• Kavya Ravikanti

Start Here: A Primer for Personal Finance

Last Updated: August 12, 2020 1:25PM


Introduction ๐Ÿ’ซ

Personal finance can be daunting and complex. So daunting that 41% of Gen Z is anxious about money and 84% rely on their parents for financial information. Young people are taking over the world, but forgetting about their money!


We get it though, often you're afraid of doing the wrong thing and losing money, but also not sure where to start! ๐Ÿ˜ŸOur hope with this page and the rest of the content on this website is to make personal finance approachable, actionable, and maybe even fun! All in all, if 3 non-finance majors can figure it out so can you ๐Ÿ˜Ž.


But why do I need to care about this now?! So many reasons:

  • Adulting 101 โ†’ Whether or not you want to, managing your money is a key part of being a fully functioning adult ๐Ÿ˜ƒ

  • Budgeting โ†’ Figuring out a budget that works for you is hard, but understanding personal finance as a whole can make this part easier ๐Ÿ’ช

  • Compound Interest โ†’ If there's one thing on Earth that's close to magic โœจ, it's this. If you still don't believe me, scroll down to the Investing Section.

So what is this guide all about?

This page is our version of giving you the "lay of the land" of personal finance ๐Ÿงญ. Before we begin, here are a few things to remember:

  1. This is not a get rich quick guide. Managing your money and building your wealth takes time. The point of this guide is to give you the building blocks so you can begin your journey to wealth.๐Ÿ”ญ

  2. Whether you're making $500 a month or $50,000, the principles and tools that we'll be covering are all applicable. We aim to give a solid foundation so that when something specific to your situation comes up, you'll know how to problem-solve and what to look for ๐Ÿค“.

If you're hoping to kick start your personal financial journey, look no further! Let's dive right in ๐Ÿ˜


Checking Account ๐Ÿฆ & Debit Card ๐Ÿง

A checking account is the bank account that'll talk to all your other financial accounts. This is the first stop for your paychecks (or should be if you set-up direct-deposits). When you open up a checking account, you'll also get a debit and/or ATM card that goes along with it.


Learn More

  • Want to learn more about what to look for when opening a checking account? Read this.

  • Ready to start looking for a checking account? Check this out.



Credit Cards ๐Ÿ’ณ + Credit Score

When you apply for a new credit card, you'll get an account to manage the card, view your spending, and pay off the credit card bill.


Why do you need a credit card?

Don't be afraid of getting a credit card as building your credit is key. When you use your credit card responsibly, you are building your trustworthiness by showing lenders you are capable of borrowing money and paying it back (i.e. exactly what a credit score measures).

A credit score is needed for the following:

  • getting a loan (student loans, mortgage, determining your interest rates)

  • renting an apartment

  • negotiating your cable bill

  • getting access to credit cards with really nice reward structures

Learn More



High Yield Savings Account (HYSA) ๐Ÿฆ

Checking Accounts and Credit Cards account for our money coming in and our day to day spending, respectively. An HYSA is (typically) an online-only bank where you can earn a little bit of interest (0.7% - 2%) by just saving your money there.


HYSA vs Regular Savings Account

A typical savings account only offers you about 0.06% in interest. That's the difference between earning 60 cents and $10 a year if you had 1,000 in these two accounts. The difference becomes more significant as you build your wealth!

Difference Between the Accounts Over a 10 Yr Period

This is essentially free money, so putting money in an HYSA for your emergency fund, short term savings goals, etc is a great way to let your money grow and not be tempted to spend it all if it were to just sit in your checking account.


Learn more



Retirement Accounts ๐Ÿ‘ต๐Ÿ‘ด & Compound Interest โœจ

Saving for retirement doesn't sound like the most exciting thing but it's one of the best things you can do for yourself because it:

Compound Interest

Compound interest is so magical, we have to talk about it here. Here's a quote from Albert Einstein that sums it up well:

โ€œCompound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.โ€ - Albert Einstein

If you don't believe Einstein, I'm going to let the math do the talking:

Alex vs Jordan - Compound Interest is Magic

Imagine Alex and Jordan, both saving for retirement but started at different times and invested different amounts. Alex invests $40K between the ages of 30 and 40 and never saves again. Jordan, on the other hand, invests $104K between the ages of 40 and 65 when they retire. Let's assume 7% in returns each year, when they both retire at 65, Alex will have ~$50,000 more in their retirement account, simply because they started earlier even though they invested a fraction of what Jordan did.

Read Time is Money for a deep dive on compound interest



How to Save for Retirement

Summary of Common Retirement Accounts

There are two types of tax-advantaged accounts to save for retirement: Employer-Sponsored and Individual.


