Personal Finance 101

Personal finance is important because it’s the path to wealth, which is the path to independence and freedom to choose how one spends their time.

Personal finance is also not effectively taught in school and taboo to bring up, which just exacerbates the wealth inequality gap the US is experiencing. It is my goal with a short blog to share the lessons I’ve learned throughout my personal finance journey and inspire you to take interest and accountability in your spending, saving, and investing. The hardest part is getting started, but your future self will thank you for the compounded rewards!

Here’s what I will cover:

1. Money Mindset

2. Tracking your spending

3. Building & Sticking with a Budget

4. Investing

5. Retirement Accounts

1 - Money Mindset:

I became interested in personal finance in the summer of 2017 and started reading books, blogs, and watching YouTube videos of people who have built wealth, created passive income, and are now free from all their money problems. The most important thing I’ve learned about personal finance is owning the future oriented mindset that believes I can build a wealthy life, no matter where I start provided I am able bodied, literate, and willing to work. This belief has only been strengthened the more I educate myself, track my spending, and run the numbers with the budget I’ve made for myself.

The thing that scares people about money is they hear horror stories about people losing everything in stocks, real estate, or building up an unrecoverable amount of debt so they chose to hold their money safely in a bank. While these fears are rational and scary, there are also people who have come from little to nothing and saved meticulously, lived frugally, and made strategic investments who have become incredibly wealthy because they educated themselves on how to play the game. If they’ve done that, why can’t I?

For me, anxiety comes from ignoring a problem I know I should be addressing and the longer I ignore it, the more my anxiety builds. I also found that the earlier I notice, track, and address my problems, the less scary they become, because I understand them and am empowered to fix them. The jargon can be confusing at first, but once you get enough exposure and start participating yourself, you’ll learn the rules pretty quick and can set a passive plan that works for you, or gamify investing.

2 - Tracking Your Spending:

This is a terrifying step because the mindless $5-$15 impulse purchases add up, but this is a critical step in diagnosing your current financial habits. Try not to judge yourself for how much you spend currently, simply note that without actively managing or thinking about it, this is normal for you.

I recommend downloading Personal Capital on your phone, linking up your credit cards, and letting that characterize and track your spend for a month. Personal Capital can also link all your investment accounts so you get a wholistic picture of your net worth, your assets, your debts, cash, investment performance and spending in one place. Mint is another app that tracks spend, but their categorization was wrong sometimes and they sent me too many emails.

After about a month of tracking or looking through your expenses, I would categorize them into necessary, fun, and unnecessary spending. It’s okay to impulse buy sometimes, but make sure that impulse buy isn’t taking money from necessary fixed items like rent, food, and bills.

3 - Building & Sticking with a Budget:

1. Record your monthly income (pre & post tax)

2. Add up all your necessary fixed spend items from the last month to get a sense of your fixed spend

3. Add up all your fun spend items from last month and then adjust your fun spend budget accordingly

4. Cut all unnecessary spend items and save/invest the money instead

5. Build up your fixed, fun, and save/invest percentages and then try to hold yourself accountable for the next month, adjust accordingly

A common budget I found was 50/30/20 which allocates 50% of your income to necessary fixed items (rent, insurance, student loans, etc), 30% of your income to fun and enjoyable things, and 20% towards investments.

I was pretty frugal as a college student without any sustained source of income, so I adapted the 50/30/20 budget to be save & invest 50% of my income, live off of 30% of my income (rent + food), and have fun with the remaining 20%. For instance, when I interned in Palo Alto, instead of paying 1400/month for a room I wouldn’t spend much time in, I spent ~$2800 on an AirBnB hacker house (hostel but w/ lots of software engineers/startups passing through) for 3.5 months of my internship at the expense of some privacy, which I valued less than $600/month at the time.

For my investments, I set up automatic transfers from my checkings account to my investment portfolios right after I get paid, so I don’t even see the money, it just automatically gets moved and invested. This helps me not mentally get attached to the money I’m investing and think of it as something I can spend, instead I see it as money for my future.

My fixed expenses include: rent, utilities, parking, wifi, renter’s & car insurance, Costco trips.

My fun expenses include: books, Spotify, dining out, drinks, impulse items, non Costco groceries.

My investing money is prioritized by: Roth IRA, Roth 401k, Index Funds, Individual Stocks, Options/Crypto

4 - Investing:

I think investing is super fun! The hard work I put into saving money allows me to make more money with my savings and when that mentally clicked and I started seeing the time value of money that I spent today, I became less inclined to impulse spend.

