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Personal Finance: Where do I Start? (Part III of III)

Personal Finance: Where do I Start? (Part III of III)

The Building Blocks of Personal Finance

The Building Blocks of Personal Finance

This article is Part III of my three part series of getting started in personal finance. Part I is Stabilization. Part II is Fundamentals. In Part III I discuss investing and advanced investing.

If you haven’t already read parts I and II start there!

I visualize personal finance as building blocks stacked on top of each other (shown to the right).

You must master the lower levels before you can get to the upper levels.

Level 3: Basic Investing

I consider basic investing saving for retirement in a 401k and Individual Retirement Account (IRA) via mutual funds and bonds, and general savings in mutual funds.

Both the 401k and IRA are ways to invest for retirement and get some tax benefits. 401ks are through an employer, and IRAs can be setup through a company like Vanguard, Fidelity, TD Ameritrade, or any number of other firms that act as the “custodian”. I talk about them in a little more detail in my article Five Tax Strategies to Keep More Income under strategies one and two.

Employer Matching 401k

StocksSome employers will match your 401k contributions. As an example lets say your employer matches your contributions up to 5% of your salary. If you make $50,000, and you save $2,500 in your 401k, your employer will add an additional $2,500 to your 401k. I put money in my 401k up to but not beyond the point where I’ve maxed out the match.

I prefer Roth 401ks to 401ks because I believe tax rates are going up in the future. Roth 401ks are more rare but I have had employers who offer them.

The vast majority of the investment options offered by the employers I’ve been at are VERY limited. The easiest option is to go with a target retirement fund. Target retirement funds are basically funds on autopilot, they automatically adjust their asset mixes to become more conservative as investors approach the target retirement date.

If there are more options I avoid bonds and favor international funds but investments depend on your risk tolerance and goals.

Individual Retirement Accounts

IRA’s come in the Roth and Traditional flavor. It all depends if you’d rather pay taxes now, or in retirement. I prefer to pay the taxes up front.

I would open up a Roth IRA and try to max it out ($5,500 in 2016). Another neat trick is that you can contribute to a traditional IRA and then convert contributes to a Roth (you do of course have to pay the taxes though), so if you want to save more than $5,500 in after tax income, that is an option.

One of the things I like about IRAs is that the investment options are much, much more flexible. I think part of the reason employer sponsored 401ks have such limited investment options is because employers are afraid of being sued if an employee makes poor decisions and loses a lot of money, so employers only offer with the most conservative investment options.

If you want to save money and not think about, you’re asking for trouble, but one option is to open up an account at a low cost company like Vanguard (my favorite) or Fidelity. Setup auto-deposit and buy a balanced fund like the Vanguard STAR fund (VGSTX).

You can also buy additional index funds, like the S&P 500 index fund, Nasdaq, large and small cap US funds, etc. These index mutual funds are setup to track the gains and losses of the index they are based on. Again, I think it is good to have money in the emerging markets as well.

Vanguard has investment professionals that will help you decide how to allocate money to different mutuals funds. (Disclosure: I have been a vanguard client for years, but gain no benefit from listing them as an option).

By setting up auto-deposit and auto-invest into Vanguard (or your IRA custodian of choice) from your paycheck you’re dollar cost averaging into the fund and not trying to time the market.

Over time this is a good, conservative strategy, and one discussed by Benjamin Graham in his seminal work “The Intelligent Investor”. Ben Graham was a mentor to Warren Buffet, who you may have heard of, and has done decently well as an investor.

Conventional wisdom is often something like a 40% bonds and 60% stocks (mutual funds) as a conservative approach. Unless you’re retired and relying on your savings for monthly income, I would not buy bonds, but a portfolio that does not include bonds is considered more risky.

You can follow these same investing principles to buy non-retirement mutual funds.

Now I do think that US stocks and bonds are in a bubble. But if the Federal Reserve responds to the bubble bursting as I think they will, stocks and bonds will still go up. I just think there are other asset classes that will go up faster.

Gold MapleConsider Physical Gold

While this could be considered more advanced, I think it is very important to have somewhere around 10% of one’s assets in physical gold and silver bullion. While I don’t give investment recommendations I think that even some of the more conservative and traditional investment advisors would admit this is not a bad idea. I gain no benefit from mentioning them, but I buy bullion from Scotsman Auction house in Saint Louis. They have been in business a long time and have great pricing. I don’t buy numismatics or “rare” coins as an investment. I’m partial to Silver American Eagles and Gold Canadian Maples, but that is just personal preference.

There are lots of gold bullion companies but I would not want to pay more than around 2% over spot price for gold. I avoid numismatics unless they can be acquired at bullion prices.

Level 4: Advanced Investing

NYSEAdvanced Investing techniques are what I’m most passionate about. Examples of what I consider advanced investments are: Investing in individual company stocks, gold mining stocks, peer to peer lending, real estate investments, private equity, foreign stocks, offshore brokerage accounts, options, cryptocurrencies, physical precious metals like gold and silver, and physical gold stored remotely through a Goldmoney personal account.

These techniques are generally considered more risky, although I think that buying US stocks at all time highs and negative yielding bonds is much more risky, even though conventional foolishness wisdom says these are the safe bets.

Get Started!

To get started figure out where you stand in the four phases. Master that phase and work towards the next.

It’s an iterative process once you’re out of stabilization and focusing on the fundamentals and investing. I’m often re-evaluating my fundamentals such as my budget and my goals. I work on my basic investing like maxing out my 401k company match and Roth IRA.