Employer-Sponsored

A benefit often offered by employers to help their employees save for retirement while getting a tax break! Some companies will offer a match (i.e a 100% match up to 3% of your salary) which is essentially free money so maxing out your match is KEY!

Corporate jobs offer this in the form of a 401(k), while non-profits do 403(b), but they're essentially the same thing.

For 2020, the limit on 401(k)/403(b) contributions is $19.5K.


Individual Retirement Account

The second type of retirement account is the IRA, and that's an account you can open/manage yourself! For 2020, the limit on all combined IRA contributions is (both Roth IRA and Traditional IRA combined) $6K.



When do you Get Taxed?

Employer-Sponsored and Individual Retirement Accounts come in 2 different flavors. This determines when you are taxed on your contributions.


Roth Accounts

Contributions to a Roth IRA or a Roth 401(k) are post-tax, which means you pay taxes when you contribute to the account, but withdrawals are tax-free.

In 2020, if you make over $139K you cannot contribute to a Roth IRA account, but there are a few ways around that. There is no salary limit for a Roth 401(k).


Traditional Accounts

Contributions to a Traditional IRA or 401(k) are pre-tax, which means you pay taxes when you withdraw money from the account in retirement.

Traditional IRA's are like 401(k)'s but differ in how eligible you are to claim a deduction. For Traditional IRA's, it depends on factors from income level to marital status on whether or not you can get a tax deduction, but for a 401(k), there are no restrictions.



Learn More

  • Want to learn more about retirement accounts? Read this.

  • Curious how tax breaks work with retirement accounts? Read this.



Investing 101๐Ÿ“ˆ

Investing simply is the act of committing money (i.e. saving) in the hopes of generating profit (i.e. money making money). Compound interest once again comes into play here. The amount we end up with is tied to how long we invest it for and where we invest it.

Want to dive deeper into the basics of Investing? Read Part 1 of our Investing Series


Building Blocks

There are multiple asset classes (categories of investments) but stocks and bonds are the most common.

Stocks are a slice of a company's equity and for public companies are traded on the stock market. You make money when you sell stocks for higher than you bought them or by receiving dividends (% of company's profits).

Bonds are essentially providing a loan in exchange for interest payments. You make money when you sell bonds to other investors or by collecting interest payments.


Investing Principles

Apart from stocks and bonds you can also invest in alternative asset classes such as real estate, commodities, etc. Investors often compare these asset classes along risk and return in order to evaluate investment opportunities.

There are some key investing principles to keep in mind for a successful investment strategy. These principles help you lower your risk while maximizing return.


Diversification is the idea of not putting all your eggs in one basket. When building your portfolio think about how much you want to allocate across assets classes (i.e. how much in stocks vs bonds vs etc.) as well as within asset classes (e.g. within stocks, how much in foreign vs. domestic?)

Want to learn more investing principles? Read this for how to think about these principles.


Does thinking about those words give you a headache? We gotchu, these investment vehicles help simplify investing and come with smart investment decisions baked in:

  • Index Funds - a type of mutual fund that is is designed to mimic popular investment indices (e.g. S&P 500) or specific benchmarks set by the brokerage offering the fund (e.g. Vanguard Total Stock Market Index).

  • Exchange-Traded Funds (ETFs) - An ETF is much like an Index Fund, but are traded like stocks. They can also be available across different sectors, industries, etc.

๐Ÿ’กIndex Funds and ETFs help you diversify your portfolio with very low effort.


How Do I Invest?

There are a ton of investment accounts available for you to start investing. These act as checking accounts with the ability to invest your money in different assets. However, they can vary among two common dimensions:


Involvement - how much time it takes to build a portfolio and invest money in that portfolio. Typically higher involvement โ†’ higher flexibility.


Cost - Every product/service comes at a cost. 2 common fees in investing: management fees and trading-related fees.


Investing Approaches

Approaches to investing, in a nutshell, are either hands-off or DIY-esque and come down to the tradeoffs between involvement and cost mentioned above.


Hands Off Approach โ†’ Low Involvement, Med Cost โ†’ passive investing

  • Using a Roboadvisor or a tool that builds a portfolio for you

  • Using a Brokerage to invest in mutual funds such as Target Date Funds (VTI funds, Fidelity Freedom Fund)


DIY Approach โ†’ High Involvement, Low Cost โ†’ active investing

  • Using a Brokerage to design your own portfolio


There's a lot more to investing than this covers, check out this article where we go in-depth into the trade-offs between different investing tools/methods here.


Popular Investing Tools:

A few recommendations based on our investigation, we aren't affiliated with any of these tools!

