A Basic Personal Finance Game Plan: How Did I Start?

Image courtesy of zirconicusso / FreeDigitalPhotos.net

Image courtesy of zirconicusso / FreeDigitalPhotos.net

Most of the friends and family I’ve talked to (between the ages of 23 and 35) about their personal finances have at least one financial goal and don’t know where to begin. They want to start families, buy homes, pay off debt or save for retirement. The most common question: How do they start these goals while paying the minimum monthly payment on their student loans (that sometimes total over $500/month)?

Here’s my list in the recommended order:

1) Have goals, talk to someone about them and write them downNot necessarily in that order. No point in saving money if you don’t have a reason or plan to spend it. Goals can change anytime so don’t be afraid to review, revise, add, delete. Penelope Trunk wrote a good article on how to achieve your goals and why writing them down is important.

2) Cut your expenses, Part I. Focus on the big three: education debt (post coming soon about this), housing, health care. You probably spend more in each of these areas than any other because they are fixed expenses — paying for them happens automatically without you choosing whether you want it month by month. One choice to enter a plan or contract leads to many automatic payments. Completing this step may take more paperwork, time, and reflection compared to all of the others on this list — but it will make a HUGE impact on your personal finances because it’ll lead to automatic savings every month.

3) Cut your expenses, Part II. List all your other fixed expenses such as cell phone contracts and plans, memberships to clubs or gyms, subscriptions to magazines and online streaming services (i.e. Hulu Plus and Netflix) and all insurance policies.* You might not realize how much these are costing you every month, every year — without you even noticing. Ask yourself: Can you live without it for one month? If not, can you get it for less somewhere else?

*Notice that I’m not mentioning anywhere here limiting your lattes or weekly ramen fixes (although this is important to do after you have taken care of the biggies). First focus on fixed expenses because spending less on what you have to automatically pay every month will make a big difference at the end of the year compared to skipping on a coffee or meal out once a week.

4) Pay off ALL credit card debt. Some people think saving for their retirement is more important than paying off debt. Paying off your credit cards is like investing in yourself with a guaranteed rate of return equal to your card or cards’ interest rate(s). Paying off your balance in full every month is the way to go. If you need help there are lots of resources available, like talking to a credit counselor.

5) Start an emergency fund. Start by having $1000 saved up as your goal in a savings account by setting up automatic transfers from your checking. I chose $1000 because it’s a round number and not too intimidating to start with. Most true emergencies that will require upfront payment will be below $1000. Many suggest having 3-8 months of living expenses available for emergencies. There is no such thing as an ideal amount in an emergency fund because everybody’s situation is unique depending on your level of family/community support, your available networks, or your skills.  The main reason for an emergency fund is to take away stress when you have an unexpected expense or lose your job and to steer you away from need to use your credit cards.

6) Open a retirement account and fund it automatically every month. If you work and your employer offers a retirement plan usually called a 403(b) or 401(k), sign up for it — especially if they match what you put in. I also put in a fixed amount every week into my Roth IRA. I suggest checking out Vanguard because they are a non-profit and have the lowest expenses in the industry (always watch out for fees when opening any account). Just don’t talk to any salespeople from the different retirement plan companies about your retirement before you do your research. There are lots of good resources online that will guide you through the options. Here’s a start:

Learnvest: “Retirement 101: Everything You Need to Know”

The Simple Dollar: “Help! I Don’t Know What Retirement Plan You’re Talking About”

And if you’re a teacher: http://www.403bwise.com/ 🙂

7) Pay extra toward student loans. And other debt like car loans. Even if you have an extra $20 to spare every month (after credit cards, emergency, and retirement savings), putting this extra into your student loans will make a difference. You can use this simple calculator to see how much an extra payment will save you.

A book I recommend to friends who ask for advice on how to manage their money: All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. It is straightforward and comprehensive and goes through the steps I listed above and more.

Next steps: After you’ve built savings, consider disability insurance to protect yourself in case you are temporarily or permanently are unable to work. Consider term life insurance if you have dependents, people who depend on you for financial support. If you are on auto-pilot and have done all of the steps above, considering saving several months (or even a year) of living expenses in case you experience long-term unemployment. Then, if you’re really motivated, consider saving enough to not have to work for money. This might sound impossible, but focusing on steps 2 and 3 will make a huge difference on your finances. The most motivating book for me on this subject was Your Money or Your Life by Joe Dominguez and Vicki Robin. I read it during grad school and it’s altered my view of money, work, and my relationship to my community more than any other book.

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6 comments

  1. […] the end of my senior year, I started getting real about managing my money. I got my first credit card, signed up for a Roth IRA, and started reading non-stop about saving, […]

  2. I couldn’t echo enough how important it is to pay of debt before saving and investing for retirement. When my student loan payments started over a year ago, I wanted to save and invest at the same time.

    A friend told me that unless I could achieve investment returns at a higher guaranteed rate than what my student loan debt interest rate were, there really was no question as to what should be done first between paying off debt or investing.

    That hit me like a ton of bricks: my debt had a variable interest rate of 5.5% and it was very unlikely I was going to achieve a guaranteed investment return of 5.5% or greater.

    I’ve focused on paying off the guaranteed interest rate charged by my student loans before any significant savings and investments start.

    1. Awesome comment, Steve! Some may remind you that the stock market annual gains of 7% per year after taxes (over the long-term average). But you hit it on the head — those gains are NOT definite and could also be negative in the short-term. Plus there’s the psychological benefit of being debt-free after having debt…makes you realize just how much you can accomplish.

  3. […] Personal finance. Frugality. Minimalism. For me it’s about separating what matters from what I’m told by others to care about… by the media (blogs included), advertising, and strangers and friends around me. […]

  4. Great post. Just found your blog, and I’ll be poking around 🙂

    1. Thank you! I can’t wait to try your recipes.

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