Personal Finance 101
Personal Finance 101
“The desire of gold is not for gold. It is for the means of freedom and benefit.”
-Ralph Waldo Emerson
In an increasingly competitive and prevalent hustle culture, money may be the most influential actor on our goals and decisions. Of course, money is important to our quality of life and a stable economy, but in the above quote, Emerson emphasizes money’s true utility; to provide us with freedom. This is a key principal to remain aware of as I dive into the basics of personal finance in this edition.
By no means am I an expert of finance or economics. If possible, always consult a financial professional before making financial decisions. However, I feel that I can provide some basic education on personal finance management, given past experiences such as shadowing a financial advisor and participating in the Atkins Investment Group, a UNH student-run, actively managed portfolio team. Supplementing these experiences, I’ve spent significant time over the past few years researching personal finance because I want to be free from crippling debt and expenses.
The goal of the Growth Archive Newsletter is to provide you with the knowledge and tools to improve your skillsets and accomplish career goals. The mental and emotional pressure of overwhelming financial obligations will destroy your goals and stunt your personal growth. In this edition, I outline 4 accounts that are essential to your financial stability and your professional dreams.
1. Emergency Savings Account (ESA)
In case we ever get knocked off our feet (which can easily happen), we need a cushion to land on. Your first priority should be setting aside enough money in an ESA to cover AT LEAST 3 months of expenses. According to a survey by Bankrate, 56% of Americans can’t cover a $1000 emergency expense with savings. Yikes.
When you find yourself in a bind, the last thing you’ll want to do is take out a loan from a bank or a friend. This money isn’t for “emergency shopping/vacations/going out.” It’s for the possibility of sudden unemployment, unexpected medical affliction, home/car repair. You get the point.
This money needs to be extremely liquid (easy to access), but we can do better than stuffing underneath the mattress. Consult your bank about opening a money market or interest-bearing savings account. You DON’T want to invest this money in stocks, as stocks may lose value. However, a small interest rate may protect your savings from losing value due to inflation, a particularly important issue right now.
2. Checking Account – Bills
If you already have a checking account, but you use it for many different expenses, I highly suggest opening an account strictly used for paying bills, such as rent/mortgage, insurance, utilities, loans, and other obligatory routine expenses. Your income should be directly deposited to this account, and ideally you should activate automatic payments for each bill whenever possible. This takes the stress and management out of paying off the important stuff.
3. Checking Account – Daily
Once essential bills are taken care of, the daily checkings account will take care of any other expenses. This can include groceries and gas (which are also good candidates for credit card expenses, but I won’t dive into that right now for the sake of simplicity), and dining out, household items, clothing, or hobbies.
If you set each checking account up on the same banking platform, there may be an option to transfer extra funds from the Bills account once expenses are paid each month. It’s a smart idea to budget the daily account, but you don’t have to be as disciplined since bills and emergencies are already accounted for.
4. Individual Retirement Account (IRA)
Now that we’ve covered all of our short-term expenses, let’s move on to long term goals. At some point far down the road, we’ll want enough money to retire from the workforce. But just because it seems far away doesn’t mean we should wait to take action. In fact, getting a head start on retirement savings is extremely beneficial and I’ll explain why. But first, let’s break down what a retirement account is in simple terms:
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The account is like a safe, and inside the safe, we store the valuables. You invest your money in asset classes like stocks and bonds and they grow over time. If you retire from the workforce around the typical age of 65, the goal is to have enough money in the account that you can withdraw to meet all of your living expenses. To ensure that we have enough, we need to be careful about what we put in our safe.
The key to a retirement account is Diversification. This is a fancy word for investing in lots of different assets to minimize your risk of losing value. The easiest way to be diversified is to invest in a Mutual Fund. There are many different kinds of mutual funds, but typically they hold big collections of stocks and bonds and are a sure bet to increase in value over a few decades.
I personally use a Target Date Mutual Fund. This is a mutual fund that is actively managed by a company to change over time as you age. Typically, as you near retirement age, the fund is adjusted to increase bond holdings and decrease stock holdings, which lowers the risk of losing value when you need it most.
TIPS:
Here’s a rundown of the two most common IRAs:
Roth IRA
If you’re 18-20’s, this account is especially advantageous. Contributions to this account are made after taxes are deducted from your income and you can contribute up to $6000 annually, unless your adjusted gross income exceeds $131,000. You can start withdrawing at age 59.5 without penalty, and because you paid tax before contribution, the withdrawals are tax-free. The advantage to young people is that you’re probably in a lower tax bracket now than you will be later in your career, so the value you save by contributing now is much more than it would be later.
401K
If your employer offers a 401k, you should use it. And if your employer matches your contributions, absolutely take advantage. This will make a huge difference to your account value down the road. The 401k works opposite to the Roth IRA. This account allows you to contribute Pre-tax income. This is a major advantage because you get to cut yourself a slice of the cake before the government takes their slice in taxes. Taxes are enforced upon withdrawal, but having a Roth IRA is a good strategy to balance that out.
As I previously mentioned, you should always consult a certified financial professional before making important decisions with your money. But I do hope this edition provided you with a solid enough foundation to build on. Here’s some resources that I used to strengthen my financial literacy:
Books
YouTube Accounts
Instagram Accounts
Thank you for reading.
CERTIFIED FINANCIAL PLANNER?
2 年Great article Colin. Financial literacy is the first step to financial freedom!