Personal Finance 101: The Fundamentals
Although I’m still young according to most, I feel like I’ve learned a lot about personal finance in my short adult life. Looking back, I have always tried to be responsible with my money, but I still can’t believe how much there is to know about personal finance, nor how much there is left to learn. I’m sure I could write a retrospective every year from here on out about “What I’ve learned last year about personal finance” and only begin to scratch the surface. The good thing is that the Pareto Principle still applies.
You don’t need to know everything about personal finance, but if you know just these few following things, I think you’ll be better off than most. At least better off than I was a few years ago.
Here we go.
1. Maintain a 3–6 month savings buffer (emergency fund)
This is one of those pieces of personal financial advice that always sounded nice in theory, but I wasn’t sure just how important it truly was in practice. There are many reasons why this is important, but this is the most important reason to me:
A savings buffer allows you to spend your valuable time and attention focusing on things other than money.
There are many rules of thumb out there around how you should automatically save 20% of your total income and whatnot, but I understand this isn’t applicable to everyone. Either it’s unfathomable because you may just be getting by paycheck to paycheck trying to cover all of your bills, or you may be in an exceptionally healthy financial position and would rather deploy your money someplace besides a low yield savings account.
Moral of the story is: Both are OK.
The important thing here is that 3–6 months savings is enough to not feel strapped paycheck to paycheck, but not so much that you’re not making your money work for you. This savings goal may be a slow, challenging process, but even setting aside an extra $20, $50, or $100 a month to build up to this 3–6 month buffer will reduce stress and give you the clarity you need to focus on making an impact on the world, not just getting by.
There are many tools out there to help you save (Mint and Qapital to name a few), but it’s not that complicated. Personally, I use a simple excel spreadsheet, but you can do this as a back of a napkin calculation by doing the following:
Target Savings = Total Monthly Expenses * Months of Runway
Total monthly expenses include everything you may need to spend to keep you afloat, not necessarily living your current lifestyle. This includes things like rent, utilities, car payment, car insurance, health insurance, food, etc. I chose not to include an additional amount of discretionary spending in the category.
Once you have your Target Savings met and you’re ready to start saving (or ready to allocate and set aside a chunk of your current savings as your emergency fund), the next most important piece is deciding where to keep your savings. Keep in mind,
Savings somewhere is better than savings nowhere.
That being said, some savings accounts are significantly better than others. You’ll want to look for a savings account where you can earn at least a 1% interest rate on your money. That may sound small, but compared to some savings accounts (Bank of America for example at 0.01% 🙄) it could be as much as 100x higher. Some examples of savings accounts that have a >1% interest rate include Ally (1.15%), Discover (1.15%), and Goldman Sachs (1.2%).
To put it in perspective, that’s a difference between $0.50 and $50 at the end of the year with only $5,000 in your account. An extra ~$50 for doing the exact same thing, just with different banks? I’ll take it.
2. Pay off debt
Paying off debt, if you have it, is one the most important things to address for anyone who’s trying to improve their financial health. I understand that incurring debt to free up capital can be a great investment strategy for some, but for the sake of this post, I’m referring to negative, undesired, harmful debt. I believe debt is the most important thing a person should address to improve their financial health for two reasons.
The first: Because it’s expensive. As of 2016, the average amount of credit card debt carried by US households was $16,425*.
The average. Some less, but some even more.
The more shocking number in my opinion? The average amount of interest paid by US households was $1,292. Incurring debt, whether it was intentional or not, is costly. This becomes even worse if you’re battling compound interest like quicksand, or getting hit with overdraft and late fees at the same time.
The second: Investing in debt has guaranteed returns. If you’re paying back student loans that are costing you 6.5% interest and you decide to start paying them back early, guess what? With 100% confidence you’ll start earning 6.5% on your money!
Inversely, that means if you decide to forgo paying back your debt and investing it somewhere else, or worse, spending it, you end up starting out 6.5% in the hole with the possibility of losing even more.
Either way, if you walk away from this post with more awareness around how costly debt can be, now or in the future, I’d consider this read a win.
On to a couple other things I’ve learned.
3. Compounding interest is a beautiful thing
Some things are best illustrated with a story.
This is straight out of Unshakeable:
Two friends, Joe and Bob, decide to invest $300 a month. Joe gets started at age 19, keeps going for eight years, and then stops adding to this pod at age 27. In all, he’s saved a total of $28,800.
Joe’s money then compounds at a rate of 10% a year (which is roughly the historic return of the US stock market over the last century.) By the time he retires at 65, how much does he have? The answer: $1,863,287. In other words, that modest investment of $28,800 has grown to nearly two million bucks! Pretty stunning, huh?
