Personal Finance Basics 101 Part 1
Let’s start with the basics for a sound financial “plan” (plan is in quotes because neither this post nor this site has any hope of addressing a proper financial plan — as done by a professional).
First and foremost, earn more than you spend. Ideally, you would set some money aside each month for a rainy day fund, a retirement fund, a college fund (if you have children or one day think you might), and a maintenance fund (fridge goes on the blink, car refuses to start, bathroom sink springs a leak, etc.). It can be small amounts, either in percentages or in dollar terms, but still, set some money aside.
At the very least, do this:
- Put 10% of your gross income in a retirement account of some sort, preferably in a mutual fund family like Vanguard, Fidelity, or T. Rowe Price (many from which to choose).
- Have funds available to you equal to 6 months worth of income. Most professionals will tell you to have 6 months worth of income available as liquid cash (i.e., a bank account or money market mutual fund). Some of the more practical professionals will tell you “liquid funds,” which could mean a credit card. This is how I operate. Now, I do have some money socked away in a savings account, but it certainly isn’t equal to 6 months of my income. However, I have way more available credit than that, and I don’t ever expect to have to use it. It’s there for a rainy day.
So, to recap: 10% in a retirement vehicle and have access to the equivalent 6 months of income.
If you don’t do or have either of these, don’t do anything else until you do.
The reason you pay your bills every month and conveniently neglect to save anything is because you put a priority on paying your bills. Change your thinking: Put a priority on paying yourself first. Check out (from the library! — money-saving tip alert) David Bach’s excellent book, Automatic Millionaire for great tips on finding ways to do this by automation.