Some people would like to know the how and why. Others just want to be told what to do. This post is for the second type of people, especially those who feel a little guilty about their finances. Maybe you’ve been out of residency for a few years and haven’t really paid much attention to financial matters. Today’s post gives you “just the facts, ma’am.”
Just 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 to personal finance. The rest of the blog is the comprehensive manual. If you have any questions, please refer to the longer manual.
#1 Get insurance
The worst thing that can happen to you and your family is that you get sick, injured or even die. Insurance is available to protect you and your family from the financial consequences of these events. It’s called disability and term life insurance. These people will help you get it and won’t rip you off.
#2 Figure out where you stand
You need to create two tables. A company would call this a balance sheet and an income statement. On the balance sheet, your assets (your home, bank account, retirement accounts, investments, etc.) are on the left and your liabilities (debts such as a mortgage, student loans, car loans, and credit cards) are on the right. If you add them all up, you get your net worth. Yes, it can and is often negative.
The income statement is like a budget. On the left are your sources of income and on the right are your sources of expenses. The difference between what you earn and what you spend, divided by what you earn, 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 those.
More information here:
Investing: what rich people do
How to build an investment portfolio for long-term success
#3 Consider getting help
If those first two steps were overwhelming, it’s time to get help. These people will help you create a financial plan and help you implement it without scamming you. If you just got sticker shock after finding out that financial advice will cost you thousands of dollars, consider our Online course firing your financial advisor instead of. You need a plan, and if you aren’t able to make it yourself, you’ll have to spend some money to get it.
#4 Figure out what you’re going to do with your student loans
If you have a student loan and aren’t sure what to do with it, at the very least book a one-hour consultation 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 this without expert help.
#5 Go to 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 all the plans available to you. These generally include a 401(k), but can also include accounts such as a 403(b), 457(b), 401(a) or a cash balance plan. You actually need to know how this all works. Request the plan documents, read them and register for these plans. Pay special attention to how you get extra money from your employer, also known as a ‘match’.
If you are self-employed, you will need to open a solo 401(k). Honestly, these days it’s probably best to just get a custom one. They’re inexpensive, and for most people they’re better than the free cookie-cutter versions from the big mutual funds and brokers. These people can help you with that.
You can also open accounts unrelated to your employment, such as Roth IRAs and taxable accounts.
Your colleagues typically use 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 through the Backdoor Process) for themselves and their spouse
- A solo 401(k) for any additional income or self-employment
- A taxable (non-qualified) brokerage account
- A Health Savings Account (HSA) for healthcare
- 529s for each child for college
Learn more about each of them. While you may not need/want them all, you will be managing most of these accounts for most of your life. Get used to it.
#6 Fix your banking situation
Most people who haven’t paid attention aren’t making anything with their money. You should open a high-yield savings account or money market fund with a brokerage such as Vanguard or Fidelity, where you can earn about 5% (varies over time) on your money instead of 0% as your bank currently gives you. Five percent of $25,000 is $1,000 per year. It may not change your life, but it sure will kick your teeth. If you don’t deserve it, you’re just leaving money on the table.
#7 Learn about investing
If you’ve decided to go the DIY route, you’ll need to learn the basics of investing. That usually means reading a few books. Here are the good ones. In the meantime, you can start investing your money in mutual funds with names like Vanguard Total Stock Market Fund, S&P 500 Index Fund or Target Retirement Funds. None of these will be a ‘mistake’, and you can refine this 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 to think that investments are the most important part of finance. It turns out this isn’t true. The way to have larger investment accounts is to put more money in the investment accounts. You do this by earning more and saving more. So take a few minutes to make sure you’re getting paid at least as much as the average person doing what you do. If not, negotiate for a higher income or change 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 has to be done. That means it’s time to look at your spending and figure out which parts of it bring you the most happiness and the least happiness. Go to the bottom of the list and start cutting back until you reach that “savings rate” of about 20%. It can help if you simply put your savings on autopilot and then spend the rest without feeling guilty. You might be surprised how much you can save without affecting your sense of well-being in the slightest.
You can do this. The White Coat Investor is here to help. The sooner you start, the sooner you’ll start achieving success. There is no better paying hobby than paying attention to these financial matters.
What do you think? Have you completed all these tasks? What else should be in a quick start guide?
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