His friend Bob gets off to a slower start. He begins investing exactly the same amount –$300 a month– but doesn’t get started until age 27. Still, he’s a disciplined guy, and keeps investing $300 every month until he’s 65 – a period of 39 years. His money also compounds at 10% a year. The result? When he retires at 65, he’s sitting on a nest egg of $1,589,733.
Let’s think about this for a moment. Bob invested a total of $140,000, almost five times more than the $28,800 that Joe invested. Yet Joe has ended up with an extra $273,554. That’s right: Joe ends up richer than Bob, despite the fact that he never invested a dime after the age of 27!
The power of compounding can also be illustrated with the penny example.
Question: Would rather have a million dollars now or take a penny now and double the amount every day for the next 30 days?
Answer: If you decide to vouch for the penny option, you’d have $5,368,709.12 at the end of your 30 day payout. More than 5x the alternative offer!

The moral of the story is that compounding interest is an incredibly powerful thing if you’re willing to be patient. In the example above, you would have had to endure the thought of potentially taking the wrong deal for 28 of the 30 days before you’d see the deal payoff. Compounding anything is powerful for that matter. Leverage it wherever you can.
4. Contribute to your 401k (especially if your company matches!)
Please ask your employer if they do any 401k contribution matching 🙏🏼
Some employers match as much as 6–8%*! This is where things can get tricky. For example, one of my past employers had a matching program where they matched 50% of the first 6% that I decided to contribute to my 401k (Traditional and Roth) each pay period. If I contributed more than 6 percent of my eligible pay, they matched 3% of my annual compensation.
For example’s sake, say an employee made $60,000 a year. Here’s how that breaks down:
- $60,000 annual compensation x 6% deferral x 50% company match = $1,800 in matching contributions from that company per year
That’s like giving yourself a $1,800 bonus!
That’s not to mention the additional amount my employer would have matched if I elected to contribute more (which I did, and you most definitely should if you can).
Keep in mind 401k accounts have a cap on the maximum total contribution you can deposit per year. At the time this article was published (2017), the maximum amount an individual can contribute to their 401k is $18,000 per year.
* Your employer may elect to match 100% of your contributions up to a percentage of your total compensation, or to match a percentage of contributions up to the limit. Though the total limit on employer contributions remains the same, the latter scenario requires you to contribute more to your plan to receive the maximum possible match. Some employers may match up to a certain dollar amount, regardless of income, limiting their liability to highly compensated employees. For example, an employer may elect to match only the first $5,000 of your employee contributions.
5. Ask your company about an HSA
A Health Savings Account (HSA) is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual’s employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision and over-the-counter drugs.
So what’s so special about them?
An HSA is a triple tax-advantaged investment vehicle – mic drop.
This means that you can contribute to the account tax free (ba da bing), your invested contribution will grow tax free (ba da bang), and you can spend those earnings on qualified healthcare expenses – wait for it – tax free (ba da 💣).
So what if you do have medical expenses? What then? Well, due to the tax advantages, I tend to pay for my few and far between medical expenses out of pocket rather than spend the tax advantaged money from my HSA account. This is assuming that the interest gained on the money in my HSA account will be worth more than the post-tax income I’m using to pay for the expense. These may be slim margins to start (depending on total expenses), but again, compounding interest is powerful and taxes aren’t cheap.
Keep in mind that this insurance plan is not for everyone, but if you’re a relatively healthy individual who has infrequent medical expenses, this may be the plan for you.
6. So you want to invest? Start with passively managed index funds.
The first reason is historical data, and the second reason is fees.
Let’s start with some data.
For the five-year period ending in 2015, 84% of large-cap funds generated a return less than the S&P 500. In the 10-year period ending in 2015, 82% of large-cap funds failed to beat the index.*
I’m sure there’s a line of financial advisors out there who are more than ready to try to prove me wrong on this, but from everything I’ve read it’s incredibly hard to outperform an index fund. In order for you to believe me, let’s start with “What the hell is an index fund?”
In order to understand an index fund, you’ll need to know what a Stock Index is.
Thousands upon thousands of individual stocks are traded in the United States and around the world. A number of so-called indexes have been set up to track how a particular part of the stock market — or the stock market as a whole — is doing. There are indexes that track large-cap companies, small-cap companies, the entire stock market and so on. One of the most common indexes is the Standard & Poor’s 500, known as the S&P 500, which represents a broad cross section of 500 large American companies.
So an index is a pre-defined selection of various companies, and their publicly available stock. Instead of actively trying to select the best performing stocks for a time period, an index fund hedges, and buys a little bit of every single stock, and matches the overall performance of the market instead. This way a majority of the company’s gains cover the loss of all the others, resulting in an average return of 10% since it’s inception, with fees around 0.14%.
