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Personal Finance: Steps to Financial Security

Personal Finance: Steps to Financial Security
Photo by Lindsay Henwood / Unsplash

You can learn how to build your financial security!

Personal Finance Resources on this page:

  • A Budget Planner to create a suggested monthly budget based on your income.
  • A Budget Basics section to learn how to use your budget to build your financial security over time.
  • 5 Tips for Young Adults to build financial independence.
  • Recommended Reading section for further learning.

Budget Planner Tool

Budget Basics: Why and How


Why we want to live on a budget

First let's deal with some misconceptions about why we want to live on a budget.

Have you ever heard someone say "I can't go out this weekend, I'm on a budget"? The vibe is "we have to live on a budget when we're broke" as if budgets are a sign of poverty or a sign that we're "bad with money" and doomed to be financially insecure for life. Another similar notion: "If I had money I wouldn't need to worry about a budget." These notions are absolutely false.

Frugality creates freedom.

The purpose of having a budget: Living on a budget helps you grow and preserve your wealth and financial security. What do we mean when we say "wealth and financial security"?

This:

  • Having money sufficient for the increasing expenses of your life, while also
  • Having increasing amounts of savings and investments which give you financial security and options.

Why you need options

  • Options for jumping on the opportunities that come your way: opportunities to start a family, adopt a pet, start a business, invest in a project or startup, take time off and travel the world etc.
  • Options for dealing with foreseeable future needs: saving up for a downpayment to buy a house, saving up for kids college, saving for retirement. These are needs that most people will need to save up for.
  • Options for dealing with unexpected needs and emergencies of life (which will come in all sorts of shapes and sizes, big and small).
  • Options for avoiding or reducing debt.
  • Options for responding to the needs of others with generosity, and for supporting the causes that matter to you.

If you don't live on a budget you won't have good options (or any options) for any of these...for example having the option to retire vs not. Budgets allow you to save up systematically over time and have options for how you address the opportunities and needs of life.

So we live on a budget not because it's a punishment or 'because we're poor' but rather because we are building and preserving our wealth.

We want to live on a budget because it improves our financial position and options day after day, month after month. Over time this makes a huge difference for you and those you care for.

How much $$ you have right now doesn't matter

You may be thinking "What's all this talk about wealth and financial security??? I don't have either and probably never will."

There is a future version of you that does and another future version of you that does not. Every day, including right now, is a chance to decide which version you'll create. A budget is a simple plan for getting to the future version of you that has wealth and knows how to keep growing it.

Where you start financially is not an indicator of where you will to end up. What matters is learning how to use a budget to build and preserve your wealth. With a budget you can save, invest, cover your expenses, have some spending money, and plan ahead.

The good news is, there are clear ways to do this, and you can find the approach that works best for your situation.

How you can plan out your own budget

Many financial advisors like the 50/30/20 rule, a simple formula introduced by Sen. Elizabeth Warren back in 2006:

  • 50% of your income goes to needs: rent or house payment, transportation, groceries...bills you must pay every month.
  • 20% goes to savings and investments. Savings = money you save up and keep in case you need it future unexpected expenses, or if you get laid off suddenly etc. Investments = longer term holdings, typically for retirement, but it could also be for specific goals, like saving up for your kid's college, saving up
  • 30% goes to wants: discretionary expenses...entertainment, eating out, clothes, streaming subscriptions etc. Discretionary just means purchases you could decide to go without (or delay to a future time) if you really needed to.

The 50/30/20 rule is a good general target, but each individual situation is different. Other options might work better for some situations:

  • The 80/20 rule: put 20% of your incoming into savings, then use the remaining 80% for bills and living expenses, entertainment etc. This is sometimes referred to as the "pay yourself first rule" - before paying bills or buying discretionary items, put 20% (or whatever portion you can) aside into savings and investments.
  • The 60/30/10 rule: This might be a more practical option for young adults earning entry level wages, or for anyone living in an expensive city. This modified approach allocates 60% to needs, 30% for wants and 10% for savings. You could also try 60/20/20 if you wanted to have more going to savings BUT, keep in mind that the 20% or 30% allocation for "discretionary" also likely includes the costs of your social life and key relationships - which is important too. Going to a movie or concert with friends, taking a significant other to dinner, buying a gift for someone - these activities all cost money, but they are a very important part of your connectedness and well being.

The bottom line is to find a method that helps you be intentional about what you are spending and what you are saving. What you save up and invest over time makes a very big difference in your future options and financial security.

5 Tips for Young Adults

When you're first getting started, these tips will help you get to financial independence faster.

