**Disclaimer:** The views below represent my opinions. These investment principles do NOT constitute investment advice, but rather are general principles one might employ in reaching his or her overall financial goals. *All* investing bears risk, including possible loss of capital. I am not a financial advisor or registered securities analyst.
I’ll never understand why personal finance is such a taboo subject. Nobody wants to discuss it! High schools rarely teach it. As of last year, only 6 states required high school students to take a personal finance class in order to graduate. Thankfully, 25 states in the U.S. have introduced legislation that would add personal finance education to their high school curriculum this year alone. I believe this is the result of the pandemic and the economic impact it has had on many households. Personal finance basically gets treated like the sex talk. Some parents avoid it knowing eventually the kids will learn about it. But by the time you’ve started to learn about personal finance you’ve made so many unnecessary mistakes! I know I did. As a society, why wouldn’t we want to set up the younger generation to be successful?? So, I’ve come up with a financial blue print. It has worked well for me and if you can implement this strategy into your finances it will help you save some serious cash.
- Set a goal. Do you want to finally get out of debt?? Take that vacation to Europe you’ve been dying to take?? Put your kids through college?? Retire early??
- Look at your checking / credit card statements from the previous year and analyze your expenses. I never really analyzed my spending until I bought my house. And it allowed me to see exactly what I was wasting money on and what I needed to cut back. Look at your checking / credit card statements from the previous year and categorize all the transactions, sum each category (see examples below) to get annual totals, then divide by 12 to get monthly averages. This exercise will be eye-opening to most and you help will realize how much you actually spend on non-essentials (e.g. fast food, clothes, movies, Starbucks, TV streaming subscriptions).
- Rent/mortgage
- Tuition
- Utilities
- Car note
- Gas
- Insurance
- Cell Phone
- Cable/Streaming
- Internet
- Groceries
- Gym
- Subscriptions
- Haircuts
- Pets
- Home & Car Maintenance
- Storage Rental
- Discretionary spending (Restaurants, bars, movies, shopping, Starbucks coffee, vending machine – basically anything that’s not a necessity)
Did this exercise show you expenses that you didn’t know were there or how much subscriptions or those Starbucks coffees added up to? I’m not telling you to give up ALL discretionary spending. But multiply one month’s amount by 12 and it really adds up over a year.
3. Start trimming the fat. It’s easier to cut spending than to increase your income. Unless you can magically convince your boss to give you a raise, this is how you start to save money. What’s highlighted in blue in step 2 is what I believe is the easiest to cut back on. Eliminate unnecessary subscriptions. XM Radio when you already have Spotify or Apple Music (Yuck). Numerous newspapers, magazines, or websites. Seriously think about how much you use these.
Storage rentals are the BIGGEST waste of money. Not only do you have so much shit, but shit that isn’t even good enough to keep in your house, that you have to go pay someone monthly to store it for you!? Nah fam, go watch a Marie Kondo episode and sell that shit on eBay or Craigslist or just throw it away.
Do you need the fastest internet service? Try going down a speed and see if you can get by for a month. If you can, congrats, you just saved yourself more money! Then go look at how much data you use per month on your cellphone. If you have unlimited data and you come nowhere close to 20GB per month, drop down to the next data package.
Do you really need Netflix, Hulu, Peacock, Disney+, and cable / Youtube TV? Seriously think about what you watch on each and see if you’re wasting money for one when you can watch it on the other. Or share paying for services with friends.
Restaurants and bars are what I blow the most money on. I likes me food and beer. BUT, try only going out to lunch 1-2x per week and bring leftovers the other days. Stay in every other weekend and make cocktails at home. Even cutting out one restaurant meal a week will make a HUGE difference. Just trim one thing from each of these categories and you’ll start to see differences. It might even encourage you to trim more.
What’s highlighted in orange is a little harder to trim but doable. How much food do you throw away? Do you buy all of your groceries at Whole Foods? Do you buy name brand when Great Value is just as good? Do you not buy in bulk? I guarantee you there are a few things you can eliminate here and you won’t know the difference.
