The Ultimate Financial Guide
This is a collection of what I’ve learned through the years, collected piecemeal through my various readings and podcasts. It is the ONLY piece of financial advice you’ll EVER need, setting up a mental framework for financial success. Legal disclaimer: I am not a financial advisor, but a personal finance enthusiast. Please don’t sue me if you feel I messed up your finances. Reading beyond this line will be a legally binding agreement that you agree to the aforementioned sentence heretofore (a la Good Will Hunting).
Spend less than you make
- A lot of financial experts say to make a budget, but that’s not how my brain is wired. I find it too tedious to reconcile every cent. Know where your money is going, but don’t slave over every line of the budget. Loosely budget. If you feel you want a higher standard of living try to make more money with a new job or supplement your income with a side income or re-evaluate what you’re spending your money on. The average American family makes about 50k. If you make this, you have hit the threshold. You can do anything you put your mind to, this is permission in sentence form. If it frees you, you’re welcome, if it doesn’t, that’s ok, read on…
Give 10%, save 10%, Live on/Enjoy 80%
- Giving 10% of gross versus net? It’s up to you. I’m a Christian and I believe tithing in all cases where you have an income, even if you are in debt. Tithing is important because it honors God, with the first fruit of your income.
- Automate your savings, this can include money you directly contribute to Roth IRA, 401(k), or a savings account.
- You should have an account where you have funds you can access immediately for emergencies, some say $1,000, some say 3 months, 6 months. Do a mixture of what’s the most money you’ve ever needed for an emergency and round up to the next thousand.
- Most experts say to do the company match first for your 401k. Most companies will match your contribution up to a certain percentage, at my old job, they matched 50% up to 6 %, so I made sure to contribute at least 6 percent.
- Then the Roth IRA (if you are eligible, you can make too much) because the money grows tax free, you pay today’s tax rate versus your future tax rate, any deposits you make can be withdrawn without penalty. It’s like a savings account that grows tax free.
- 401k’s are good because they grow tax free and they reduce your taxable income (Roth does not).
- Warren Buffett directed his heirs to invest any monies in low cost index funds, like the Vanguard S&P 500 index fund. In 30-40 years, your nest egg should be at least a million dollars plus, given you save over those years with 10 % of your income and you make an average of 50k at 8-10% return. You’re well on your way to being a future millionaire.
- If you plan to put a down payment on a house or car, that’s separate from an emergency fund.
- Mark Cuban says it’s ok to have large sums of cash to invest for those big investment opportunities that come by. Don’t feel rushed to invest all your money right away. If you’re investing 10% in Roth IRA and/or 401k and you still have money to save, it’s ok to sit on it. Some say it’s losing purchasing power, but if your friend asks you to invest in the next Facebook, you’ll have the liquid money to invest.
- Tony Robbins says that if you’re just sitting on cash to time the market though, you’re better off investing it today, no matter the price of the index because the entire stock market is trending up and there are also dividends to consider for compounding. If you sit out of the market for a few select key dates over the course of your investment, you will lose a significant chunk of your invesment potential in the long run. Invest long and consistently, it’s called dollar cost averaging.
- Make sure to ENJOY your earnings, most financial enthusiasts recommend spending on memories over things. Buy quality over quantity. Instead of buying a latte every day and binge shopping every weekend, save for that vacation to Paris or Rome! When you are older, you’ll remember the trip to Paris, not the new spring jacket or the latte everyday from Starbucks.
- School loans are almost impossible to get rid of unless you qualify for debt forgiveness through a public service program (limited to certain professions) and/or you become permanently disabled or die. You may also not graduate. In most cases, you’ll have to get some type of student loans, but MINIMIZE it by taking out the minimum amount, go to a less expensive school, work while you go to school, etc. Make sure you go to a school you can afford. It’s ok to say you can’t afford something.
- Most financial experts say you CAN go into debt for a house, but make sure you’re not borrowing too much. Buy a house you can afford, leave your take home pay a healthy margin. A good rule of thumb is to spend 20-25% of take home pay (net) for housing costs (mortgage/rent, utilities, etc) and ideally try to make the mortgage for 15 years rather than 30 years. This is for your best interest, the bank may say otherwise, but they have their interests (pun intended).
- Try to buy a used car if you are able to. Avoid buying a brand new car until you are at least a net millionaire. If you need to buy a new car for a variety of reasons (safety, health reasons, etc), buy less than you need, you don’t need the newest Cadillac Escalade or Porsche Cayenne Turbo. Pay the car off as soon as you can.
