The Ultimate Guide to Kickstarting Your Personal Finance Journey (for 2023)
Approximately 78% of full-time workers in the United States live paycheck to paycheck in 2019 according to a report by CareerBuilder.
This number is so astoundingly high because people often get overwhelmed and procrastinate on getting their finances together. On top of that, how to manage your finances isn’t taught in school. Yet I believe this is one of the most important skills you need to design a life that you love.
Getting started in your personal finance journey is a daunting task.
Money-related topics are taboo to talk about and emotionally draining.
But today, I want to share the basics of how I got started on my personal finance journey and saved $100K in less than 3 years of graduating college.
If you are new to personal finance and want to get started on the right foot, then this guide is for you! In this article, I will explain some of the most important (and actionable) steps to take in order to set yourself up for success with your finances.
The Cash Flow Equation.
Cash Flow = Income – Expense
This is the most basic concept in your personal finance journey that you need to understand.
The only way to make sure you start accumulating more and more money in your life is to either increase your income or decrease your expenses.
I learned how to keep my expenses under control during college. In college, I only was making a couple of hundred dollars a month from my part-time jobs. I was very scrappy and creative on how to have the most fun while spending the least amount of money. I learned to be frugal by saving money where I can, but still budgeting and spending money on experiences that created memories that will last a lifetime.
Frugality is not the same as deprivation. Save where you can, I believe certain experiences are priceless, so also make sure to spend on the experiences that are worth it to you.
After graduating, I lived at home for a year (bless my parents for letting me live with them), which saved me +$1,300 a month, which is equivalent to +$15,600/year. This kickstarted my financial journey as it gave me the funds to start my investment journey as well.
While I was living at home, I focused on increasing my income. I made sure that I had high-value skills that would allow me to land a good corporate job. I got an accounting role at one of the biggest firms in the world. I also job hopped after about a year into a financial analyst role, which gave me a 40% increase in my salary.
The Cash Flow Equation is a simple equation that should be the basis of how you model the early stages of your financial spending.
Next, I’ll go more in detail about what to do with the extra money to set yourself up for success, as well as how to keep your expenses down.
Get an emergency fund.
The first stop after you save a bit of money is to start an emergency fund.
An emergency fund is a stash of cash that you can use in case of an unforeseen financial emergency.
What counts as an emergency?
An emergency is something that is absolutely necessary and cannot be avoided. For example, If your car breaks down and needs to be repaired or if an unexpected medical expense arises, having money saved up will help keep you from going into debt or taking out a loan. This fund is not your last-minute shopping fund or your going-out fund. It is a last resort stash of money to keep you out of a life-and-death situation, like losing your job, a medical emergency, or if a natural disaster hits your home and you need money NOW to find housing.
Automate the Process
I found that the key to building up your emergency fund is to automate the process. You can open a new high-yield savings account (more on this later) and automatically wire over $100 or so dollars every week or month until you hit your target emergency fund. A good rule of thumb is to first save up $1000 in your emergency fund. Then, you can increase this number to 3-6 months of your total expenses.
Create a new High-Yield Savings Account
I personally found that having a separate checking account for your emergency fund is helpful for a couple of reasons. 1. Out of sight out of mind: if you are struggling with impulse control for spending, having the money somewhere else will help you with your urges to dip into your emergency fund. 2. You get more interest if you use a high-yield savings account. 3. It’s just easier to separate your spending money from (no spending) money.
Saving for an emergency fund may seem daunting, but once you’ve automated the process and established a habit of living off less, you’ll be able to reach this goal in no time. Start small and contribute however much you are comfortable with, every little bit counts! I promise you that once you have this emergency fund, you’ll be able to live with more peace of mind knowing that you took the time and money to take care of your future self.
Make a budget.
A budget is one of the most essential tools you can use to reach financial independence. A good budget will not only help you save money, but it can also keep track of how much money is coming in and going out. It’s essential to stick with your budget as closely as possible, but also remember that life is unpredictable and be kind to yourself if you fail to stick to your budget for a certain week or even month.
