pay out of pocket, and let the money grow (HSA has a triple tax advantage, and you can use it as a retirement fund once you’re 65 — see How Do I use My HSA as a Retirement Fund ?
- Keep Improving: Keep working on the big things (don’t get lost in the weeds, trying to optimize $5 costs), like getting promoted/getting a better job, increasing/improving your investing, etc.
Example Money Flow: