Advanced personal finance for young professionals

11 min readApr 14, 2017

If you already make solid financial decisions and want to grow your wealth, this is for you. (Updated Aug 2023)

If you’re like many of my young professional friends, you likely:

Have a good credit score
Are contributing to a company 401K
Have some student loans and/or a car loan but otherwise relatively little debt
Are sitting on some decent cash in your savings account that you’ve dutifully squirreled away over the past few years at your salaried job

Now you have big life questions to answer, like how much should I spend on a condo or new house? How much do I need to keep in my savings (asked while looking at photos of pretty apartments and houses)? Retirement is so far away, how much do I need to be putting away now?

If my quarter-life crisis at age 19 was any indication (pierced my nose, opened a retirement account), I’ve been collecting financial strategy from finance professionals, best-selling books, and industry blogs for years and have been pressure testing their recommendations against my own modern millennial life demands. The resources and concepts below will help you answer those burning questions in your life — and hopefully, help you take advantage of opportunities you weren’t even aware of.

When following this outline, it should take you a few hours to assess your finances (step by step review outline at the end). I’ve been open with my own financial experiences along the way, so you can get a feel for what these concepts look like in real life. Do the work — your future is worth it.

1. General savings & budgeting

Resource: The Minimalist Guide to Budgeting in Your 20's

As a general guideline, finance professionals widely recommend the 50/30/20 rule of thumb (also here) for allocating your budget. 50% of your income goes to fixed expenses, including rent, food, and utilities. 20% goes to savings (retirement and otherwise). Lastly, 30% is slotted for discretionary spending. Discretionary spending includes anything you could nix if you really had to, like your cell phone plan, cable, yoga, and trips to Dunkin Donuts.

In Boston, rent is so disproportionate to income that I find rent often slides into the discretionary spending category, even though it’s a fixed expense. I’ll cut Starbucks trips for a nicer apartment any day.

Tip: Don’t forget about investments. When I look at my spending breakdown, I trend below the recommendation: 44%/ 16%/ 40% (expenses, savings, discretionary spending). BUT this isn’t counting my 401K contribution and employer match that I don’t even see taken out of my paycheck. Factoring this in brings me to a much nicer breakdown: 40% / 27% / 33% (expenses, savings, discretionary spending).

2. Brush up on personal finance basics

Resource: The Ultimate Guide to Managing Money in Your 20s

This handy overview above touches on budgets, savings, retirement, and credit. It’s a good refresher before jumping in further.

3. What to pay off, and where your money should go

Resource: Reddit r/personalfinance

This flow chart from Reddit is a great visual that answers the question, “Where should my money go?”.

Some details to keep in mind. Most resources say to pay off all your debts before investing and saving. The flow chart does say to pay “highest interest loans”, but this can be misleading. Oftentimes, these catch-all recommendations are for people with credit card debt, which can hit rates of 15–30%. Of course you want to pay that off ASAP before anything else. However, having debt like a car loan can be good, because you’re likely being charged a lower interest rate than what you could make if you invested that cash in investments. For example, if your car loan is 3% with a 5K balance left on it, it makes more financial sense to keep that loan and invest the rest of what you have in the stock market and get a return of 6–10%, that way your money is working for you. My first financial advisor was in his 30s when I met him, and he loved that he still had low-interest rate student loans. Instead of paying them off quickly, he extended the loan for as long as possible and invested his cash in the market at a higher return than the loan interest charge.

4. Calculate your emergency fund

Determining an emergency fund goal will be a fast exercise if you did the 50/30/20 rule calculation above. Personally, my emergency fund also includes discretionary spending that I can’t or wouldn’t necessarily want to dump tomorrow if I lost my job, like my car payment and cell phone. Look at your total spending and see what you would cut out if you had to watch your money — such as going out, trips to Whole Foods, extra gas. Then, put away 3–6 months minimum away for your emergency fund. I always opt for six months of expenses because even in a pinch, I never want to take a job I don’t love just because I didn’t put enough emergency savings away to live comfortably while on the hunt.

Investing your emergency fund.

This is my favorite tip. We all likely know that you’re supposed to have your emergency fund ‘liquid’, or easy to get to ASAP if you need it. I had previously held my emergency fund in cash for years, which is a common approach. Recently, I invested it with Wealthfront (referral link) in funds that I could easily pull back without any penalties within 2–3 business days. I also keep a slush fund in checking for day-to-day expenses.

Wait, but the market fluctuates; how do you know that the money you need in an emergency will be there if it’s in an investment that changes in value?

This question is why financial professionals tell you to keep your emergency fund in cash. What I’ve done is built that market fluctuation into what I’ve invested. Let’s say I want my emergency fund to have 10K in it at all times. I put it in a low-risk investment that historically produces yields of 3%. Let’s say I need this cash when it’s at a downturn — say, 5% below what I invested. I start by putting in $10,500, so even if the balance bounces around a little bit, I will always have the 10K cash I need. This may not work for risk-averse investors, but it works for me. In my emergency fund investing approach, money isn’t losing value sitting in a checking account (inflation). It’s making more money.

Impact: My emergency fund investment shockingly made me a 10.3% return over the past year (2016–2017). It was performing so well that I added some more cash from my savings into it last summer, and it’s yielded a total of $1,770 extra cash for me in one year. THAT’S FREE MONEY! SO MUCH BETTER THAN A CHECKING ACCOUNT! All while being liquid so that I can get to it at any time. Sweet!

Aug 2023 Update: Wealthfront savings accounts are now performing upwards of 5% due to the Fed hiking interest rates. That return on a cash account is unreal. Here’s a referral link that will get you an additional 0.5% APR for 3 months when you open an account.

5. Retirement Calculators

Resource: Smart Asset Retirement Calculator

I’ve reviewed a lot of retirement calculators, and I like this one the best. Be prepared to be shocked to see how much you actually need to save before retirement.

Tips on using this retirement calculator:

“What do you estimate your annual expenses to be during retirement?” How the heck should we know that now? Rule of thumb is 70% of your salary. I don’t love this rule. This calculation is helpful when you’re in your 50’s, but not for us now while we’re growing our careers. Input the lifestyle you hope to lead in your 60’s & onward — keeping in mind that medical costs often skyrocket later in life.
By default, most financial calculations assume social security benefits will be available during retirement. I don’t think we’ll have that luxury when it’s our time to retire. I recommend turning this function off in the calculator.
Annual return on savings is set at 4%. I’m sure this is based on years of historical data, but we haven’t seen these returns in our adult lifetime. I set my projection at 2% to be conservative.
Caveat: I weigh how realistic or unrealistic financial calculators are for my situation because I’m determined to have other income streams established before retirement. The problem is I have no clue what that looks like now! Maybe it’s income properties or other businesses. In the meantime, I’m conservative in my projections to give myself more options and flexibility down the road. I recommend reading Rich Dad Poor Dad by Robert Kiyosaki if this mental model sounds similar to yours. It completely changed my perspective on money and investments.

Another helpful resource: Retirement Savings in Your 20's

6. Compound interest and the huge cost of waiting to invest

Resource: What is the cost of waiting?

If your jaw didn’t drop while using the retirement calculator, it might now. Put in the total dollar amount that you need saved for retirement (found in Step 5) into this simple calculator above. You’ll see that the longer you wait to start investing in your retirement, the cash needed to retire exponentially climbs.

More resources on compounding interest and the costs of waiting:

In a nutshell, compounding interest is how your money makes you money, and arguably, your best shot at having enough money saved for retirement. If you haven’t begun investing yet, start today.