Which phase are you in and what are your savings and investment goals?

Personal Finance: Where do I Start? (Part II of III)

Personal Finance: Where do I Start? (Part II of III)

This article is part two of my three part series of getting started in personal finance. Part I is Stabilization. If you haven’t already read part one start there!

Part II: Fundamentals

The Building Blocks of Personal Finance

The Building Blocks of Personal Finance

As a reminder I don’t give financial advice. One of the reasons I don’t give investment advice here on my website is because there are exceptions to many rules and your personal situation could merit additional considerations. What is suitable for me might not be suitable for you.

Level I is stabilization. Once you’ve stabilized your finances (you’ve stopped the bleeding, you’re no longer increasing your debts) it’s time to go onto the fundamentals.

Level 2: Fundamentals

You’d think that the Fundamentals would come first but I list it second intentionally. When you take on bad debt you’re starting your wealth growing journey BEHIND. You’re not even beginning at the starting line!

Piggy Bank

Piggy Bank

Setup a budget.

Having a written budget on paper, an excel spreadsheet, or your tool of choice enables you to produce and save more than you consume.

For excellent resources on budgeting, I refer you to McClain Griffin of He has an excellent process for setting a budget, broken down into three parts (1), (2), and (3). He also has a great Ultimate Budgeting Check List to help in this process.

Your budget should include a plan for paying off any outstanding debts you have.

You’ll want to start with the loans with the highest interest rate. You might also look into a debt consolidation loan.

In a simplified example let’s say you owe $1,000 and are being charged 20% interest per year ($200). If you can take out an additional loan for $1,000 that only costs 8% interest and use that money to pay off the loan that costs 20%, you’ve just saved yourself 12% in interest. 8% of 1000 is $80 so you’ve just lowered your costs by $120. This example doesn’t factor in payments or compounding interest but the principle is the same.

Part of getting started in Personal Finance is Saving up money for an emergency fund

Part of getting started in Personal Finance is Saving up money for an emergency fund

Save for a rainy day.

Part of your budget should also include saving for an emergency fund. I like to keep a months income in cash in a safe.

You’ll know you’re well established in the fundamentals of finance when you stick to your budget and you have more money in your bank account at the end of each month than when you started.

Once you’ve setup an emergency fund, what is there to do with the rest of the money?

Oh what a nice problem to have. In Part III I discuss the third and fourth levels of personal finance, investing and advanced investing.

Personal Finance: Where do I Start? (I of III)

Personal Finance: Where do I Start? (I of III)

I was having coffee with some new acquittances a few weeks back and mentioned I run a blog website about personal finance. I was asked a very good question which I don’t think I answered very well!

The question was: “Where do I start?”

I’ve been saving and investing for a long time and thus far this website has often focused on alternative and more aggressive investment strategies.

I can appreciate it’s hard (and likely unwise) to jump right into advanced investing so I want to write what I think are some things to consider when just getting started in the world of personal finance.

I originally wrote this as one big article. But realized it was too much! So I broke it down into three digestible parts. Today is Part I: Stabilization

Disclaimer: I don’t give financial advice. One of the reasons I don’t give investment advice here on my website is because there are exceptions to many rules and your personal situation could merit additional considerations. What is suitable for me might not be suitable for you.

Basic Principles about Personal Finance

The Building Blocks of Personal Finance

The Building Blocks of Personal Finance

I visualize these principles like building blocks. You have to have the lower levels in place before you can move to the upper levels.

Here are the basic principles:
– Debt for consumption is bad (Stabilization)
– You must produce and save more than you consume (Fundamentals)
– Have your money work for you (Investing and Advanced Investing)

The first level: Stabilization

In the health and medical field it is wise to make sure that a patient is stable and healthy before they try to fix some less pressing long term issue.

First AidIf an out of shape person is hemorrhaging blood due to an injury it would be absurd to focus on ways to improve their cardiovascular fitness until they are stable and healed from their injury.

The first step on the path to growing your wealth is to stabilize your financial situation.

These things don’t make you rich but they stop you from getting poorer.

One of the great financial traumas to an individual’s finances is bad debt. This bad debt must be controlled before any other steps can be taken.

Stop Adding Bad Debt!

Bad debt is when you borrow money (usually at higher interest rates) to buy something that goes down in value and produces no income.

Examples of bad debt:
– Credit card debt (if you don’t pay it off every month)
– Auto loans
– Payday and title loans

Stop racking up bad debt!

$5 per day on coffee is $150 a month and $1800 per year

$5 per day on coffee is $150 a month and $1800 per year

Stop buying things you don’t need via debt! Downgrade or cancel your cable plan. Stop buying $10 lattes. Stop eating out as much (I’m really bad at this one!).

If you live in a swanky single apartment maybe you could bring on roommates, downsize, or some combination of both.

Don’t buy a a new car every 2 years. Buy a used car you can afford.

If it doesn’t involve clothing your naked body, providing shelter, eating, or isn’t required for your job, consider cutting it out.

Yeah, this is no fun, but it pays off in the longer term.

If you don’t address your bad debt, its like having an uncontrollable bleed and wanting to start training for a marathon. You must stop the bleeding and get stabilized before you can start training for a race.

Next up Part II: Fundamentals

In Part II I discuss the importance of a budget and setting goals. Not only will this help you get and stay out of the stabilization level, but will help you save more than you spend and prepare you for level III: Investing.