I wrote this as an email to my brother but I figured it would fit nicely on here as well.
This is a TL;DR guide to personal finance, for the newly graduated college kid.
The goal of this guide is to give you the freedom to choose what to do with your life.
The freedom to choose where to live, what kind of work you want to do, and even whether to work or not at all. More money, more options. It doesn't automatically make you happier. It just gives you more choices.
The minimum length of your working career is entirely determined by one variable: your SAVINGS RATE.
SAVINGS RATE = (after tax earnings - spending) / after tax earnings
My savings rate is 63% which results in a minimum 11.3 year working career
I started working at 22, so I will retire by age 33 or earlier.
If you want to retire early, get your savings rate up.
Savings rate has two components: spending and earnings
SPENDING
Don't spend all your money, duh. Get a little self control. Spending money on dumb stuff like a $5 coffee every day ADDS UP (over 10 years of buying every weekday = $13.2k SPENT. When you include compounding returns @ 5% you could have earned, it costs you $17k). And, more importantly, it doesn't really have much of an effect on your overall happiness. Real happiness comes from God, family, friends, and physical health, in that order. No wonder
Americans aren't very happy.
List of ways to not waste money, in no particular order:
- live with roommates. housing is a huge expense
- drive less. Gas, tires, insurance, repairs, stress, obesity. All these costs rise with every mile you drive. see about living close to work to reduce this
- cook your own food. eating out is expensive(over time). McDonalds costs 2-4x more than if you just made your own dinner. Get a crock pot. It takes no skill to make delicious meals.
- Pay off your debt. It takes no skill, and you get a guaranteed return on investment.
- use a cheap cell phone plan. You probably don't need unlimited data. I use Republic Wireless http://republicwi.re/2AGQkAS
- pick a high deductible health plan. It's cheaper and encourages you to take care of yourself and not visit the doctor.
- dont get a personal trainer. not worth it. working out is easy to do for free. run, calisthenics, join a rec sports club. or pay a cheap $40/mo for a gym membership.
- dont buy a new car. good car buying advice
- dont pay for cable. lol have you heard of the internet? it has everything.
- cultivate entertainment habits and hobbies that are cheap/free. hiking, sports, brewing your own beer, building things, playing board games, etc.
- Use a good cashback card. NEVER EVER UNDER ANY CIRCUMSTANCES KEEP A BALANCE ON YOUR CARD. pay it off every month.
- Use a cheap investment broker
EARNING
A job is not a good way to earn money, because it takes up a lot of your time, and has fixed/limited upside. We (mostly) all need to do it for a while, but in most cases you're better off on your own, unless you can really climb that corporate ladder and make real bonus money. Otherwise, be sure to negotiate as much salary as possible. Ask for a raise. It doesn't hurt to ask. Don't be a coward about it.
Real earning comes from ownership. Own productive assets that earn you money while you sleep. The absolute easiest way to do this is to buy low cost mutual funds and ETFs like
VNQ VYM VIG SPY DIA. Don't know what an ETF is?
Read this, you absolutely DO need to know what this is.
Simplest investing advice possible:
Every month, dump your excess savings into your investment account and buy more shares of your broad market-tracking ETF of choice. It doesn't super matter which you pick. Never sell. Stock market crashed and you lost 50% of your savings? DO NOT SELL. Either the world is ending or its not. If it is, the money wont help you, so don't waste your time selling, or the world is not ending, and selling now is a terrible idea, since in a few years they'll be back above where they were.
The most high power/go-big strategy for earning is to start your own company. If you want to do this, do it. It's a lot of work though. Most people aren't cut out for it.
A middle of the road strategy for earning is to do your own investment research and try to beat the market average returns. This is very difficult, but can be done. If you are interested in doing this, prepare to waste a lot of money learning before you actually do figure it out.
CLOSING POINTS
Your basic money flow should be this:
Paycheck - basic necessities = savings
savings => ETF investments each month.
you can retire when your investments are worth 25x your annual spending. Or not, whatever floats your boat.
