Rohan’s Ultimate Guide to Personal Finance
(or, what your parents, teachers, and professors never told you)
Time to read: 15 minutes
Cost to read: $0
Time to implement: <2 hours/month
Time to get rich: 30+ years
Money Saved: $400,000 - 1,000,000+ (*)
it’s not useful to watch the stock market day-to-day
Roth stuff: Say that you’re maxing out your after-tax contributions by contributing $27,000 per year, or $1038 per paycheck. Let’s assume that this money is invested immediately and rolled over to Roth the next day. Even with an average of a 1% gain between the day the money hits your account and when it is rolled over (incredibly unlikely, or else we’d all be very rich), you’d be paying taxes on 1038 * 0.01 * 26 = $269 more of income. that means you’re paying taxes on $598 right now (which you wouldn’t pay if you weren’t doing this), for the right to invest $27,000 this year, keep it invested for 30+ years, and not have the gains (or principal, of course) taxed at all. That’s huge.
I’ve received a lot of questions about managing one’s personal finances over the last couple months, as many of my friends start new jobs or internships. I’ve been interested in personal finance for a while now, so I decided to write this basic guide up in the hopes that it will answer many common questions and be useful for years to come.
Why should you listen to financial advice from me? Honestly, I have no idea. Perhaps you shouldn’t. I’m not rich in any definition of the word, don’t make a significant amount of money, and I haven’t, nor do I expect to, ever hit it big in the stock market.
Who this Guide is For
This guide is primarily aimed at individuals in their 20s-30s who have stable employment, not much debt, and are earning income of about 70k-500k a year. This guide aims to help individuals in such positions save for common goals (weddings, retirement, house down payments, or large purchases), grow their investments through low-cost, low-effort approaches, increase their total income, and plan for (potentially early) retirement.
Pay off all your high-interest debt
First, before saving for retirement, starting an emergency fund, or investing in the stock market, I always recommend paying off your high interest debt in full.
Many personal finance gurus on the internet actually recommend contributing so that you get the free money from your employer. Here’s my take on this. That free money is in a 401k account, and you won’t be able to touch it until you’re at least 59.5 (unless you want to pay hefty fees). You need to pay off your high interest debt right now. Having high-interest debt is one of the highest sources of stress for a modern American. Your high interest debt is compounding much faster than your investments in your 401k will, so by definition, the best time to pay off the high interest debt is right now.
Contribute the minimum amount to your 401k to get your employer match
- Free money! Do it
Start an emergency fund
- 3 months to 6 months, survival, even in the case of a disaster
- Assume a giant earthquake hits (I’m from California) and you don’t have anywhere to live, any food to eat, and you’re also unemployed. Are you able to use your emergency fund to get yourself (and your loved ones) back on your feet? This is my metric for a good emergency fund.
- Unexpected medical expenses
Contribute to a Roth IRA (if you earn < 120k a year)
Max out your 401k contributions, and/or contribute to an IRA
- If you can’t max out both your 401k and IRA contribution for the year, then you’ll have to decide whether to contribute to the 401k or the IRA. In general, if your 401k account seems to fewer investment options or have high fees (compared to a brokerage such as Vanguard), such as advisory, active management, or trading fees, then you may want to max out your IRA in an account of your choice (such as Vanguard), where you have more control over the fees you pay and possibly greater access to more financial products.
Consider maxing out your HSA
** If you have an FSA, put the minimum rollover into it **
** Consider a Backdoor Roth IRA, if you make too much to contribute to a regular Roth IRA **
** Consider setting up the mega-backdoor Roth IRA, especially for higher earners **
Open a standard taxable investing account, such as with Vanguard
- Optional section: tax loss harvesting to improve your gains
- Better for high net worth individuals
Leveraging Credit to your advantage
Open a high-yield savings account
- As of early 2019, the fed has continued to hike interest rates, so rates on savings accounts have continued to go up. The best accounts I know of right now are Wealthfront’s cash account (2.57% APY) and Goldman Sach’s Marcus account (2.15% APY), and
This has the potential to save you a lot of money over a lifetime. Say that you want to establish a risk-free account where your money can slowly grow. Your local bank will tell you just to open up a savings account from your checking account, and they’ll transfer over how much money you have to safe every month. Easy and done (they’ll even throw in a whole $300 as a bonus!).
This is one of the times where going with the default can have an outsized negative impact on your (financial) life. Let’s say that you bank at one of Chase, Wells, or BofA. A quick search reveals that (as of July 2019) the first two offer a 0.01% interest rate on your savings (that means, for every $10,000 you save with them per year, they give you one dollar). The latter offers a savings rate of 0.03%. Let’s assume that you bank at BofA and decide to use them for your savings as well. You start off with a 20k principle, and contribute 5k a year for 40 years.
This means that over 40 years, you’ve missed out on $184,830.04 of free, risk-free money. If you didn’t stop in the middle of this section and open up a high-yield savings, do it now, I’ll wait. Simply internalizing this bit of advice and spending < 30 minutes opening up an account online can net you an additional free 200k over a lifetime, at zero extra risk.
** These numbers are based off of interest rates as they were in June 2019. They will change, please don’t come after me with a pitchfork.
 Computed as a difference between total value of one account. Value is pretax. Of course, savings rates are variable and tend to fluctuate over the years. It’s still likely that high-yield online savings accounts will continue to offer at least tens of times more interest (in APY) than traditional brick and mortar banks.
220,483.13 - 405,313.17
FIRST AND FOREMOST: pay off your credit card in full at the end of the month, every time, with no exceptions. Do not carry a balance month to month. If you think that you will need to, then stop using your credit card and go back to debit (and work on getting in a better financial situation?)
