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Personal Finance Basics

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    Personal Finance Basics

    The mods put their heads together and came up with some basic advice for personal finance. We have drafted this with the general public in mind, as well as for those who are new to the forums and need some pointers.

    Creating a Budget and Setting Goals

    The first step in managing your finances is to know where your money is going. This task can be achieved by creating and sticking to a budget. There are several free online tools and resources available that you can use to create a budget and track your finances. Here are a few of the more popular ones:
    Personal Capital

    If you donít want to use a template online you can create your own using Excel or do it the old-fashioned way and write everything down in a notebook or journal.
    You should be tracking every dollar of income and every dollar of expense. The more detailed that you can be, at least starting out, the better you will be able to ďseeĒ where your money is coming from and where it is going. Once established, many people will scale back a bit and stop tracking every penny, instead focusing more on larger expenses.
    Once you have a budget you need to create goals. You should have short-term and long-term goals in mind. A few examples of short term goals might be, buying a new car, or a remodeling project for your house. Long term goals might be retiring financially independent, or saving up for a house or college.

    Click on the link below to see how some of our forum members categorize their expenses.

    Build an Emergency Fund

    Everyone should have money set aside for unexpected expenses. It should be a fairly liquid and secure account that can be accessed quickly should an emergency arise. A medical emergency, a sudden home or auto repair, or a job loss would all qualify as an emergency.
    So, how large of an emergency fund do you need? 3 to 6 monthsí worth of expenses is adequate for most people. You may want a larger amount if you have variable income or are of a more conservative nature. A good starting point is to save up $1000.

    Keep your emergency fund someplace safe. An FDIC insured account at a bank or a money market account are good choices. Avoid riskier investment vehicles such as stocks or investment vehicles that can charge a penalty for early withdraw. If you must use your emergency fund, then your first priority after getting back on your feet should be to replenish it as quickly as possible.

    Here are a few thoughts on emergency funds

    Employer Sponsored Matching Programs

    Do you work for a company that offers a match on a 401(k) or similar retirement investing program? If so, you should be taking advantage. You will be reducing your tax exposure and getting a guaranteed return on your investment at the same time. Assuming that your company matches 50% up to the first 6% of contributions, make sure that you are contributing 6%. You will get an instant 50% return on your money. As time goes by, and as your finances improve you should strive to periodically raise the amount that you are contributing to these plans. Ideally, you should contribute up to the maximum amounts allowed.

    Here is a recent discussion on this subject.

    Paying Down Debt

    After taking advantage of an employee sponsored matching plan, you should take a look at paying off debts. You should be making the minimum payments on all your debts every month regardless, but there are a couple of methods to accelerate your debt payments.

    With the avalanche method debts are paid down in order of interest rate. Mathematically, this is the optimal method for debt repayment. You will pay less interest on your loans overall.

    With the snowball method debts are paid down in order of balance size, starting with the smallest. If you are familiar with Dave Ramsey, he is credited for popularizing this method. This method will cost more in the long run, as more interest will be paid, however there can be a psychological boost to using this method of repayment, since cash flow will be improved, and smaller balance loans will be paid off sooner in some cases.

    What about lower interest loans such as mortgage debt? There can be an argument made to simply keep paying the minimum amount on these types of loans since you will most likely be able to outperform the interest rates on these types of loans by investing the money in the markets. This has been true in the past but is in no way guaranteed going forward. Remember that paying off a loan gives you a guaranteed return on the loanís interest rate. A general rule of thumb is that loans at 4% or less can be stretched out. Anything above 4% should be paid off as quickly as possible. All of this ultimately depends on your personal feelings toward carrying debt.

    What about keeping a loan to improve your credit score? Donít do it. Never keep a loan or take out a loan to improve your credit score. Take care of your finances, and your credit score will take care of itself.

    For more insight on debt repayment strategies click the link below.

    Opening an IRA

    The next step is to start contributing to an IRA or ROTH IRA. Your goal should be to contribute up to the max allowed by law. To play catch up, you can contribute to last year if itís between January 1st and April 15th.

    Why contribute to an IRA if you already have a 401(k)? Typically, a self-directed IRA gives you much more flexibility and fund choices than an employer sponsored plan. Several firms can easy set up an IRA for you. Fidelity, Vanguard, and Schwab are the main ones.

    Here is some more info concerning retirement accounts.

    Save More for Retirement

    You have a 401(k), your debts are being paid down, and you have opening an IRA. Now what? You can circle back and contribute more to your 401(k) or perhaps pay down some debts faster. If you have already done those things or want to boost savings more, then you can open a taxable brokerage account and invest in stocks, ETFs, Mutual Funds, or some other investment vehicle.

    Click below for more info on opening brokerage accounts.

    Saving for Other Goals

    Once you have your retirement saving goals in order, you can focus on other goals. Maybe you want to save up even more with a goal of retiring early. Now is also a good time to start focusing on non-retirement saving goals. Down payment for a house, a new car, college funds, and vacation funds are all examples.

    Creating a budget, setting up a saving regime, and maintaining it doesn'ít need to be difficult. It is actually rather easy once you start. This article is just a basic overview of budgeting and saving. Check out the forums for more in-depth ideas and strategies to help you achieve your saving goals.

    If you have comments, or you disagree with any of this we look forward to your thoughts.

    - The Mods
    Last edited by james.hendrickson; 02-09-2019, 08:29 AM.