If your car note is more than 10% of your take home pay, you’re spending too much. The rule of thumb is you shouldn’t spend more than 20% of your income on all car related expenses (Car note, insurance, gas, maintenance, etc.).
And a good starting point is living by the 50-30-20 Rule: 50% for necessities, 30% toward discretionary spending, and 20% toward saving.
4. Create a budget. Now that you’ve cancelled subscriptions and identified where you waste money, set up a budget and try to stick with it. Your budget will fluctuate and some months you will exceed it. Prices will increase and that’s out of your control. But that’s okay. It’s an ever-evolving process. There are budget tools like YNAB, Mint, and Personal Capital. Personally, I’m old school and have an Excel spreadsheet that I manually track all of my purchases with on my laptop. I may look into using Google sheets though so I can update it on my phone.
5. Establish credit with credit cards. I know a few people that refuse to use credit cards. Credit cards can be VERY useful though. 1. They establish credit. Higher credit = less in interest you pay on car loans and mortgages. 2. Rewards. Just for applying for a new credit card and paying my normal bills with it allows me to obtain sign up bonuses that pay for a couple of flights per year. On top of sign up bonuses you can get anywhere from 1-3% back using your card. Not to mention it’s more secure to use credit cards than debit cards and easier to dispute fraudulent charges.
6. Open a high yield savings account. For years I kept my savings parked in a regular savings account earning 0.0000002% interest. I had thousands in my account and I was only earning pennies in interest. Then I discovered high yield savings accounts like Capital One 360, who at the time was offering a 2% interest rate! I was missing out on a couple grand per year in interest! Nowadays the interest rates are much lower ~0.50%. But it’s still better than nothing. Currently a high yield savings account is where I like to park my emergency fund (More on this later). You can shop around online to see who is offering the best rate. Typically, it’s Capital One 360 or Ally.
7. Contribute to your 401K. You should AT LEAST be contributing enough to your 401K to achieve 401K employer matching. If your employer does 3% 401 matching, that means if you contribute 3% of your paycheck to your 401K, they will also contribute 3%! Employer matching is FREE money. Another benefit to contributing to your 401K is that it reduces your taxes. The amount you contribute is exempt from federal income tax. Let’s say you make $50,000 per year (pre-tax income). If your total 401K contributions for the year was $10,000 (Max yearly contribution set by the government is $19,500 as of 2021) then you would only get taxed on $40,000 of income. Simply contributing to your 401K could drop you down a tax bracket! Later on in this plan we’ll talk about trying to max out your 401K.
8. Pay off high interest debt. 8% interest and higher is considered high interest. Usually these aren’t mortgages, car notes, or student loans. Typically, it’s credit card debt or personal loans (Usually from someone named Joey Two Fingers threatening to take a bat to your knees if you don’t pay up). Now that you’re saving money since you’ve trimmed your expenses, you should be doing everything you can to get out of debt. Before you can even think about investing, your debt has to be paid off first. Look, I’ve never been in credit card debt. But doing some research I’ve found that you have a few options. First you can call the number on the back of your credit card and ask for a lower interest rate. There’s no guarantee they will but it’s worth asking! You can try the snowball method (Paying off lower interest debts first) or the avalanche method (paying off higher interest debts first). Lastly, you could get a balance transfer credit card where you get a credit card with 0% interest for the first so many months and use this credit card to pay off all other credit cards. Just be careful because sometimes there will be a fee associated with this and after so many months the interest rate on your new card could skyrocket.
9. Start an emergency fund. Goddamn, look at you. You have a budget, you’re contributing to your 401K, and now you’ve wiped out your debt! You’re doing AWESOME. But the last step before you can begin investing is starting an emergency fund. You don’t want to go back to paying for emergencies with credit cards (Unless you have the money to pay off the balance, then you should and collect the points and cash back). This pandemic has taught us that a disaster can strike at a moment’s notice. At first, it should be 3-6 months of expenses. Park it in a high yield savings account like Capital One 360 or Ally. Eventually you can reduce this fund once you have solid investments but until then, 3-6 months of expenses!