Brokerage:

  • Vanguard: Popular for low-cost investing, great for retirement/long-term investing

  • Fidelity: Has expense-ratio free index funds and many mutual fund options

  • Robinhood: Free stock and ETF trading, $0 account minimum

Roboadvisor:

  • Wealthfront: Low management fee (0.25%) and great tax optimizing features

  • Betterment: Low management fee (0.25%) and has a premium option available as well

Other:

  • M1 Finance: Offers a balance between a brokerage and a roboadvisor


Learn More

  • Curious about Investing Jargon/Building Blocks of the Stock Market? Read this.

  • Want to dive into Asset Classes/Investing Principles more? Read this.

  • Want to figure out what investment tool you should use and how to set them up? Read this.



Student Loans ๐ŸŽ“

Many students have to borrow money in the form of student loans to help pay for college. There are several types of student loans:


Federal vs. Private Loans

Federal loans are given out by the government, tend to have lower interest rates, and more flexible repayment plans.

  • Direct Subsidized Loans - Available to undergraduate and graduate students, the government will pay interest while you're in school, for 6 months after you graduate and during a period of deferment (postponement of loan payments).

  • Direct Unsubsidized Loans - Available to undergraduate and graduate students, the student has to pay interest during the entire period of the loan.

Private loans are given out by banks or your schools, tend to have higher interest rates, and less flexible repayment plans.


Terms to Understand Your Loans

In order to pay off your loans, make sure you understand the ins and outs of how they work. Here are some terms to know/lookup about your loans:

  • Principle: Amount you borrowed for the loan, doesn't include interest.

  • Interest Rate: Percent your lender charges you for borrowing money. Higher interest โ†’ higher amount added on to your principle that you need to pay off.

  • Payment Terms: When you have to start making payments, when the interest starts getting added to your loan, etc.

If you're not sure where to find this information, contact your loan servicer to help you out.


Learn More



Healthcare ๐Ÿฅ

One of the largest expenses you'll ever incur (expected and unexpected) are medical expenses. Nowadays, most employers provide their employees with health insurance.

When you sign up for a healthcare plan with your employer you'll have to think about deductibles, copays, and how much you need to pay out-of-pocket for each plan you sign up for.

We break down common health care plans here.


Your employer might also offer one of these employer-sponsored tax-advantaged accounts to help you save for health-related expenses: HSA (Health Savings Account), FSA (Flexible Spending Account) and HRA (Health Reimbursement Arrangement).


If you use money stored in these accounts for qualified medical expenses, that money is tax-free!


Learn More



Equity ๐Ÿ’ธ


Public Companies

Employers often allow their employees to own their company's stock through these 2 common programs.


Employee Stock Purchase Plan (ESPP)

An ESPP allows employees to purchase company stock with after-tax wages usually at a discounted price. They often come with a time frame (1-4 years) that you need to act within to take advantage of the program.


Employee Stock Ownership Program (ESOP)

ESOPs allow employees to own stock in their companies without actually having to purchase the shares. This usually functions more like a retirement account as employees can't access this until they retire.


Learn More


Private Companies

Equity compensation in private companies is notoriously complex. It's important to understand the implications of the equity you are signing up for as it can major financial implications. A proper understanding of equity can help you avoid some costly pitfalls.

Here are some excellent and comprehensive guides



Taxes ๐Ÿ’ฐ

Taxes can be the least sexy part of personal finance but having a little bit of knowledge around how they work can save you lots of money in the long run. Apart from taking advantage of tax-advantaged accounts (see what I did there ๐Ÿ˜‰) you should know the basics of personal income taxes to make sure you're paying the right amount of taxes.

U.S. Income taxes are based on 2 key pieces: withholding (i.e. paying an estimate of your tax bill throughout the year) and filing your tax return each year (i.e. figuring out how much you actually owe in taxes). If you withhold more than you end up owing, you'll get a tax refund. If you withhold less, you'll owe taxes when you file your tax return. You can lower your taxes through tax credits and deductions.


Learn More



Conclusion

Whew! That was a lot of information but you made it through! We hope this gives you a good understanding of all the moving parts of the personal-finance world as you begin your journey. In true Young, Not Broke fashion, we can't end without giving you some Action Items.


Action Items

  1. Dive deeper into the concepts that you don't know too much about by clicking on the links in the Learn More sections.

  2. Take the next step in your financial journey! Make a budget, open up a new account, or make your first investment.

  3. Tell us what you want to see next! We hope to dive deeper into topics we have covered the basics for and ones we haven't gotten to yet. Shoot us an email hello@youngnotbroke.co



If you want Young, Not Broke content delivered straight to your inbox subscribe here and if you have any questions โ€” email us at hello@youngnotbroke.co.


Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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