Five Universal Truths About Personal Finance
By Alexander Sterba, Financial Advisor
Starting your personal finance journey can seem like a daunting task. There is tons of accessible information about investing. One click on Google, Amazon, or Spotify will lead you to a so-called “expert” on the topic. But who should you listen to? What should you look at?
It’s important to remember that personal finance can — and should — be simple. To sort through the clutter, I read four personal finance books to see what knowledge is presented across the spectrum. Here are five ideas I found that should help anyone looking to take control of their finances.
An Emergency Fund Is Always Step One
Establishing an emergency fund should be step one in any personal finance journey. As a general rule of thumb, three to six months of living expenses is a solid baseline. This enables you to buy time in case of an emergency (job loss, home repair, accident, medical issue, etc.). For example, someone who spends $4,000 per month should have no less than $12,000 in a checking account.
This is not a hard and fast number. More conservative people, or those in a volatile industry, might need or want twelve months of expenses. The key to reaching the optimal emergency fund target is knowing both your personal psychology and your spending and saving numbers.
Tax-Advantaged Accounts Are Important
The personal finance authors doubled down on this point: Tax-advantaged savings accounts such as Roth IRAs, 401(k)s, and IRAs are crucial to building wealth. While there can be healthy debate about which account to invest in, utilizing these accounts is the natural way to start investing. Roth IRAs and Roth 401(k)s offer tax-free growth, while traditional IRAs and 401(k)s offer tax savings on the front end.
In addition, many employers now match retirement plan contributions. This is free money! Be sure to always contribute to the matching limit (if you don’t know what it is, check with the HR or benefits specialist at your company).
Humans Are Emotional — Behave Like a Robot
As humans, we tend to behave in odd ways when it comes to our finances. One method to bypass our emotional selves is to set up automatic flows and payments. Even for the less technically savvy, smartphone apps and user-friendly websites make it easier than ever to automate finances. 401(k) contributions provide a good example. The contribution never reaches our final paycheck, so in our minds it doesn’t even exist. This is a great way to start automatically investing.
In addition, be sure to set up automatic payments to pay off your credit card in full. This eliminates the chance to accrue high-interest debt. Most banks and savings accounts also make it easy to automatically send and “bucket” money toward different goals such as a house, vacation, or wedding. Lastly, if you are adding to an account like a Roth IRA, be sure to move funds into the account, and also purchase investments on a regular schedule. The easier we make it on ourselves, the more we tend to save and invest.
Utilize Low-Cost Index Funds
Savings accounts are easy; account values remain stable. However, the logistics and emotions involved in investing in the stock market can get complicated in a hurry. Low-cost index funds that track the broad stock market are a common starting point to build wealth. Investment companies offer low-cost products that help you take advantage of the long-term upside of the market. Specific asset allocations and funds depend on individual circumstances. That is why a long-term financial plan is a necessity. However, when it comes to initial investments, don’t overthink your options. Simple index funds are a great foundation.
Not All Financial Advice Is Created Equal
There are thousands of finance experts out there. If you want to seek help, make sure the advice you get is truly in your best interest. This means ensuring all advice is held to the fiduciary standard of care. In addition, a strong financial plan should be an integral part of your investment journey. Any financial recommendations should be based on your specific goals, needs, and objectives. Just remember, fiduciaries and financial planning are the starting points for a good relationship with a financial professional.
Hopefully there is something here that speaks to your personal journey with money. With any journey into personal finance, the above points are the basis for a strong connection to your money. As always, if you have any questions or want more detail on any topic, feel free to reach out to us at Marcum Wealth.
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