Some Thoughts on Personal Finance

Personal finance is a skill for which everyone is at a different stage. This post is geared towards the 21/22 year old who just graduated from college/is just starting a new job.

Personal finance is as much of a personal, emotional issue as much as a logical, rule-based one. In the end, it’s about taking actions to reduce stress and sleep better at night.

Budgeting

Here’s the template I use, it’s basically a 12-month forecast in which I start off with my paycheck $$ at the top and expenses below.

Take Home Pay	XXXXX
Rent	XXXXX
Food + Drink	XXXX
Transportation	XXXX
Gym + Laundry + Haircut + Exam + Phone	XXXX
Travel	XXXX
Donation	XXXX
Roth IRA Contribution	XXXX
Total Expenses	XXXXX
Remaining $	X

This is just a forecast/goal that I try to maintain.  I’m fortunate enough to be in a position where I don’t have to worry about student loans, but that should take priority if you do.

Emergency Savings - 3-6 months. Your expenses for however long you think it takes you to find another job in case a catastrophe happens.

There are actually checking accounts out there that yield 1-2% interest (Emigrant, ING, AllyBank, GE).

The amount of taxes withheld compared to your actual taxes owed is calculated during mid-Jan to 4/15, and you’ll receive your refund a few weeks after submitting your taxes (or send additional money to the government).

Credit cards

Three types: cash back, travel, low interest
AMEX/Chase have the best IMO.
Try to hit point bonus offerings that CCs have. To hit these bonuses (ex. spend $4k in 3 months to get 40k points), you can...offer to pay for big purchases your parents/friends make, use your CC to pay taxes, buy a huge Amazon gift card, etc.
In my opinion, even though I really don’t like to tell people how to live their lives...there’s no reason to carry a balance (not pay off all of your bill) every month.

Investing

The biggest investment pool in the United States is for retirement.  Pension plans aren’t so popular anymore because they bankrupt companies, but your firm may offer a 401(k) plan, where you contribute X% of your salary.

401(k) are company-sponsored retirement plans. You should at least contribute up to the company match because it’s free money. Limit a year is $18,000 atm.

IRAs are individual retirement accounts set up by yourself. Limit a year is $5,500.  

Each of the above have two types: traditional and Roth. Traditional means it’s deducted from your base salary (before tax), like your social security taxes for example. However, when you withdraw the money at age 60, you will have to pay taxes.  Roth means it’s deducted from your after-tax amount, so you’ve already technically paid taxes on it already, but when you withdraw it, you won’t have to pay taxes.  There is a penalty for withdrawing the money before you turn 60 years old.  For young folks, it’s been suggested that the Roth type is the way to go because assumingly, you’re in the lowest tax bracket right now, so you should pay the tax now rather than later when you will be in a higher tax bracket in the future. You can open an IRA account with Vanguard, Fidelity, etc.

For younger people, you may want to set up both a Roth 401(k) and Roth IRA. Unless contributing to a traditional 401(k) can bump you down to the next lowest tax bracket. Also, you are currently not allowed to contributed to a Roth IRA if you make over a certain amount (6 digits). However, there is currently a loophole where you can contribute to a traditional IRA, and then immediately convert it to a Roth IRA - don’t ask me why that’s still okay...

Only invest in stocks if you are willing to spend significant time researching the companies and industries. Otherwise, you’re pretty much just gambling.

After you’ve set up an emergency fund, you can take the remaining savings and invest it in index funds. Mutual funds are funds that are professionally managed that buy many securities such as stocks and money markets that are funded by people like you. I think the most important factor for people starting out is to look at expense ratios. For example, a mutual fund with a 1% expense ratio means that every year 1% of the fund will be used to cover expenses, which means less money to you.

This post was a pretty general overview, and I realize I'm probably just regurgitating stuff that you can find through a Google search of "basic personal finance" - but if you want to talk in detail about something mentioned above feel free to shoot me a message.