Managing personal finances can be a source of stress for many people, and for good reason. The average American has $38,000 of personal debt, excluding home mortgages – enough to make anyone stressed.
One of the best ways to combat anxiety, however, is arming yourself with information, so today we’ll be sharing Tyler Hogge’s 10 Commandments of Personal Finance. We’ve designed this post to be simple and informative, so you can start taking steps to improve your personal finance habits right away.
Plus, as a bonus for Lambda School Students, at the end of this post we’ll be sharing the details for how you can get your first $15,000 managed for free by our partners at Wealthfront.
4 Keys to Mastering Your Personal Finance
According to Tyler, there are four things you need to do well to be great at personal finance. These are:
Budgeting
Saving
Investing
Protecting your assets with insurance
If you can learn to do these things well, you’ll be on your way to financial freedom. These keys are simple, but they’re not as easy to master. If they were, everyone would be an expert at managing their personal finances. To get good at managing your money, you need to follow what Tyler refers to as the “10 Commandments of Personal Finance.”
The 10 Commandments of Personal Finance
Here are the 10 steps to mastering your personal finance. It’s important to keep in mind that these steps should be taken in order, as they build on each other.
Start with a budget. There are many free budgeting tools like Mint or Empower that you can get on your phone or computer to make budgeting a breeze. Being able to drag and drop expenses will help you understand where you spend money and where you can afford to cut back and save.
Pay off high-interest debt next. After you’ve established a reasonable budget and have begun improving your spending habits, the next step is to aggressively attack your credit card debt. The average credit card interest rate is 16% – so when you pay off your debt, you’re essentially lowering your expenses by 16% every month.
Pay off credit cards every month and stay out of debt. It can be a smart strategy to use your credit card for as many expenses possible – you can earn miles and points for expenses, and if you’re paying it off, you can use the benefits in a positive way, but the points aren’t worth it if you’re carrying a balance and paying 16% interest.
Build an emergency fund. Before you begin investing, you need to save. According to a survey by Lending Tree, less than half of Americans have the money to cover an unexpected emergency costing $1,000 – the rest would have to borrow the money or sell something to cover the expense. To avoid being in that situation, you need to build an emergency fund. There are reasons you might need to stop working and live off cash alone – you get in a car accident, you have to take in your sick mother or father-in-law, you have to move suddenly – so you should always have 3-6 months of your income saved in an emergency fund, just in case. Do NOT put this emergency fund in your regular bank account. Instead, use a high-yield savings account (don’t invest it!). High-yield accounts pay 1.85% interest on your savings, which is 185x more than your regular bank account. A few high-yield savings accounts you can check out are GSBank.com, Ally, and American Express Savings.
Use debt for only 2-3 things. All debt is not created equal. Avoid all credit card and personal debt and try to get into debt only for a home and an education (unless you’re a Lambda School student!) A third exception might a car if you need it to get to work, but try to buy a car that you can afford to pay for in cash, if at all possible. For all other large expenses – a TV, phone, furniture – save up the money (in a separate account from your emergency fund) and buy them with cash.
Match a 401k. The larger your company is, the more likely they offer a 401k, and the more established your company, the more likely they offer 401k matching. If you get 100% match on your money, you should definitely take it and should contribute the max to get the match. It’s free money!
Contribute to an IRA next. After you’ve maxed out your 401k, max out your IRA. You have two options when it comes to IRAs – traditional and Roth. A Roth IRA grows tax-free and you do not pay tax when you withdraw. When you retire, you do not have to pay taxes on a Roth. A traditional IRA is pre-tax and requires you to pay taxes when you withdraw the money at retirement. The most commonly used IRA is a Roth. Keep in mind that the contribution limit is $5,500 a year, and you should try to max it out, because you can get tax breaks for contributing to your retirement funds. The other important thing to note is that as tempting as it may be to withdraw money from your IRA to use on expenses, don’t – there’s a penalty for withdrawing the money early, and you’ll need that money down the road.
Open a taxable investing account. Only after you’ve saved 3-6 months of expenses, and maxed out your IRA and 401k should you begin investing in the stock market. A taxable investment account has no limit on contributions, no limit based on your income, and no penalties for withdrawing funds early, but you’re fully taxed on gains. A few options for beginner investors are Robinhood (if you want to invest actively), or something more traditional like Charles Schwab, Scottrade, or E*Trade.
Invest passively. In general, there are two ways to invest: actively or passively. Active investors try to best the market by picking stocks they expect to do well in the future. Passive investors try to match the market – they use low cost Exchange Traded Funds (ETFs), which allow you to buy the market and let your money grow over the long-term. My advice to you is to avoid active investing and focus on long-term growth. Unless you have an edge, do not sit at the poker table. What do you do when the market drops big time? The market fluctuates all the time – the key is to “set it and forget it.”
Buy term life insurance. The last step to personal finance mastery is insuring your income against the possibility of your death. This is particularly important if you have a family – you’ll want to be sure your spouse and/or dependents will be okay if you were to unexpectedly die. Sometimes, your employer will offer a small life insurance policy, but usually, this isn’t enough. It’s a good idea to have a separate policy from the one included in your benefits. However, don’t worry about buying whole life insurance – all you need to do is buy a term that will last up until your retirement, and then at that point, if you’ve invested wisely, your retirement fund will be able to support you and your family. For most people, 30-year term life insurance is a good way to go. Tyler recommends checking out Ladder and Ethos as you begin to explore your options.
Take Charge of Your Finances Today
"If you can master these 10 Commandments of Personal Finance, you’ll be in the top 2-3% of Americans when it comes to wealth management." –Tyler Hogge, financial analyst
If you’re serious about building your wealth and taking charge of your money, it’s a good idea to have a trusted financial advisor on your side – that’s where Wealthfront comes in. Lambda School and Wealthfront have partnered to ensure that our students and alumni have the tools they need to grow their wealth after graduation.
To get your first $15,000 managed for free by Wealthfront:
Sign up for an account at Wealthfront.com
Send an email to support@wealthfront.com and tell them you’re a Lambda School student and would like to claim your $15k credit.
Start growing your wealth!
Want more tips for managing your personal finances? Watch the full Personal Finance Bootcamp Brownbag Lecture here:
Tyler Hogge is the VP Of Product and Strategy at Divvy, and the former Head of Product Partnerships at Wealthfront. He holds a BS in finance from Southern Utah University and an MBA from Cornell University, and is a Chartered Financial Analyst through the CFA Institute. Connect with Tyler on LinkedIn.