10. Invest in a Roth IRA and max it out yearly. OMG you’ve finally made it. You’ve gotten out of debt, you have an emergency fund to keep you out of the debt abyss, and now you’re ready to invest! Roth IRA’s are the opposite of traditional IRA’s or 401K’s. The contributions you make to a Roth are with after tax dollars (contributions are not tax deductible). So, they do not lower your tax bill like contributing to your 401K. BUT, the money you earn in a Roth is exempt from federal taxes if you withdraw from the fund after the age of 59 ½ and you have had a Roth account for at least 5 years. When you withdraw money after this age and you’ve had the account for at least 5 years, you do NOT owe taxes. And as long as you have had the account for 5 years, no matter how old you are, you can withdraw what you contributed without paying taxes or a penalty. You’ve already paid taxes on your Roth IRA contributions. This is money you’ve put into the Roth with after tax dollars. Uncle Sam can’t tax you twice. This is why a Roth IRA can also serve as an emergency fund. You just can’t withdraw the earnings from the Roth until age 59 ½. Unless you want to pay taxes and a 10% penalty.
Here are the 3 rules for a Roth IRA. Just like a 401K, there’s annual limits to how much you can contribute. Just like a 401K, the amount is subject to change but as of 2021, the annual limit is $6,000 if younger than 50 and $7,000 for people 50 and over. If you’re single and earn more than $140,000 in annual income you’re NOT eligible for a Roth IRA. Same if you’re married and your total income is more than $208,000. And lastly, you have to wait 5 years before you can withdraw your contributions.
There’s another benefit to Roth IRA’s if you’re in the market for a house. If you’re a first-time home buyer AND you’ve had the Roth account for at least 5 years, you can withdraw all contributions and up to $10,000 you’ve earned in your Roth without paying a 10% penalty. If you haven’t had the account for 5 years, you’ll have to pay taxes on the earnings you withdraw.
So, what type of funds should you invest in in a Roth? You want funds that are either going to generate dividends or interest such as dividend index funds, REIT’s (Real estate investment trusts) or bond index funds. Or you want to invest in growth index funds, since in most cases, you won’t be withdrawing your Roth for years and you’ll have a long time for growth funds to appreciate in value. My Roth IRA is parked in 2 funds, Vanguard Real Estate Index Fund (VGSLX) and Vanguard Mega Cap Growth ETF (MGK).
11. Contribute to and max out an HSA. Full disclosure, this is the only step I have not done on this financial blueprint, as of writing this article. But the more I did research into it, the more it just makes absolute sense to do, since I already have an HSA account. An HSA is a savings account for people to pay for medical expenses that have a high deductible health plan. Just like a 401K, it’s funded with pre-tax dollars. Typically, an employer contributes a certain amount annually to an employee’s account and the employee has the option to contribute to it as well. There’s an annual contribution limit. As of 2021 it’s $3,600 for someone who is single and $7,200 for a family. You can use your account to pay for qualified medical expenses, tax free. But if you pay for anything other than a qualified medical expense, you’re hit with a 20% penalty. Now what most people don’t know about an HSA is that you don’t have to just let your money sit in an account, not working for you. You can invest the money in a mutual fund. So not only are you reducing your tax bill by contributing to an HSA and saving for unexpected medical expenses, but you’re also able to invest the money, letting the balance grow tax free. Just don’t be too aggressive with these funds because you never know when you will actually need to use the money to pay for an unexpected medical event. And once you hit 65 you can use the account to pay for anything, penalty free. You just have to pay taxes on it like a traditional IRA (401K).
