Personal Finance 101

Today we’re continuing the journey we started last week traveling through the different subjects that we’ve covered this year.

Last week we took a big picture look at life planning, which was our topic for January.

Today, we’re diving into our February research, which was on personal finance basics.

Getting Your Financial House in Order

We started the month by learning how to get our financial house in order.

What we learned in life planning was that you need to know where you are and where you want to go before making a plan to get from A to B. The same is true with finances. We can’t make an effective plan until we understand our starting point.

This is much tougher mentally and emotionally than it is from a strategy standpoint. You need to get mentally comfortable with your situation before diving in. Brace yourself and remind yourself that there is no need for judgment. You are where you are and there’s no shame in that. The only shame would be in staying there because you’re afraid to do the work needed to take the next step.

Once you’ve mentally prepared yourself, you can gather all of your financial information. I like Mint for this, but there are other tools or you can do it by hand. Find what works for you.

You’ll want to gather information about your bank accounts, your income, retirement accounts, credit card spending, debt, and any other spending or assets.

Once you’ve got all of that in one place, start working to understand it. How much money is coming in? How much is going out? Where is it going?

Does your spending reflect your values? Are the categories with the most spending the categories that you feel are most important to you?

Try not to feel too overwhelmed with all of this information. We don’t need to fix everything right off the bat. We just want to understand it.

Where Do You Want to Go?

After figuring out where we our in our financial lives, we next need to figure out where we want to go.

This is the fun part!

Brainstorm everything you’d want to do with more money, no matter how outlandish. Would you buy a Tesla? Start a scholarship fund? Buy a business? Build a moat around your house? Put it on the list.

Think about the different ways that money can make you more like the person you want to be. If you want to be more generous, think about giving more to charity or setting up your own. Think about expanding your gift budget. Want to travel more? Try new things? Go out more? Pay for your kids’ college? Put it on the list.

Once you have your giant list, work your way through and think about which are the most important goals to you. Take those with you into the next phase of our personal finance journey.

Making a Plan

That next phase is making a plan for our money. To do that, we need a budget.

People hate budgets because they see them as inflexible barriers to fun. That doesn’t need to be the case! It can be, if that’s your thing. But budgeting really just means deciding what you want to do with your money rather than having it disappear every month. You can be as granular and detailed as you’d like.

A traditional budget is where you decide how much money you’ll spend in each category and then try to stick to it. This method works for a lot of people. It also very much does not work for a lot of people.

A much looser version is based around paying yourself first. This method has you setting aside your savings goals first and then spending whatever’s left on anything you want.

Think about your money goals from the last section. How much do you need to save to get there? Make a plan to save that much money and then do whatever you want with the rest of your cash.

One way to make this easier is automation. I have my Vanguard investment account set up so that it automatically withdraws a set amount from my checking account the day after payday and invests it in VTSAX.

With automation you can make one good decision that will continue to help you grow rather than needing to make good decisions every time your paycheck hits your account.

Money for Couples

After learning how to make our financial plans, we moved on to more abstract topics. Our first was how to handle money as a couple.

Like most personal finance topics, this needs to start with the emotional rather than the technical.

The most important part of handling money as a couple is having conversations about money. The most important part of having conversations about money is avoiding being judgmental.

Money problems are the top cause of divorce in America, so even if these conversations seem unpleasant or difficult, they’re worth having. It can be easy to just keep bumping the conversation back another day or another week until ultimately it gets forgotten, so make sure you set a schedule and stick to it. It can be as often as you’d like, so find what works for you.

When approaching these discussions, it is of the utmost importance to make sure they are non-confrontational and non-judgmental. Whatever has happened in the past is over. You’re trying to plan the best path forward as a team, not judge past behavior.

As for the technical, there are all sorts of ways to handle your money. You can have totally separate bank accounts and just jointly pay your bills. You can have mostly separate accounts, but a joint account into which you each contribute for joint expenses. You can have mostly joint expenses, but separate accounts for personal spending and fun money. Or you can have fully joint accounts.

People have strong feelings about what the best method is. But they shouldn’t. Other people are not part of your relationship. Find what works for you and your partner and do that without shame.

Big Changes

The next topic we covered was planning for big money changes.

There are two types of big changes that we can encounter: expected and unexpected.

For expected changes, we can make space in our budget and think through the financial ramifications of changes before we make them.

If we know the costs, we can pretend to spend that money earlier. If you’re planning to move to a more expensive home, for example, start pretending to make the larger mortgage or rent payments and move the extra money into your savings account. By doing this before the big change you can make sure you’re comfortable with that level of spending and adjust your behavior (or decision) accordingly.

If you don’t know the exact costs, then plan for the worst. Cut back as much as possible to prepare. If it costs less than expected, then great! Now you have more money than you thought you would. But if you do encounter the worst case scenario, you’ll be prepared.

For unexpected changes, the big points to keep in mind are maintaining flexibility and keeping an emergency fund.

The biggest unexpected change is job loss. Prepare for job loss before it happens. Keep your resume up to date and keep good relationships with others in your field. Think through areas of your budget that you could scale back ASAP if necessary. Think through other places you could pick up income if your day job disappears. We can’t eliminate the risk of job loss, but we can plan to make it as painless as possible to our finances.

A lot of experts have strong feelings on the exact size of your emergency fund. Those experts are all wrong. There is no right answer for everyone.

You can keep a smaller emergency fund if:

  • You are part of a two income household
  • The two incomes are from different companies and different fields
  • You are in a stable job with minimal chance of layoff
  • You don’t have dependents
  • You have a flexible budget
  • You have investments that you can sell off if necessary
  • You would be able to quickly pick up freelance work or side job work to bring in some income if you were to lose your job

You should have a larger emergency fund if

  • Your income is inconsistent (especially freelancing or gig economy work)
  • You are the sole earner for your household
  • There are others depending on your income
  • Your budget is already bare bones and could not be shrunk much

The most important thing to keep in mind with emergency funds is to be comfortable. If you feel safer with a larger emergency fund, then go for it. Optimizing the numbers is great, but minimizing stress is better.

Financial Independence

We wrapped up the month with a quick overview of financial independence. The main thrust was that financial independence is simple and necessary.

Essentially, the road to financial independence comes down to cutting your expenses, increasing your income, and investing the difference. You can get into the details on the numbers, but you don’t need to when you’re starting out. Just save as much as you can.

People often see financial independence as a way to retire early and hit the beach. That’s not at all what I see.

From an optimistic perspective, I view financial independence as buying options. You can choose to stay in your job, find something else, work on a hobby full time, or jump around from thing to thing. You are buying flexibility and control over your time.

And that’s great. But it wouldn’t make financial independence necessary. That falls to our changing economy.

Maybe you love your job and want to stay there. Maybe you plan on working until you die. That’s fine if that’s what you want to do. But it may not be up to you.

The economy is changing rapidly. Technology is advancing rapidly. We don’t know what the future holds, but we do know that no single career path is safe.

People debate whether we’re entering an era of mass unemployment or not. I say you need to prepare either way. If unemployment is at 4% but you need to enter a new career field when you’re 50, that’s going to hurt your wallet. It also may not be a move you want to make.

So save and invest while you can. Brace yourself for a changing world.

Join the Conversation!

And that was our trip through personal finance basics! What do you think? What would you add? What is your plan? Let us know in the comments!

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