After getting a credit card and making on-time, full monthly payments for 6 months:
Ask for a credit limit increase. Not so that you can spend more necessarily, but you can use this to decrease your credit utilization (better for your credit score). You can also do this if you get a raise or otherwise gain income.
If your credit limit isn’t very high, you risk having a high credit utilization, which could negatively impact your score. If you notice your credit utilization hitting 30%, it might be wise to pay off your credit card twice a month, to keep that utilization low. Most credit card companies allow you to set multiple autopays so you can just set this and forget this.
Opening and starting to responsibly use a credit card can have numerous advantages. Several personal finances gurus, most notably Dave Ramsey, strongly encourage their listeners to not use credit cards. Ramsey may have a point for individuals who have trouble controlling their spending and have been riddled with consumer debt in the past. But for debt-free individuals who spend less than they make, credit can be a very effective tool.
Why? One word: leverage. Warren Buffet has said that the 3 L’s that will cause you to go broke are “liquor, ladies, and leverage”, but we’re not talking about taking out a loan to invest in the stock market here.
Using leverage properly will allow you to amplify what you can do with your money and what impact it will have on your life. We use leverage all the time in our daily lives without being aware of it (example: any time you pay someone else to do something for you), yet many people are vehemently opposed to doing so with money.
If you were given a 5% discount on all your food, you’d be silly not to take it.
Building your credit history
Other reasons to use a credit card over a debit card
Obviously, points, cash back, and building your credit history. But are there other benefits to swiping your credit card over your debit card?
- Security features? Better fraud protection?
- Miscellaneous freebies, such as cards that give you insurance for your phone
- Frees you up to do other things with your cash in the checking account, since you pay for shit at the end of the month (time value of money, saves you a small amount of money that adds up every year)
A word on churning
Many people have heard of the term churning, which refers to the practice of opening up many high-reward credit cards and milking them for their benefits. Pro churners are generally able to get regular cash bonuses and airline miles as a result of this research. However, I generally recommend against this practice since credit card rewards won’t change your life in any meaningful way, and once you’ve got a few cards that are best suited for you, opening additional credit cards will only increase your burden. It’s also much easier to spend a lot more on these cards, since a higher spend is generally needed to hit the minimums needed to get the cashback bonus or airline miles that many churners seek.
Thus, I recommend avoiding this practice and holding only a small number of credit cards.
Setup automatic payments on all your credit cards to pay off the bill in full each month, so that you never miss a payment and always pay in full (improving your credit score). If you have many credit cards, then don’t forget to use each one at least occasionally, since accounts can be shut down if you don’t use your credit cart. An easy way to do so is to put a recurring subscription on the card, or use it to buy your coffee.
However, I only recommend holding a small number of credit cards at once. Just for stress purposes, it becomes a lot to manage
A word on loans
- Never take out an auto loan if you don’t have to
- This explanation is of course oversimplified, since it doesn’t take into account the fact that money at the end of the loan term is worth less than money right now, so it must be discounted appropriately.
In particular, if you’re a high-net worth individual (for example, earning over 1M a year), this guide probably won’t be too useful to you. If you’re also interested in eventually owning real estate (beyond saving for a down payment on a home), most of this guide probably still applies to you, though you may wish to skip the portion including my thoughts on real-estate investing.
Invest early, and invest often - you will not build or grow wealth unless you invest.
Automate your finances
Setup recurring transfers from your main checking account to savings, investment accounts, etc
- Warning here: make sure that your bank account has sufficient balance to ensure all these transfers complete successfully every month, to avoid overdraft fees. This could happen if a regularly scheduled paycheck is missed, if you switch bank accounts and forget to transfer everything over, or get a new job and miss a biweekly deposit.
Automatic buys into the market
Automatically save for vacations, etc
What’s next? Additional Strategies
If you’ve done all the above, then congratulations! You’re debt free, have an emergency fund that can support you for a 6 months, are contributing the maximum to your 401k and IRA, hold cash for near-term use in high-yield savings accounts, and are regularly contributing to these cash accounts for large purchases that may be on the horizon (a home, a car, a wedding, helping parents, etc).
When should you take money out of the market? If you’ve invested a large portion of your assets into funds that track the stock market, then you know that large short-term fluctuations in your assets are likely to happen. For example, in the recent stock market correction in the end of 2018, the S&P 500 index dipped nearly 20%. If you planned to buy a house around late 2018 or early 2019, and the money was tied up in the stock market, you’d have to liquidate in order to make your down payment. This would result in you pulling out of the market at a local minimum (the market ended up rebounding in the first half of 2019), at a significant loss.
Since stocks can be wildly volatile,
Contribute to an HSA
Consider a mega-backdoor Roth IRA
Review your tax situation
- Large refunds are shit
- Ideally, you’d break even at tax time, or owe very little, or in the best case, owe just enough to avoid extra penalties.
Consider setting up additional income streams
Generally speaking, company-sponsored 401k plans don’t have great investment options, as they are often limited to the investment options that the company providing the 401k plan offers, which often includes a push towards high fee investment vehicles.
Real Estate Investing
Disclaimer: I know very little about this, and my opinions are likely going to change as I explore more.
Thanks for reading this! If you actually got here and read through the whole thing, I hope that you got something useful out of it! If you did, I would love to hear about how via email, or this google form if you’d like to remain anonymous.
Checklist for every couple of months:
- You’re likely paying more than you need to for some bills: cable, internet, etc. Make sure that you’re not.
- Negotiate insurance rates, or look for other insurance providers who can improve your rates
- Ensure that you are using the best credit card for your needs
- Call to increase your credit limit, thereby improving your credit score by decreasing your credit utilization