The “Lucky 7” That Will Get You Started on Your Financial Journey

Personal finance doesn’t need to be hard! Most people never get a chance to learn about it in traditional education and often don’t know where to start once they graduate and land their first job. They’re excited about moving out or having more money than they’ve ever dealt with before, but they may not know what to do with it.

As someone who has recently begun my journey into finance, there are many things I’m glad I learned early on, as well as things I wish I had done sooner. The earlier the decisions you make in your life, the greater the compounding results will be later on. Little differences today can lead to big changes in the future.

I’ve also noticed that many of my peers in my age group tend to ask me similar questions, which inspired me to write this article on seven important concepts to get you started on your financial journey.

1. Budgeting

Tracking your spending and knowing where each and every dollar goes is crucial. You might be surprised at how seemingly small expenses can add up without you realizing it. There are many apps available that allow you to consolidate all your cards to track your spending in one place and view all your cash, investment, and debt balances securely.

Alternatively, you can take a more old-fashioned approach by creating a basic Excel or Google Sheets document. By entering your transactions into expense categories and subtracting from your monthly income, you gain more control over customizing your budget. Manually entering expenses makes you more aware of your spending habits.

The key is to be reasonable with your budget. You want to balance your satisfaction with your goals and finances. It’s okay to spend on eating out or indulging in that coffee, but make sure not to overspend.

2. High-Yield Savings Accounts

This is something I always emphasize: big brick-and-mortar banks often pay only 0.01% interest on savings accounts, while high-yield savings accounts offer rates much closer to those set by the Federal Reserve (around 4-5% at the time of writing). The higher rates are due to these accounts being offered by online banks, which have lower overhead costs and pass those savings on to consumers. This difference can result in noticeable monthly earnings, allowing your savings to work for you.

You can use these accounts for various purposes, such as emergency funds. The general rule is to have 3-6 months’ worth of expenses saved in case of job loss. It is also worth factoring in your out-of-pocket maximum from health insurance. During the time of writing, I had surgery for a fractured ankle and found peace of mind knowing I could cover the expenses. Additionally, these accounts are great for short-term savings for a home, a car, or even a fun trip!

3. Credit Cards

There are many strong opinions about credit cards, and for good reason. The horror stories of high interest rates if you can’t make your payments on time and the potential snowball effect can trap people in debt. Additionally, without adequate discipline and self-control, things can spiral out of control quickly. That said, there are many great benefits to credit cards if used correctly, such as only using them for purchases you can cover with cash.

Credit card rewards, whether for cash back or travel miles, are significant benefits. Personally, I’ve saved up points to pay for plane tickets, making my trip to Singapore two years ago much cheaper! Furthermore, since you’re spending the credit card company’s money first and paying it back later, you benefit from strong fraud protection. Many companies offer zero liability if you report fraudulent charges quickly. In contrast, if your debit card is compromised, it’s your own money being lost, making it less secure.

Finally, credit cards are one of the main ways to build your credit score, a number that represents how likely you are to repay debts on time, ranging from 300 to 850. This number is crucial – not only to qualify for auto or mortgage loans, but also for obtaining favorable credit terms, which can save you money over the life of the debt. It also affects renting and even insurance rates.

4. Traditional and Roth IRAs

An IRA, or Individual Retirement Account, is a type of tax-advantaged account you can open at financial institutions like Vanguard, Fidelity, and Charles Schwab. The purpose of these accounts is to store money to grow for retirement spending. The main difference between traditional and Roth contributions is that traditional IRAs offer a tax deduction when contributions are made, but funds are taxed upon withdrawal. In contrast, Roth IRAs provide no tax benefit upon contribution, but withdrawals are tax-free.

There are income limitation rules dictating whether you can contribute to these accounts, as well as limits on how much you can contribute (in 2024 the limits are $7,000, or $8,000 if you’re over 50 years old).

5. Employer Retirement Plans

Employer retirement plans serve a similar purpose as IRAs, offering tax-advantaged accounts through your employer. The most common plans are the 401(k) for for-profit companies and the 403(b) for nonprofit organizations. Contribution limits are much higher for employer-sponsored plans, set at $23,000 (or $30,500 if over 50) in 2024.

Many employers offer additional benefits on your contributions, such as employer matches or profit sharing. An employer match means that the employer will match a certain percentage of your contributions, often up to a specific amount. For example, if you contribute 3% of your paycheck into your 401(k) – let’s say $300 – your employer may match that amount. It’s highly recommended to take full advantage of the employer match, as it represents an immediate 100% return on your contributions. Profit sharing, on the other hand, is a one-time contribution made by the employer based on company profits, which doesn’t require you to contribute to receive.

It’s important to remember that these accounts are meant for long-term saving, and withdrawing funds before age 59½ usually incurs penalties. Additionally, required minimum distributions (RMDs) begin at age 73, where a minimum amount must be withdrawn annually based on life expectancy and account balance.

6. Health Savings Account

A Health Savings Account (HSA) is a powerful tool available only if you are covered under a high-deductible health plan (HDHP). If your employer does not offer an HSA, you may be able to open an HSA at a financial institution. This account provides tax deductions on contributions, grows tax-free, and allows for tax-free withdrawals for qualifying health expenses. You can reimburse yourself indefinitely as long as the account is open, but be sure to keep receipts for any expenses you reimburse yourself for!

In 2024 the contribution limit is $4,150 for individual coverage and $8,300 for family coverage, and anyone older than 55 can contribute an additional $1,000. Many people use these accounts to pay for medical expenses as they occur, but some plans also allow you to invest your HSA balance, treating it as a retirement health investment account while paying for expenses out of pocket.

7. Investing in General

Earlier, I mentioned various retirement accounts like employer plans and IRAs. After contributing to these accounts, it’s crucial to invest the money; otherwise, it just sits in cash! Many people feel paralyzed by the numerous choices available, but adopting a mindset of “simplicity is best” can be beneficial. Consider buying low-cost index funds or Exchange-Traded Funds (ETFs), which are baskets of securities like stocks or bonds. This allows you to own a portion of hundreds or even thousands of different holdings, providing crucial diversification for your investment portfolio with low expense ratios.

The allocation of your portfolio will depend on various factors, including:

Risk tolerance: The amount of volatility and loss you’re willing to accept. More risk generally means higher potential rewards.

Time horizon: How long do you have to contribute and let your money grow?

Goals: What is the ultimate purpose of this money?

After considering these factors, you can build an investment portfolio that is conservative, moderate, or aggressive, depending on the ratio of stocks (riskier) to bonds (safer). People are emotional creatures; during tough times, emotions often drive decisions over logic and reasoning. For instance, during significant market dips – like those that occurred in 2008 or 2020 – people often panic and sell at a loss, missing out on subsequent rebounds. History shows that markets tend to correct after large dips, but it’s emotionally challenging to watch portfolios drop by 30% or more. Therefore, it’s essential to acknowledge your emotional side when investing; even the “perfect” portfolio won’t matter if it’s not executed properly.

The key is to stay the course and remain invested in the market consistently. Most market returns happen on just a few days each year, and no one can predict when those days will be. That’s why the saying “time in the market beats timing the market” has endured to this day.

Ending Remarks

These are just some basics to get anyone started, from those in their early 20s to individuals at any stage of life. Keep your goals in mind, simplify your approach, and be aware of your emotional tendencies as you begin your financial journey. I’m always rooting for everyone!