The second reason: Fees.
This is the other most commonly cited advantage of index funds. The alternative to an index fund would be an actively managed portfolio. This means, you, as the investor, would pay a financial advisor a fee to manage your money for you. This fee commonly ranges anywhere from 0.75% to 1.5% annually on your entire amount of assets (money) that they have under management.
This doesn’t make sense to many people because this would mean that the financial advisor would have to out perform the passively managed index funds (which have historically outperformed them) by the difference between their fees and the index fund’s fees.
In simple numbers, that means if the financial advisor’s fund costs 1% annually and the index fund costs 0.14% annually, the advisor’s fund would have to outperform the index fund by 0.86%.
Remember the power of compounding? The additional caveat behind the additional fees is the opportunity cost of not having those fees (in our example above 0.86%) in the market, compounding over time.
So what do financial advisors have to say about this?
Well, one of the most common (and valid) objections to the index fund approach is that although the index fund is technically a package made up of many various stocks, a single index fund only represents one asset class. If you went with a financial advisor, they take the time to diversify (spread your money) across multiple asset classes to help prevent against market corrections or significant losses in one particular asset class.
The most common counter to this objective is robo advisors such as Wealthfront, or Betterment who take on the responsibility of spreading the investor’s money across 7+ asset classes for a slightly higher fee (~0.25*) than index funds, but a significantly lower fee than actively managed funds.
I’ll finish off this lesson learned with the fact that everyone has a different risk tolerance. There have been many people who have done incredibly well investing in one-off stocks, real estate, cryptocurrencies, etc. These are all lucrative in their own rights, but if you’re just starting out, I’d personally err on the side of developing a safety net with conservative, long-term investments that leverage compounding gains first, and then start making more risky investments in the future.
To each their own.
7. Bonus: Health and education – two things I nearly never hesitate spending money on
By hesitate, I mean spend an extra amount of mental overhead debating whether I should spend a little more, or try to cut corners to save a little extra. If I don’t have the money, especially if I haven’t addressed the 6 previous points in this post, I’d still be incredibly diligent about how I spend my money. By not hesitating, I’m not saying I’ll go buy a $10,000 road bike, but I am saying I’d never think twice about buying a reliable pair of running shoes if I have the money and need them. Here’s why.
The health category is something I never hesitate spending money on because it’s the one category that consistently keeps me feeling energized and confident. Being healthy commonly kicks off a whole chain reaction of great returns for me. If I can get a great morning workout in, I’ll most likely make healthier food choices throughout the day. I’ll most likely be in a more happy, optimistic state. I’ll be more likely to maintain energy levels and focus throughout the day. The results are incredible, and by doing these things, I’ll most likely be a better partner, son, brother, co-worker, and friend.
For me, the health category includes a breadth of categories, activities, and choices. A few of these categories include lifting weights, HIIT training, long duration cardio, and nutrition. This means if I’m considering signing up for an extra personal training session, 9 times out of 10 I’d go for it. If I think preventative physical therapy is slightly expensive, I’ll do it anyway. If I need equipment for running, cycling, swimming, or some other athletic activity, I try to buy it sooner than later. If my two meal options are a slice of pizza or a salad, I’ll not only get the salad, but I’ll make sure to add chicken and tack on a bottled water (if they don’t have tap).
As for education, not only will I not hesitate, but I’ll most likely pay a premium for it. I think this quote sums it up the best:
“Travel is the only thing you buy that makes you richer” ~ Author Unknown
Education, including travel, is not only the one thing that you can buy that makes you richer, but it’s the one thing you can buy that will make you exponentially richer.
Drawing from the compounding effects example earlier, if you could read one more book today that enables you to make one better decision tomorrow, and that one better decision enables you to make better decisions for the rest of your life, I find it hard to begin to put a price tag on the initial cost of that book. This applies to many things in my mind: books, classes (especially a coach for a deliberate practice), lessons, tickets, or transportation costs to someplace you’ve never been – the list is endless.
As mentioned earlier, I’m sure there are many other things I could and should be doing with my money, but these are a handful of things I’ve chosen to invest my money in over the last few years, and they are definitely things I wish I knew to invest in years ago. That being said, I’m always learning! Please don’t hesitate to reach out if you disagree, have any advice, or especially if you learned something new! Also, let me know in the comments if there’s anything you’d like covered in a Personal Finance: 102 follow-up post.
P.S. Thanks for reading this far! If you found value in this, I’d really appreciate it if you recommend this post (by clicking/holding the 👏🏼 button) so other people can read it too!