#1. Find and work with a trustworthy Financial Advisor.

Trusted financial advisor = someone who is financially secure, financially knowledgeable and does not need to make money off of you.

A good financial advisor is not trying to sell you anything, but rather is ready to help you get information you need to make good financial decisions and prepare for your future. Meet with your Financial Advisor to discuss investments, large purchase (like a house), college debt, taxes or other financial events. How to find a good Financial Advisor.

#2. Save and invest consistently.

Take advantage of 401k and employer matching. Some employers will match up to 5% or more, up to a certain amount. If you can, set your 401k deduction to the maximum financial contributions. In addition to investing you'll want to save regularly.

To explain, let's review the 3 kinds of accounts you use to manage your finances:

  • Spending Account: Your spending account (what the older generation used to call "checking account") is the basic bank account where you want your paycheck deposited to and where you spend money from. Your debit card will be linked to this account. Keep enough money in this account to pay your bills and discretionary purchases. When you get paid, move some money from this account into your Savings account first. Then pay all your bills, then spend
  • Savings Account: Try to save up 9 months worth of salary (so you could pay your bills for 9 months without any income if you had to)
  • Investing Account: You should have a basic index fund (that tracks an overall market) as a foundation. As you get older if you want to branch into more specialized or focused funds you can work with your financial advisor to select funds that fit your goals and your risk tolerance.

And finally 3 simple rules of thumb to guide your investing:

  1. Start now. Don't wait or try to time the market. Two statement I remember investment advisors telling me when I was young:
    1. "Get off zero." It means just start investing now. The earlier you start, the more market growth you have exposure to.
    2. The average person will live through 5 bull markets. Starting early lets you catch as many as possible. One advisor I knew had figures showing that if you miss even 1 bull market (by waiting until you're older before starting to invest) the drop in your eventual gains is substantial.
  2. Dollar cost averaging. This just means invest on a consistent regular basis - ideally with every paycheck. Most employers make this easy through their 401K program - allow you to deduct a specific amount from every paycheck to invest.
  3. Diversify. This means investing across a range of different things, rather than for example betting everything on Bitcoin, or on one "hot stock". Why is this important? Because:
    1. We aren't good at predicting the future: we don't know what company, stock or crypto asset is going to grow and be successful vs not. So you do not risk all your money on 1 thing.
    2. Economic growth occurs in different sectors at different times.

Work with a trusted financial advisor who can help you make leverage these rules of thumb in ways that work for you and your goals.

#3. Know how to manage your paychecks so bills get paid on time, while saving and spending:

  • Pay yourself first: When you get paid, make sure that a set amount of your paycheck is automatically sent to your 401k (or other investment account). Then when your paycheck is deposited into your bank account, move a set amount of that money from your spending account to your savings account. It's ok if it seems like a small amount. Consistency is more important than amount. This is called "paying yourself first".
  • Pay your bills next: Rent/house payment, electricity bill, water bill, car payment, plus your usual allotment for groceries. Be sure to pay your bills on time. This is important for your credit score. If you can set up autopay.
  • Use what is left for discretionary expenses: Go out to eat, go to the movies, buy something you like, etc.

#4. Avoid credit cards, and debt except for good reasons

Credit cards try to trap you into debt that grows: high interest rates cause the amount you owe to grow faster than you may be able to pay it off. Use your bank's debit card instead. Debit cards only spend what is in your account.

Likewise avoid debt unless you are investing in something that is a good investment, like:

  • a house (houses are considered good investments because usually they grow in value over time)
  • an education (which is an investment in you, and will increase your future earning potential),
  • a reasonably priced vehicle (while it doesn't grow in value, it can help you get to work, earn more money and thus is valuable).

Even in these cases, you need to consider whether your income will have enough money for.you to make the required payments.

#5. Every week make time to review your finances

Build a habit of spending some amount of time 15, 30 or maybe 45 minutes to

  • Pay your bills - again make sure they are paid on time.
  • Review your investments
  • Check your savings accounts. Do you see any charges you don't recognize? If so, call your bank.
  • Make notes of things you want to ask your financial advisor.
  • Review your spending patterns, subscriptions, auto-payments and make adjustments as needed. If a subscription isn't giving you what you expected, cancel it. Monitor autopay as well...make sure they're paying the correct amounts, and it's still something you owe etc.

Suggested assignment: read these and look at the common themes in the advice they share.

Opinions expressed are those of the individual contributors and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial, investment or legal advice, and no offers for securities or investment opportunities are intended. Mentions should not be construed as endorsements. Authors or guests may hold assets discussed or may have interests in companies mentioned.