Let’s talk about compound interest. Here are some numbers that blew my mind:

1. The S&P500 has returned 10% on average since inception in the 1920’s, 7% adjusted for inflation.

2. If you invest $6,000 when you’re 21 and it compounds at 7%, that’ll turn into $118k when you’re 65.

3. If you invest $6,000 when you’re 30, it only turns into $64k, which makes sense because Rule of 72 indicates that 72/7 = 10.3 years to double your money. But WOW, the money I spend now will become 20x what it’s worth if I just invest it? Suddenly a $100 shopping splurge costs retired me $2k? Yeah no thanks.

4. This is also conservatively assuming you’re just investing in the S&P500 and not predicting where technology is advancing (5G satellites, cloud computing, AI, IoT, AR/VR, EVs/self driving cars, clean energy etc) which will create value for society and generate returns for investors.

5. Let’s assume you do a little better than the S&P500 because of freakishly good investing years like 2020 and average 10% return. $6k at 21 (6,000*1.1^44) now turns into $398k, nearly triple what 7% returns? That’s absolutely incredible.

After doing these calculations, I started prioritizing investing my money at the bare minimum, and second learning how to increase my return on investment (ROI).

Investing risk/reward assessment

1. For beginners, I recommend throwing all money you don’t need in the next 3-6 months into an index fund like VGT, VTSAX, or SPY. These are market trackers and track the overall market and will grow with them.

2. Your money will fluctuate on a day to day basis, you might even lose money for the first few weeks/months, but by putting your money in the stock market, you are betting on the American economy to continue to grow, which is a bet I hope you’re confident in making as innovation, access to capital, and high quality information are only accelerating. Remember, time in the market beats timing the market.

3. For intermediates, I recommend buying more aggressive ETFs or even individual stocks of companies you support or believe will continue to perform well. ETFs of industries that will continue to grow like VGT - information technology, DRIV - Electric & autonomous vehicles, LIT - lithium ion technology, and TAN - solar energy, will allow you to benefit from specific industry growth compared to the overall market as a whole.

4. As far as buying individual stocks goes, there are traditional ways of measuring a company’s worth like a discounted cash flow analysis, price to earnings (PE) ratio, or a revenue multiple based off industry, but these traditional valuation companies struggle to accurately determine the valuation of high growth tech companies. I would advise thinking about what sectors will continue to grow in the next decade and find the most innovative companies in those industries.

5. Anyone else probably can find better places on the internet than my blog to get investing advice, but I think this is a decent primer. For the more risky investors, I think there is a lot of upside to crypto (Bitcoin just broke $23k) if you can handle the swings, and options trading is an amplifier to the gains and loses in the market.

I enjoy experimenting around with different asset allocation percentages. At the start, I threw 100% of my money into ETFs, later I did 75% ETFs and 25% individual stocks for about a year. I sold a couple individual stocks to play around with options, I lost some money, but made it back and then took a break to just invest. Recently I have revamped my portfolio to be 25% ETFs, 60% stocks, and 15% Crypto/Options. I think the 75/25 ETF/stock split was a great allocation for getting used to the noise of the market but also learning how to pick stocks and research companies.

5 - Retirement Accounts

Retirement accounts have incredible upside because there’s potential to pay reduced taxes on the money that you invest which allows you to keep more of the fruits of your labor. There are 2 types of retirement accounts (Individual Retirement Account/ IRA and 401k) and 2 subtypes of each (Traditional and Roth).

Here are the definitions:

1. Traditional 401k - employer sponsored retirement account that takes pre tax money

2. Roth 401k - employer sponsored retirement account that takes post tax money

3. Traditional IRA - individual sponsored retirement account that takes pre tax money

4. Roth IRA - individual sponsored retirement account that takes post tax money

Contribution limits:

It’s ideal to max out your contribution limit every year because after the tax year passes, you can no longer contribute to last year’s limits. Thus, you’d be losing out on a year of potential compound interest, which makes a sizeable impact in 30 or so years.

1. 401k - $19,500 contribution limit for 2020

2. IRA - $6,000 contribution limit for 2020

What can you invest in?

1. With 401ks, employers typically have plans you can invest in, these range from actively managed mutual funds, target date retirement funds, to general market/asset trackers

2. With IRAs, the brokerage you use should allow you to invest in everything they typically offer which allows you to customize your investments more

Priorities:

I typically prioritize maxing out my retirement accounts (IRA/401k) and specifically my Roth IRA first because I can customize my investments more than in a 401k. Then I make sure I’m on track to max out my Roth 401k, and any left over amount can go into an individual brokerage where I can invest it on my own.

There’s also something called a backdoor Roth IRA which allows you add more money to your Roth IRA, but I don’t have first hand experience and haven’t researched it enough to teach you about it but that shouldn’t stop you from researching it if you’re interested!