7. How much you should have saved, by when

Resource: How Much Do You Need To Have Saved For Retirement? (At Age 30, 40, 50, 60, And Even 65)

When you are looking at resources that cite how much you should have saved by x year, date, etc. — these projections almost always assume that you are investing in high-risk funds that perform on par with the stock market. Conservative estimates usually estimate at 6%, some at 10%. If your savings are sitting in cash at the bank, you likely haven’t reached the recommended amounts.

Caveat: These types of canned projections don’t speak to lifestyle changes like career growth promotions and taking time off for family, but following the rule of thumb is of course much better than doing nothing.

8. Consider becoming your own financial advisor with robo-investing

Resource: Wealthfront (Referral Link)

I wrote here about online personal finance tools, including why I love Wealthfront and the success I’ve had on their platform. Even if you’re not ready to commit, I recommend going through the account setup process to understand the investment allocations and risk preferences that they recommend for your situation.

9. Roths or IRAs?

Resource: Roths vs. Traditional IRAs

Roth = pay tax now, IRA = pay tax later. Roths were made for young investors. In general, you make the most money by paying taxes now on what you invest vs. paying taxes later on the entire sum of your account that’s been growing interest for years. Many financial professionals recommend maxing out your Roth (currently $5,500/year) before investing in IRAs.

Important caveats.

Income limits for Roth contributions — Currently at $117K earned income for singles, but there’s a sliding scale for smaller contributions the more you make. You can find your AGI on the tax form you submitted last year as a reference.
Since the Roth is “such a good deal”, some investors are curious about how much longer it will be offered as an investment tool. Because the federal government could change withdrawal rules and limits down the road, I invest in both Roths and IRAs to hedge my bets.
For specific life events, such as buying a house and going back to grad school, you can take money out of your long-term investments or borrow against your own money. There are rules and sometimes some fees, but it’s a great resource to have at your disposal. To meet near-term goals, you should be intentional about where your money goes so you can get to it when you need it.

Withdrawing funds (Researched Dec 2016)

401K: 50% or less; You don’t have to pay taxes on the money, but you do have to repay the loan on time. The timing for repaying the loan varies, but keep in mind that if you leave your current employer, you may have to pay back the funds upon severance to avoid penalties.
Traditional IRA: You can withdraw up to $10,000 from a traditional IRA to buy a home for the first time without paying a tax penalty, though you will have to pay income tax on the amount withdrawn.
Roth IRA: You can use up to $10,000 for a first-time home purchase without triggering penalties. However, you may have to pay income tax on any portion of the withdrawal that comes from investment earnings.

10. Roll up your sleeves and get to work.

If you work through the resources and tools above, it should take you a few hours at minimum to get a thorough assessment of where you are, where you want to be, and what steps are needed to close the gap. Afterward, you’ll have a strong plan that you can feel confident in.

Recommended steps:

Spend some time in Mint or with a giant excel spreadsheet and find:

Your current ratio of income/fixed expenses/savings/discretionary spending
Use this to figure out your max rent/mortgage payment that you’re comfortable spending.

2. Analyze the financial calculator I shared and determine if you’re on track for retirement and what you need to put away to feel comfortable.

3. Determine your savings goals:

Emergency Savings
Long term savings/retirement: Money you’re okay not touching for a while
Short-term savings: Money for buying a condo, going back to school, taking a year off to backpack — whatever you’ll need money for in the next 3–10 years.
Revisit your current ratio and what you now feel comfortable spending on rent/mortgage.

4. Determine if you’re comfortable investing on your own (Wealthfront, Betterment, E-trade) or if you want to work with a financial advisor. I’m happy to make recommendations on either choice.

In Closing

Talking about money can feel taboo, I get it. Rich Dad Poor Dad shares that one difference between the middle class and the eventually wealthy is that folks in the middle class never ask their successful friends and family members for advice, while the people that end up successful ask those around them how they can get there. I hope you’ll share what’s worked for you and what hasn’t, and challenge me on my recommendations. From one young professional to another, let’s make each other better, savvier financial investors.

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