- Never carry debt like credit card debt. If you have to carry a balance, it’s not worth it. Don’t buy it. Credit cards are for emergencies and convenience, if you can afford it. It’s also okay to say you can’t afford something, yet! Yet is a key word. Emergencies are medication, broken heater in winter, etc. Not the newest record from the iTunes store from Taylor Swift.
- If you are trying to get out of credit card debt, the best way to pay it off is to stop using it, don’t play the revolving balance game. Go on a cash only spending until you are debt free and feel you can manage credit cards better. It may take years. Credit cards are for emergencies and convenience, the perks aren’t as good as you think. The plastic swipe has empirically shown to promote spending. Don’t ever pay a yearly fee for a credit card. This doesn’t make sense from a dollars and sense (no typo).
Practical things & sidebar tips
- You can’t expect to live in a similar place as your parents as soon as you graduate from college. Their house was established over decades. Start smaller. Be content.
- Save for a downpayment on a house. Also, keep in mind of where you will be in 7 years. If you think you are going to move within 7 years, don’t buy a house, just rent. A house seems like a good investment, but it’s really a liability. Depending on the housing market, it can be difficult to sell a house when you want to, you may lose money on the sale, not be able to sell it, or be underwater on the payments (value of home is less than your mortgage). They say 20% is ideal.
- Eating out can add up, try to think of eating out in terms of monthly and yearly costs. Eating out once can be a $50 tab, which isn’t much, but if you do that multiple times a month, that can easily be $200 if you eat out every weekend of a month, that’s $2,400 a year. Would you be better off paying down debt rather than eating out? Make your own coffee at home. Pack a lunch most days of the week. Drink water only at restaurants.
- Buy Less. I have so many clothes that I don’t wear anymore. You probably wear the same few pieces of clothing and could get away with drastically reducing your wardrobe by 50% or more. Try to sell clothes you don’t wear and apply that to your debts and/or add towards savings. Sometimes, you’re better off donating it and getting a tax donation receipt, or donate it to a family friend who may need clothes.
- Herm Edwards told a story about how new NFL rookies get told that they only need one of anything. One car. One watch. One house. That’s a good rule to follow, do you really need 10 Invicta watches? A house on each coast?
- Nowadays, you can get away with doing most of your internet activities on the phone. Do you really need that new macbook laptop? Do you need cable at $100/month or $1,200 a year? Try a cheaper monthly subscription like Sling or YouTube. I find there is a lot of good free content on YouTube and Amazon Prime. I think I have bought my last laptop. It’s still going strong and don’t foresee buying another one soon.
- Sign up for an app like Mint, to get snapshots of your spending. Credit cards do a good job of categorizing your spending, but doesn’t include checks and cash spending. You need to know where your money is going.
- Save time and not money. How can you use your finances to get rid of a problem. A good example is laundry (I live in NYC). It takes up time to go to a laundromat and do the laundry, the opportunity cost is about 3 hours. You would be better off feeding your passion and/or earning extra money than to spend 3-4 hours to do laundry.
- Dave Ramsey is a good financial person to help you get out of debt, his no credit card stance and baby steps are very helpful. It’s extreme, but you need to avoid debt to serve God better!
- At a certain point, you should think about capping your income, making more money may cost you time and there is a point where income has diminishing returns. Making extra money on an extra shift will be eaten up by taxes and it takes away from family time, is it worth it?
- This is a new thought for me lately, have a maximum capped income ($50,000/year), and give the rest away. Be content with what you make. It’s counterintuitive, but worth doing a mental exercise.
- Supplement your pay with passion. You don’t have to make more money. You may be in a position where you make $400,000 and you’re seeing the entrepreneur craze and you want to upcycle coke cans into airplanes… and it’s not realistic to walk away from the money, it’s ok to spend your free time doing something you’re passionate about like coin collecting or shell collecting and stay at your high paying job (Tim Ferris).
- I do not know the celebrities I’ve mentioned, they don’t endorse me nor I them. I just found what they said to be helpful. Think of it as my “Jeong Coin (kwon) Do” (Jeet Kune Do, word play on Bruce Lee’s martial art form, he took different parts from different disciplines).
One of my favorite artists is Henri Matisse and this is because he painted over his pictures to perfect them, he felt different lines, shades and angles could make the painting better. He felt he was never really done. This is my financial masterpiece a la Matisse, I WILL rewrite this many more times.
2 thoughts on “The Ultimate Financial Guide”
great tips here!!! Love your writing voice- I can hear a lot of wisdom in it 🙂
Thanks Esther. I appreciate the feedback!