12. Max out your 401K. If you’ve gotten to step 11 and still have money in your budget, you should seriously consider maxing out your 401K. This reduces your tax bill even further and adds even more funds for your retirement! It took me at least 5 years into my work career to achieve this but what made it easy was every time I received a raise, I increased my 401K contributions to where it was a complete wash. If you can budget yourself to live off of a certain amount of money, then any additional money you earn in the future through raises can be put towards your 401K. You wouldn’t believe how much my 401K has grown by maxing it out these last few years! #CompoundInterest
13. Extra mortgage payments. I’ve heard both sides of this argument. One side advocates for investing that money in the stock market instead of extra payments towards your principal if your interest rate is low. The argument is that the average annual stock market return is 7% (1950 – 2009). Let’s say your mortgage interest rate is 4%. By making extra mortgage payments instead of investing in the stock market you’re missing out on a return of 3% annually. The other side argues that 7% is just the average and what happens if the stock market performs worse than that during the time you’re paying off your mortgage? On this issue, I hedge my bet. I continue to invest in the stock market but I also pay an additional $250 towards my principal every month. Not only will I make money off of my investments appreciating but I will also pay off my mortgage quicker and will pay less interest over the life of the loan. Win win!
14. Invest in index funds. My FAVORITE step of this plan. It’s good to be set for retirement and have your 401K, Roth IRA, and HSA that you can rely on in retirement. But it’s also important that you have a place that you can park your money and let it compound that you can also access whenever you like without having to pay penalties. Any spare savings outside of your emergency fund should be growing in index funds. I’m not going to go into complete detail about an index fund. You can Google it. They’re mutual funds that you can buy from brokers like Vanguard, eTrade, Ally Invest, etc. There are sooo many index funds that you can choose from and it can get very overwhelming. Someone brilliant on Reddit once said, “Do not let the quest for the perfect plan paralyze you. You want a good plan, not a perfect plan. A simple plan, not a complex one.” Keep it simple and choose the classic Three-Fund Portfolio: Total stock market index fund, total international stock market index fund, and a total bond market index fund. This portfolio allows you to diversify and helps minimize your losses during a market downturn through the investment in bonds. Your next question might be, what percentage do I invest in each three? Well it depends on how aggressive you want to be. Rule of thumb is to subtract your age from 100 and that should be the percentage of your portfolio invested in stocks. By that measure I should have 32% of my Vanguard account invested in bonds. But I like to live dangerously. It’s more like 14% lol. And I have a four-fund portfolio: Vanguard Total Bond Market Index Fund (VBTLX), Vanguard Real Estate Index Fund (VGSLX), Vanguard Total International Stock Index Fund (VTIAX), and Vanguard Total Stock Market Index Fund (VTSAX). I started off investing lump sum amounts into these four funds. Then over the last few years I invest monthly into the VTSAX account. This account runs on autopilot and automatically invests into this fund every month. If you want to go even more conservative than a three-fund portfolio, do some research into the “Golden Butterfly Portfolio.”
15. Create an opportunity fund if you want to dabble in investing into individual stocks. This fund is for when the market is in a correction and you want to invest in a great company that has been overpriced. I talk more about this in the Basic Investing Principles post.
16. Open a brokerage fund and invest in individual stocks. ONLY invest money you’re not afraid to lose. Because you WILL suffer losses in the beginning. That’s how everyone learns. Trial by fire. Check out this post for investing basics.
17. If you’ve made it this far, you’ll want to create a document that lists all of your investment accounts, the purpose of each account, and the goals for each. Not only does it keep you focused but if something should ever happen to you, it would greatly help your beneficiary.
18. Start off every new year with a financial checklist:
Update your net worth tracker
- Review your budget
- Check your credit score
- Shop around for credit cards to obtain new sign-up bonuses
- Shop around for car and home owner’s insurance quotes
- Shop around for high yield savings accounts
- Lower cell phone & internet plans if possible
- Review subscriptions
- Rebalance portfolios
- Make Roth IRA contributions
- Collect tax documents
19. Buy a rental property. I’m currently in the process of saving up for a down payment for my second house so I can convert my current home into a rental property. I plan on writing a future post about everything rental property related.
20. Start a side hustle. “Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.” I’m hoping to one day turn this blog into a legitimate side hustle. If you have a good idea for a blog, check out the “How to start and monetize a blog” post on the Listen Money Matters website.