Being open and willing to learn is the first step to budgeting. Your budget will always evolve, and as long as you are trying to improve yourself, you will be able eventually to find the system that is perfect for you.
Budgeting isn’t easy, and sometimes it takes several attempts before finding what works best for your lifestyle and goals. But once you get into a groove with budgeting, there are plenty of ways to keep track so that it doesn’t feel like work anymore
Pay off your debt.
The first thing you should do when you start your personal finance journey is to pay off any debt that you have. Debt can be a huge burden, and it’s important to get rid of it as quickly as possible so that you can start saving for the future and building wealth. Interest rates for certain types of debt, like credit card debt, can be a huge and unnecessary expense every month.
Pay off credit cards:
Credit card debt is probably the easiest form of debt to eliminate since there are no penalties associated with paying off credit cards early (as long as it’s not an introductory promotion). Interest rates for credit cards are also ridiculously high. After you have your emergency fund, it is crucial to get out of credit card debt and stay out of it as well.
Just make sure that whatever amount is left over from paying off your credit card balances gets transferred into savings or invested somewhere else so that it doesn’t just go back into being spent on new purchases!
Student loans: Student loans are also relatively easy to pay off because unlike mortgages or car loans, which often come with high-interest rates, the interest rate on student loans tends not to be very high at all (it depends on what type of loan).
However, if possible try not to take out student loans if at all possible. Even though they may seem like a good option at first glance due to their low monthly payments, they end up costing much more than other types of borrowing.
Start investing and diversifying your money.
It’s time to move on to the next finance equation once you got the previous steps mastered:
Net Worth = Assets – Liabilities
Ultimately, my goal is to increase my net worth and build wealth so I can retire comfortably.
Investing is the key to increasing your net worth.
Although investing may feel like you are “spending money,” what you’re actually doing is just converting one asset (cash money) into another asset (stocks, bonds, other assets, etc).
There are many different types of investing that can yield you high returns. I started out by investing in stocks, specifically diversified index funds. In my opinion, this is the most beginner-friendly and low-risk way to grow your net worth over time.
As you gain more experience with investing, you can also diversify your portfolio across different types of assets, real estate or Bitcoin, so that if one goes down, another may go up.
Make sure that you understand what you’re investing in and start out small. You don’t want too much pressure on your finances if it doesn’t work out as planned. It’s important to start investing early, but a good investment strategy is long-term and sustainable.
Save for retirement, and start early
Saving for retirement is a critical part of your financial security. If you don’t save, you’ll never have enough money at the end of your working life to enjoy the same lifestyle that you had when you were younger.
The earlier you begin saving, the better off your future self will be due to the magic of compound interest. A $1 investment at age 25 grows into $2 by age 65 if it earns an average annual return of 6%. An investment made at age 35 grows into only $1.60 after 65 years–a difference of nearly $1 million!
Here is a compounding interest calculator for you to calculate just how much your $5 Starbucks money is worth in 20-30 yrs if you invest it instead.
Although investing in stocks carries risk (they can drop in value), diversification mitigates that risk by spreading out investments across different types of assets such as stocks and bonds (and other types). Diversification makes sure that no one holding fails completely if there’s a downturn in any one sector or type of asset class; instead, there will always be someplace where things are doing well enough so that overall returns remain positive despite some losses among individual holdings.
Starting early and being consistent with it is the best way to ensure you reach your financial goals.
Conclusion
The most important thing to remember when you’re starting your personal finance journey is that the journey matters. No matter where you are financially, there is always room for improvement.
I’ve learned so much since starting my financial journey 3 years ago, but I also recognize that there is so much more to learn. I hope the mistakes and lessons I make along the way will help you reach your financial goals as well.
I hope this guide will help you get started on your financial journey. It’s not easy, but I can tell you that it’s worth it! If you’re feeling overwhelmed or confused by all of the information out there, feel free to reach out to me or comment below. I’ll do my best to answer your questions as it is my goal to help others reach their financial goals and live life without the stress of finances.