Personal Finance 101

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This isn’t writing related at all, but I think it’s super important to learn how to manage your finances. It’s an essential life skill that will have a huge impact on your life, yet so many people are really bad at it.

It doesn’t matter how old you are or how much money you make, you will use your money skills until the day you die, so you might as well get good at it, the sooner the better.

I’m considering starting a finance blog, but for now, here are some bullet points of what I’ve learned over the years.

Track all your spending and income

You need to gather raw data before you can assess the situation, so you need to track where all of your money goes. Track every single dollar that comes in and goes out.

I use mint.com, which is free.

I recommend doing this for 2-3 months before you move on to the next step so you get a sense of what you make and what you spend in an average month.

A lot of people say you should use cash as much as possible because it’s too easy to overspend if you use credit cards, but I disagree. I pay for everything I can with my credit card, and pay if off at the end of every month. This improves your credit rating, and it’ll be automatically tracked in mint so you know where your money’s going.

Make a budget

Step 1: Figure out the totals for your income and expenses. Hopefully, your income is more than your expenses every month.

Step 2: Categorize your expenses.

fixed – same amount every month (rent, car payment, student loans, health insurance)
variable – the amount changes month to month (groceries, entertainment, clothing)

Step 3: Calculate the minimum amount of money you need every month. Always know this number.

Cut spending

This is the hard part. There are entire books and blogs written about this one thing. Look at your budget and see where you can cut back. An old coworker of mine was spending $800/mo on clothes. That’s $9600 a year! She had no idea until she started tracking her spending.

Cutting expenses is better than making the same amount of money. Why? Taxes. If you cut spending by $1,000, you now have an extra $1,000. If you got a raise or bonus of $1,000, you would be taxed on that income, and would only get about $700 or so.

The biggest cost is usually housing. The rule of thumb is you should spend no more than 30 percent of your gross income (money before taxes) on housing. If you’re paying more than that, it’ll be difficult to make up for that huge expense, so change your living situation and lower your housing cost.

Living below your means takes consistent effort, but the rewards more than make up for it over time.

Track your net worth

I do this at the end of every month, and at the end of every year.

Add up all your assets (checking account, savings account, 401k, stocks, etc).
Subtract all your debts (credit card, student loans, car loans).

You might have a negative net worth, which means you’re in debt. Track this every month to make sure your net worth is growing, or that your debt is shrinking.

Pay off high interest debt

Usually, this is credit card debt, with interest around 12% to 18%, or more if you have bad credit. Your number one goal should be to pay off high interest debt! Any extra money you have after paying the bills should go to paying off as much debt as quickly as possible. People usually have several debts with different interest rates. I would pay off the highest interest one first, get that to zero, then start paying off the one with the next highest interest, etc.

If you have debt, don’t bother investing or saving for retirement. Let’s say you’re paying 15% interest on your debt. Any investment you make would have to gain more than 15% for it to be more profitable than just paying off the debt, and I don’t know any way to consistently get a 15% return. Paying off your debt is a guaranteed return.

Save up a few months of expenses in cash

Once you get your credit card debt to zero, you should start stockpiling some cash into an emergency fund. All that money that used to go to paying off debt can now go into savings. Back at step 2, I told you to figure out the minimum amount of money you need per month to live. Multiply that amount by how many months you need.

If you work a stable, 9 to 5 full time job, I’d say you could probably get by with just 2 to 3 months of expenses. If you freelance, work part time, or have any of sort of irregular work, you should aim for 6-8 months of expenses.

I saw this article that said most American’s don’t have $1,000 in cash.

What?! Are you serious? You never know what’ll happen, so have some cash set aside in a money market account just in case.

Save for retirement

If you have a job that has a 401k, start there, especially if they offer any matching.

If you don’t have the opportunity to invest in a 401k, or in addition to your 401k, open up a Roth IRA. In a Roth or standard IRA, you can choose to invest in mutual funds, but I hate mutual funds. Instead, you can choose to invest in individual stocks. If you want to do it the easy way, buy an index fund or ETF that tracks the overall stock market, and has low fees compared to regular mutual funds.


All of these steps apply to everyone, regardless of how much money you make, how much you have, or how much you owe. It might take several months or several years to get to the point where you pay off all your debt and save up an emergency fund. During this time, you should have developed strong money habits, and now you can move on to the fun stuff.

Make more money (passive income)

You might be lucky enough to have a good day job that pays well, but it’s hard to get rich just from a job where you’re working for someone else.

Other than inheriting a bunch of money, people generate wealth with some combination of the following:
1 – investing in stocks
2 – real estate
3 – your own business

(I guess you can work for a company that gives you stock options and then goes public or something, but I’d categorize that as stocks/your own business)

There are risks with each, but the returns can be enormous.

Invest in stocks

It takes a little more work research to invest in individual companies instead of an index fund or mutual fund, but the returns can be much greater.

I’m just going to show you this little chart of Apple stock over the last 15 years.

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Sometime in 2001, I managed to save up $500, opened up a brokerage account, and bought my first stock: $500 worth of Apple at around $18 per share. Today the stock is around $118. Split adjusted, it’s about $2 per share. So every $2 I invested would be worth $118 today (I sold a year ago), almost 60x gain, or 6000% returns. That’s the power of stocks.

There is risk involved, but the time it takes you to learn how to get good at investing in stocks is worth it.

Invest in real estate

I think owning the place you call home is a pretty decent investment. You have to live somewhere, and instead of throwing money away on rent, you build equity, and there are a lot of tax incentives.

The thing with real estate, though, is you need a big chunk of money to invest. You need a 20% down payment to avoid paying PMI, or you can pay PMI and try get an FHA loan for 3.5%. Also, real estate isn’t liquid like cash or stocks, but you get to leverage your money and can take out the equity you’ve built up.

Once you own your primary residence, you can move on to other investment properties in the form of homes, apartments, or commercial real estate.

Your own business

Be an entrepreneur. Working for yourself isn’t the same as having a business, though. If you’re only getting paid per hour that you work, that’s not really a business that can grow. You don’t want to become an employee to your clients. The key difference is that a business has to be scalable. Watch a couple episodes of Shark Tank for inspiration.

Investing in stocks and real estate can be fairly passive, but obviously if you’re running your own business, that’s going to be a much bigger commitment of time and energy, and probably capital.


It’s never too early or too late to get your finances in order. Good luck, everyone!

  1. Jen left a comment on December 9, 2015 at 12:13 pm

    It is pretty baffling that so many people haven’t even saved $1000! Crazy. For a bit, I was making more than my means and paying down some student loans while also saving. It was always a debate whether to put all the money toward the loans, but in the end I’m glad I saved, because I was just laid off. Yes, I can get unemployment, but it’s nice to have this savings as well in case things get desperate.

    Good idea for a post! I think more people need to be aware of their finances; it seems a lot of people would rather turn a blind eye than pay attention and possibly be sad by what they see.

  2. Retirement and Personal Finance – Studio EB left a comment on September 12, 2016 at 11:20 am

    […] Now, I’ll be the first to admit I wasn’t the best in this category by far. I’ve had a couple close friends who are very good with their finances constantly advising me to do a better job with mine.  I didn’t listen and boy do I wish I had. One of these friends, Kiyong wrote a topic on his blog. He goes over the fundamentals.  This is the perfect stage 1. Here’s a link to what he wrote: Personal Finance 101 […]

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