Money management 101
6 August 2019
Money is scary.
Not so long ago, I preferred not to know exactly how much money I have than to face the truth. Proper money management and investing have always been something I wanted to figure out "one day".
This January, with the usual "new year, new me" motivation, this day finally arrived. I spent a couple of weeks researching money management, talking to friends, and experimenting. The results were quite satisfying, and now, half a year later, I am confident enough that they really work to share them here with you.
Disclaimers and philosophy
All the usual disclaimers apply. I am not a financial advisor, use your own judgement.
A lot of tools described here are US based, but you can either use them worldwide or find your local alternative.
Finally, my money management philosophy is quite simple. I am not particularly enjoying investing and such, and want to spend on it as little time as possible. Thus, I am always choosing the easiest, passive long-term solutions.
What to do
Here is what I do for money management, and you probably should too:
Use common sense.
Don't spend more than you earn. Don't take unreasonable loans. Pay off any debt you may have.
This all should go without saying, but it's probably the biggest problem for a lot of people, so worth mentioning explicitly.
- Save. Aim to save at least 10–20% of your income. It's always possible.
Track your money.
This is the most basic, and the most helpful step you should take. Knowing how
much you have is the foundation for everything else.
I am not a big fan of tracking everyday expenses (bank statements are usually enough), so I just track all my bank and investment accounts once a month in a Google Sheets document. It looks something like this:
Have an emergency fund.
Before you do anything else, make sure you have enough money in case of an emergency, or if you would want to change your job, or for any other similar situation. The general rule of thumb is to have enough money so that you could live on them for 3–6 months.
These funds should be safe and easily accessible. One of the best and easiest options is to keep them in the savings account. At the time of the writing, highest interest savings accounts in the US like Marcus by Goldman Sachs and Wealthfront offer upward of 2% annual yield. You can use any of them.
- Maximize your 401k or any other retirement accounts. If your job offers some kind of 401k match (like 50% up to some limit in a lot of tech companies), use it to the fullest. In most cases, it's free money.
Invest in index funds. Index funds offer an easy and safe way to invest. Think of them as investing in the stock market, but instead of buying individual stocks, you invest in a portfolio consisting of hundreds of stocks and bonds. This allows you to diversify and minimize risks. A typical simple portfolio consists of investing in the US stocks, international stocks, and bonds.
One of the most popular and trusted options is to build a simple Three-fund portfolio on Vanguard. This will require a couple of hours of reading and setting up your account. After that, it's mostly invest and forget.
Or you may go an even easier way like I do, and use robo-advisor like Wealthfront or Betterment (be careful: you shouldn't use both of them together as it will mess up your taxes). Robo-advisors are investment services that build your portfolio, invest, and manage your money for you, so you don't have to do anything. For that, they take a yearly fee of around 0.25% of what you invest, but it's said that because of smart money management they do (i.e. tax-loss harvesting and other fancy stuff), it's worth it. And actually, under the hood both Wealthfront and Betterment are often based on the same stock funds as used by Vanguard.
You can also use my Wealthfront invite link to get $5000 managed for free.
Finally, once you start investing, continue doing so on a regular basis, and don't take money out for many years. Let the compound interest work for you.
Credit score and credit cards.
A high credit score is important to get good credit cards and loans. But I found that there is no need to
worry much about it – just pay off your credit cards fully every month (tip: use autopayment) and that's it.
In terms of credit cards, here are the ones I have and recommend:
- Discover it Cash Back – credit card that is easy to get even if you don't have long credit history, so it is a good choice for the first credit card. It offers 1% cashback on everything, and 5% cashback on rotating categories each quarter.
- Amazon Prime Rewards Visa Signature Card – if you have Amazon Prime (and you probably should), you can get 5% cashback on everything at Amazon.com and Whole Foods with this card. This is a great deal.
- Chase Sapphire Reserve – probably the best travel credit card out there. Despite hefty annual fee of $450, it's worth it: you get $300 on travel each year, 50000 bonus points (equal about $750 on travel) when you open the card and spend $4000, and 3% cashback on travel and dining. Plus, my favourite perk: with this card, you get a free membership in Priority Pass, which gives you access to more than 1200 airport lounges worldwide. I used this to get into the lounges with free food and drinks everywhere from Seoul to Sharm El-Sheikh, and it's simply the best :)
Personal finances spreadsheet. All rows and data are fictional, but you can get the idea.
What not to do
What not to do is equally or even more important than doing the right things. Here is a short, not comprehensive, list:
- Cryptocurrencies – they usually are too volatile and unpredictable for the long term.
- Investing in individual stocks – buying, for example, Amazon stocks can be great short term, but it's not the best strategy in the long run. It's hard to really know the market and investing unless you do it a lot.
- Holding unstable currencies – if you hold your money in the currency that is prone to devaluation or other risks (I am speaking about you, tenge), simply don't use it for your savings. Prefer something relatively stable like dollars or euros.
- Holding much cash – keeping your money in cash (including bank accounts with no interest) doesn't make sense long term. It's prone to inflation and you are missing out on the interest you could earn otherwise.
There is an interesting alternative possibility you can explore: if you do it right, especially with high paying tech jobs, it's possible to retire early in your 30s or 40s. Reading up on Mr. Money Mustache blog is a good place to start researching.
Finally, I also found that minimalism is a great philosophy to reduce and control what you spend :)