Some people like to know all the whys and hows. Others just want to be told what to do. This post is for the second type of people, especially those who are feeling a little guilty about their finances. Maybe you're a few years out of residency, and you haven't really been paying much attention to financial stuff. Today's post is going to give you “just the facts, ma'am.”
Like when you order a new computer, personal finance comes with two manuals: a comprehensive manual and the one-page “quick-start guide.” This is the quick-start guide for personal finance. The rest of the blog is the comprehensive manual. If you have questions, see the longer manual.
#1 Get Some Insurance in Place
The worst thing that can happen to you and your family is you getting sick or injured or even dying. There is insurance available to protect you and your family from the financial consequences of these events. It's called disability and term life insurance. These folks will help you get it and won't rip you off.
#2 Figure Out Where You Stand
You need to make two tables. A business would call these a Balance Sheet and an Income Statement. The Balance Sheet has your assets (your home, bank account, retirement accounts, investments, etc.) on the left and your liabilities (debts like a mortgage, student loans, car loans, and credit cards) on the right. If you total them all up, it gives you your net worth. Yes, it can be and often is negative.
The Income Statement is like a budget. It has your sources of income on the left and your sources of spending on the right. The difference between what you make and what you spend divided by what you make is your savings rate. Your net worth and your savings rate (not your credit score) are the two most important numbers in personal finance, so pay attention to them.
More information here:
Investing: That Thing Rich People Do
How to Build an Investment Portfolio for Long-Term Success
#3 Consider Getting Some Help
If those first two steps were overwhelming, it's time to hire help. These folks will help you get a financial plan in place and help you implement it without ripping you off. If you just got sticker shock after finding out that financial advice will cost you thousands, consider our Fire Your Financial Advisor online course instead. You need a plan, and if you don't feel capable of making it yourself, you're going to need to spend some money to get it.
#4 Figure Out What You're Going to Do with Your Student Loans
At a minimum, if you have student loans and you're not sure what to do with them, book a one-hour consult with Student Loan Advice, a White Coat Investor company. It's hard for me to keep up with all the changes in student loan management. I don't know how the average person is going to do it without expert assistance.
#5 Go See HR
Your employer or partnership has an HR person who has information about any retirement accounts available through your employer. You need to get your hands on it and read up on any plans available to you. These generally include a 401(k) but might include accounts like a 403(b), 457(b), 401(a), or a cash balance plan. You actually need to know how all these work. Ask for the plan documents, read them, and enroll in these plans. Pay particular attention to how you get any additional money from your employer, often called a “match.”
If you are self-employed, you'll need to open a solo 401(k). Honestly, it's probably best to just get a customized one these days. They're not expensive, and they are better for most people than the free “cookie-cutter” ones at the big mutual fund companies and brokerages. These folks can help you with that.
You can also open accounts that have nothing to do with your employment, such as Roth IRAs and taxable accounts.
Your peers are typically using the following accounts to save for the future:
- 401(k)/profit-sharing plan OR a 403(b) and a 457(b) from the employer
- Roth IRAs (funded via the Backdoor process) for themselves and their spouse
- A solo 401(k) for any moonlighting or self-employment income
- A taxable (non-qualified) brokerage account
- A Health Savings Account (HSA) for healthcare
- 529s for each kid for college
Learn about each of them. While you might not need/want all of them, you're going to be managing most of these accounts for most of the rest of your life. Get used to it.
#6 Fix Your Banking Situation
Most people who haven't been paying attention are earning nothing on their cash. You need to open a high-yield savings account or a money market fund at a brokerage like Vanguard or Fidelity, where you can earn something like 5% (varies over time) on your cash instead of 0% like your bank is currently giving you. Five percent on $25,000 is $1,000 a year. It might not change your life, but it beats a kick in the teeth. Not earning it is just leaving money on the table.
#7 Learn Something About Investing
If you've decided to go the DIY route, you're going to have to learn the basics of investing. That usually means reading some books. Here are the good ones. In the meantime, you can start investing your money into mutual funds with names like Vanguard Total Stock Market Fund, S&P 500 Index Fund, or Target Retirement Funds. None of those will be a “mistake,” and you can do some fine-tuning later when you know more.
More information here:
The Nuts and Bolts of Investing
150 Portfolios Better Than Yours
#8 Remember What Really Matters
The problem with learning about investing is that you start thinking the investments are the most important part of finance. It turns out that isn't true. The way to have larger investment accounts is to put more money in the investment accounts. You do that by earning more and saving more. So, take a few minutes to make sure you're being paid at least as much as the average person doing what you're doing. If you're not, negotiate a higher income or switch jobs.
Now, go back to that Income Statement. Is the difference between what you earn and what you spend at least 20% of what you earn? Probably not, but it needs to be. That means it is time to look at your spending and figure out which parts of it are bringing you the most happiness and the least happiness. Go to the bottom of the list and start cutting until you get that “savings rate” up to about 20%. It might help if you just put your savings on autopilot, and then you can spend the rest guilt-free. You might be surprised how much you can save without impacting your sense of well-being one iota.
You can do this. The White Coat Investor is here to help. The sooner you get started, the sooner you start having success. There is no better paying hobby than paying attention to this financial stuff.
What do you think? Have you accomplished all of those tasks? What else should be on a quick-start guide?