Starter Pack: Personal Finance Goals
Starter Pack: Personal Finance Goals
So you’re thinking of committing yourself to becoming BFs with your PF, but you have no idea where to begin. You’re a little intimidated. Maybe you tried getting into personal finance before by trying to budget and understanding what a 401K is, but you felt lost and ultimately gave up. I get you, it’s like me deciding to go to the gym but having no idea how to “gym.” When I try even simple things like the dumbbells I feel awkward and constantly think, “Am I doing this right?”
Talking with some of my friends I get the general consensus that many of them feel the same way about personal finance. A lot of them want to know more about personal finance but don’t know where to begin or where to find resources so they just end up putting it on the back burner.
Well, for those who wanted to get on that PF train, this is your year. Below are 5 personal finance goals you can set for yourself – including a personal finance priority infographic (fun fact: layout taken from a how to cook meat properly guide)
1. Establish A Budget, And Stick To It!
Budgeting – it’s probably the most popular personal finance buzzword. People make it seem like budgeting is some kind of ultra complicated task that only “adults” do, but it’s really just planning how to spend your money and tracking to that plan. Budgeting allows you to prioritize allocating money to things you need (like rent, insurance, groceries) and to things that are important to you, whether that’s traveling, restaurant foods, donating, etc. I’ll be writing a blog post dedicated to just budgeting later on but here are two tips to get you started.
- Simply start tracking your money
- If you have no idea how much you spend or where you spend it just start with tracking your spending. You can use budgeting tools like mint, YNAB, or even plain excel to track your spending in a month. I personally love using YNAB even though it costs money. If you’re a student you can get the first year for free – no credit card info needed.
- Use the 50/30/20 Rule as a General Rule of Thumb
- Have no idea what you should aim for? You can start off by aiming to follow the 50/30/20 rule, which allocates your after-tax income to 50% necessities (rent, insurance, loans, groceries, bills, etc.), 30% to lifestyle (eating out, traveling, treat yoself items, etc.), and 20% savings (401K, savings account, IRA, extra payment towards loans, etc.). Don’t freak out if you can’t get here immediately as it can take some time – be realistic with your budget but try to challenge yourself if you can.
2. Build Up An Emergency Fund
Unexpected events happen all the time – flat tires, a layoff, car flooding, you accidentally light something on fire, there’s a lot of stuff that can happen… It can be extremely stressful to deal with these kinds of events and when money’s tight it’s even worse. This is why you want to build up and maintain an emergency fund aka a liquid fund that you can quickly and easily pull money from to cover unexpected events that you didn’t budget for.
How much is enough? If you’re starting from $0 your first priority should be to build your emergency fund to cover at least 1-3 months of regular expenditure. Then you can decide if you want to continue to build the fund up to a 3-6 month fund or try to complete some of the other PF goals first and then come back to add to your emergency fund.
One thing’s for certain, you should keep your emergency fund in a high interest savings account. What’s a high interest savings account? It’s what it sounds like… a high interest savings account is a savings account, but with a much higher than normal interest rate lol. If you are like college Angela, you have a savings account with a mega bank like Chase or Bank of America. These banks payout something like .01% interest and at that rate your money may as well be in a checking account. High interest savings accounts pay >1% interest, some nearly 1.5%! Here’s a few federally insured banks that require no minimum amount to open: Synchrony Bank at 1.45%, American Express at 1.45%, Ally Bank at 1.45%, and Capital One at 1.00%. Sign up should be easy and with no minimum balance required there should be no reason you don’t do it now!
*Rates edited 2/9/18
3. Aggressively Pay Off High Interest Debt
For many millennials the topic of debt can feel overwhelming and down right uncomfortable. Debt and how to deal with it is not something most of us learn about in school. However it’s something that many millennials have to face, especially in the form of student loans and credit card debt so let’s face debt together!
If you haven’t already, take a close look into your debt situation. You don’t have to wait till you complete goals 1 and 2 to do this! It’s easier to tackle your debt situation by first making a game plan. So here are some action steps you can take to get started:
- Take a look at all your debt: the total amount, the type of debt, the minimum monthly payment, and the interest percent.
- Determine which debts have high interest rates. I consider anything greater than 6% as high interest. Typically this includes: credit cards (interest rates can be 15%+…ouch), private student loans, and those sketch payday loans.
- Use a debt repayment calculator to figure out an aggressive but realistic payment plan to reduce your high interest debts. You can use Credit Karma’s (it was the first link I found with my 5 second search) https://www.creditkarma.com/calculators/debtrepayment.
- Tackle debt with the highest interest first, then go down that interest ladder. It may take you a while to be debt free, but now you’ll have a good plan to tackle it and being aggressive with your debt means you can save potentially thousands of dollars on interest payments. Remember, you should be paying at least the minimum required monthly interest payments so that you don’t get in trouble with debt collectors!
