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Financial Advice for Personal Finance Novices

Posted By Jim On 08/01/2007 @ 2:22 pm In Personal Finance | 9 Comments

Very often the posts that you see on my site are generally about a single topic that I’ve recently dealt with (or read about) and so it’s difficult for someone who is new to managing their own finances to figure out what exactly it is they should be doing, especially if terms like Roth IRA, 401K, emergency funds, loans, mortgages, etc. aren’t entirely familiar to you. So, what I outline below is a step by step guide to what you should consider doing if you’re recently coming into control of your own finances, such as if you just started your first job, moved out of your parent’s house, etc.

Holy Grail of Personal Finance Advice: Spend less than you earn. That’s it, ask anyone anywhere and the only piece of advice you’ll ever need when it comes to money is that you should save more than you earn. How you save that money and where you save it, that’s where all the nuances come into play, but that is the most basic of basics.

Where To Save: (and in this order)

  1. Local Savings/Checking Account
  2. Emergency Fund
  3. 401K (if you have a match)
  4. Roth IRA
  5. 401K
  6. Education savings, child care savings, travel fund, etc. (Needs)
  7. Brokerage Account

The list is a product of a rationale I outlined in a post titled Your Financial Fortress [3] in which I metaphorically outline one’s financial picture using the analogy of a medieval castle. In the above list, you can save towards any of the vehicles concurrently (don’t feel that you have to fund an emergency fund before your 401K) but the general order is generally accepted by most as the “right” order.

How To Save:

  • Re-evaluate your needs
  • Research how to reduce the cost of your needs
  • Learn to live on less (even if temporarily)

It’s like eating and losing weight, everyone knows how to do it, it’s the actual doing that is difficult and requires the most help. You might want employ tricks like putting less money in your wallet/purse, keeping credit cards in your desk drawer so you’ll have to take an extra step to spend money on it, or you might want to try zero dollar days – days where you spend zero dollars Think of those like the Atkins diet or the Miami Beach diet or the juice diet, the real savings come in real steps that you take to spend less but are obviously less gimmicky and fun. Take some time to re-evaluate everything you spend money on and think of ways to get away from spending it.

If you save $50 each month, that’s $600 at the end of the year and that’s enough for a last minute 4 day cruise to the Western Caribbean on Carnival if you book at the right time. Do you want a $5 coffee each day or save that $150 a month, $1800 year, and put it towards a much nicer vacation during the holidays?


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