Personal Finance 101

Within the last handful of years I’ve seen the rise of self-proclaimed personal finance gurus and influencers that flaunt ridiculous claims of performance and wealth that offer tidbits of helpful information in order to sell some kind of secret mystical silver bullet cure all product or service that will make you rich beyond your wildest dreams. I’ll tell you, personal finances aren’t complicated and the majority of “finfluencers,” or financial influences, are full of bullshit, their wealth doesn’t come from their secrets, it comes from duping people like you to pay for content or courses for publicly available information. Much like dieting, whether or not you’re healthy and it works is how persistent and dedicated you are. Consistency is what matters and is the key to success. I’ll walk you through the outline/template of (something). Be realistic and reasonable, use your common sense.

Create a Budget & Stick to it

The foundation of every healthy personal finance(?) is a well balanced budget. (sustainable) It’s key to living within your means and achieving financial goals. The general rule of thumb is to make more than you spend but there are more in-depth details and nuances than that. The important part of a budget is outlining where your money will go in a realistic way and stick to it, otherwise budgets are useless dreams.

I personally like to follow the “50/30/20 rule” but swap the traditional 30% and 20%.

(reword) Many financial professionals or personal finance experts would suggest compartmentalizing and automating your money; direct deposit gets split into different accounts depending on the intent or purpose of the money, automatic payments for bills taken from the account dedicated to needs, money dedicated to saving and investing automatically deposited or transferred to a high-yield savings account, retirement account like 401(k) or Roth/Traditional IRA, or a brokerage account (or other account), and only wants money is deposited in an account readily accessible to spend such as a checking account with a debit card or that you pay off a credit card with (although I’d say be cautious with credit cards).

50/30/20 Rule

U.S. Sen. Elizabeth Warren popularized the 50/20/30 budget rule in her book, All Your Worth: The Ultimate Lifetime Money Plan. The rule is to split your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.

Key Takeaways

  • The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement.
  • The purpose of the 50/30/20 rule is to balance paying for necessities while being mindful of long-term savings and retirement.
Investopedia – The 50/30/20 Budget Rule Explained With Examples

Traditionally, the 50/30/20 rule dictates

  • 50% of your after taxes income goes toward needs or must-haves such as rent or mortgage, basic groceries, utilities like water and electricity, health care, etc.
  • 30% is spent on wants such as eating at restaurants, entertainment, shopping, travel, etc.
  • 20% savings or investing which includes student loan repayments, credit card or other debt, retirement, etc.

If you could get your needs and wants below 50% and 30% respectively and could increase savings more than 20%, that’d be ideal/desirable. Ultimately, the less you spend on recurring expenses and one off purchases and the more you save and invest (something).

(reword) In an ideal world my savings/investing rate would be 50% but I have more expenses than (something) so I couldn’t support that with my lifestyle. So I settle for 30% savings and investing and 20% wants, but I’m naturally on the minimalistic side. Trading/sacrificing current for future.

Needs and the Distinction of Necessity

You’d be surprised about what constitutes as absolutely necessary. If you go through your accounts and itemize anything you could survive without no matter how uncomfortable, you’ll most likely be left with a relatively short list which generally/normally contains shelter, food, utilities, and health care (insurance and expenses – as an accident without these could be infinitely more costly).

If you expand outward about what you should spend money on first, it would most likely include things like minimum payments on debts and loans and income earning or generating expenses such as transportation, possibly internet or phone, etc.

Lifestyle Inflation

After you set a budget, you’ll most likely change jobs or get a raise at some point. It’s important, especially early on in your career, to not fall victim to “lifestyle inflation” or raising your reoccurring expenses like rent, etc because you have increased your income. If you survived in your current situation (something).

Build an Emergency Fund

As Caleb Hammer, in his popular YouTube series Financial Audit, likes to say “not having an emergency fund is an emergency” because it’s more likely that any significant unanticipated expense could have a catastrophic downward spiraling effect as paying those may require individuals to enter into a situation they can’t easily get out of (e.g. taking a loan with a horrible interest rate, credit card debt with high APR and not paying it off at the end of the month, etc).

After starting an emergency fund by putting $1,000 or one months’ worth of expenses (whichever is greater) in a high-yield savings account, then we can pay off non-essential bills like internet, phone, cable, etc.

After paying off high-interest debt ( > 10+%) and taking advantage of employer 401(k) match, then you can increase your emergency fund to 3 to 9 months of living expenses depending on your job stability and risk tolerance, 6 months is pretty safe for most people.

Employer 401(k) Match

Pay Down Debt

Retirement & Higher Education

Other Goals & Advanced Methods

If applicable:

  • Max yearly HSA contributions
  • 529 plan for college expenses
  • Retire early?
    • Max out 401(k), 403(b), or other employer sponsored account, consider the “mega backdoor Roth IRA”, then use a taxable account
  • More immediate goals?
    • Use savings for goals sooner than 3 to 5 years and a conservative mix of stocks and bonds for goals more than 3 to 5 years away.
    • Common examples include down payments for homes, saving for vehicles, paying down a mortgage, and vacation funds.

After paying for necessities from your such as (in no particular order, some may not apply)

  • rent/mortgage including renters or homeowners insurance if required
  • groceries
  • utilities (water, energy/electric, heat/gas, etc.)
  • minimum payments on all debts and loans
  • health care (health insurance and health care expenses)
  • income earning expenses (transportation, internet/phone, etc.)