4. Open Up An IRA
IRA stands for individual retirement account. It’s essentially an account with special tax benefits that anyone with U.S. earned income can open. So even college kids with part-time jobs can open up and contribute to an IRA. Eventually I will write a more detailed blog post about retirement accounts, but for now here is some basic information:
- Who is eligible to open up an IRA?
- Like I said previously anyone with U.S. earned income can contribute to an IRA for that year. Income includes: wages, salaries, commissions, and bonuses. Unfortunately, any “under the table money” you may receive from babysitting, tutoring, or any other side hustle that is not reported to the IRS doesn’t count as earned income.
- Why should I contribute to an IRA?
- First off there are two different types of IRAs – the Roth IRA and Traditional IRA. You can have both types of IRAs so you don’t have to choose one or the other but they have different tax benefits.
- The Traditional IRA. If your income is under a certain amount or if you don’t have an employer-sponsored retirement plan (like a 401K) your Traditional IRA contribution is tax deductible. This means that the amount you contribute can lower your taxable income and potentially knock you down to a lower tax bracket. However, when you withdraw from your Traditional IRA later on, you will be taxed based on the tax bracket you’re in at the time you withdraw from the account
- The Roth IRA. Although you don’t receive any immediate tax benefits from contributing to a Roth IRA, all contributions made to your Roth IRA grow tax-free. So if your $5500 contribution for 2017 grows to $23,000 in 30 years you won’t have to pay taxes on the $17,500 of gains you made. Another bonus benefit of contributing to a Roth IRA is that you can always withdraw your contributions penalty free. Say you contributed $5500 and by the next year it grew to $5775, but you desperately needed money, you can withdraw $5500 penalty free. You just have to make sure that you don’t accidentally withdraw the growth – in this case the additional $275.
- How much can I contribute to an IRA per year?
- Whether you decide on a Roth IRA, Traditional IRA, or a mix of both, as of 2018, you can contribute up to a $5,500 per year. If you decide to contribute to both types of IRAs make sure the total combined amount is not more than $5,500.
- How can I open up an IRA account and when can I contribute to it?
- An IRA is attached to an individual so you have to open an account with an IRA provider. Popular companies include: Vanguard, Fidelity and Charles Schwab. Do a quick search on which one might be a good fit for you. It should only take a few minutes to open your account so do so today! I opened mine with Vanguard because they are my 401k provider and I like their low fee funds.
- The awesome thing about IRAs is that you can actually contribute to your IRA up until around mid April of the next calendar year. So even though it’s already 2018, you can still make contributions for 2017 until 4/17/2018 and you can make 2018 contributions until 4/15/2019 (you should always check the deadline for the new year).
- Also, you can make 1 contribution per year or 100s of contribution per year as long as it’s not more than $5500 and you do so before the deadline.
- I opened an account and started contributing – now what?
- Now you have to decide whether you want to keep it as cash (not recommended) or invest it! I highly recommend investing in low fee index funds. Index funds are great because they allow you to be invested in potentially thousands of stocks, which keep your investments diversified. Also, these funds beat the majority of pricey actively managed funds (funds that try to beat the market).
- If you want a “set it and forget it” kind of fund I recommend looking into Target Date funds. They are relatively low expense fees and automatically adjust as you age.
5. Contribute To Your Company's 401k
401k, another popular personal finance buzz word for sure. So… what is it? Very simply, it’s an employer sponsored retirement plan that allows you to put away a portion of your paycheck for retirement savings. Since it’s an employer sponsored plan you can only contribute to it if your employer provides a 401K. Here’s some basic information:
- What are the benefits?
- The 401K has a lot of the same tax benefits as an IRA. However, not all companies allow a Roth contribution so you may be limited to pre-tax contributions and pre-tax benefits.
- How much can I contribute?
- The 2018 contribution limit increased to $18,500.
- Unfortunately you can’t contribute for the year past December 31st and since all contributions are deducted from your paycheck you can’t contribute more than your paycheck. So if you were paid only once a month, made $3500 per paycheck, and decided to start contributing to your 401k in December, you would only be able to contribute $3500 less taxes.
- What’s an employer 401k match?
- If your employer offers a 401k match that means they will contribute a certain amount (typically a % of something) to your 401k depending on your contribution.
- Think of an employer’s 401k-match contribution as FREE money you get from your company for just contributing to your 401k. Some companies are more generous than others but whatever the amount, you should aim to try to get the full match every year.
To those who made it through this post – wow, I applaud you. This was a lot of information at once but now you can get started on that PF train. In the future I’ll write about topics more specifically, but you should be able to get started on all 5 goals. I’m not a professional financial advisor but feel free to reach out to me for any questions you have!