The Ultimate Beginner’s Guide to Financial Awesomeness

This beginner's guide to financial awesomeness contains just three steps, but they're absolutely crucial if you want to achieve financial independence.

Everyone has a different dream.

Maybe life sucks. You’re trapped by debt. You want to quit your suffocating job (or find a job). You feel stuck in your hometown and you want to explore the world.

Or not.

Maybe you love your job. You’re debt-free. And you’re just trying to figure out how to maintain and protect your awesomeness for the long-term.

Regardless of your current situation, everyone shares the same basic recipe for financial awesomeness.

This is a simple, three-ingredient recipe — ideal for financial novices, who want to keep it simple. Master these three ingredients, and you won’t have to sweat about your bank balance anymore.

A Beginner’s Guide to Financial Awesomeness

At the beginner, basic, bare-bones level (ah, I love alliteration), just follow three rules:

  • Live debt-free.
  • Keep massive cash reserves.
  • Max-out your retirement accounts.

Do these three things, and you’ll be awesomesauce.

It’s simple. It’s basic. It’s as pared-down as possible.

How do you achieve this?

How to Live Debt-Free:

Spend less than you earn.

How? Here’s my favorite tactic:

Pull your savings directly from the top. Force yourself to live on whatever money is leftover.

I call this the “anti-budget,” thanks to its simplicity. You don’t need to create an elaborate spreadsheet detailing how much money you spent on dog food in the past 7 days. Save first, and spend the rest.

This is perfect for lazy people (like me) who want the easiest, most automated budget on the planet.

  • 1) Decide how much you’ll save.
  • 2) Shoot that money into a savings account. Set this up as an automatic transfer every time you get paid. (You can then transfer it into an IRA or investment account, if you want.)
  • 3) Go wild with whatever is leftover.

How much should you save? Twenty percent is the bare minimum that applies to everyone. If you want to ditch the rat race and enjoy complete financial freedom, ramp this up to at least 50 percent. And if you have any high-interest debt (APR above 8 percent), you’re in an emergency situation. Halt all spending and pay that sucker down — ASAP.

“But how can I spend less?”

Restaurants are a luxury, not a human right. Same goes for cable TV, a new shirt, and prime cuts of meat from the store. You can achieve happiness without these. (And you can splurge on this later, when you’re debt-free.)

Then hustle on the evenings and weekends, to earn extra cash. (More on this below).

How to Keep Massive Cash Reserves:

Keep at least 3-6 months’ of expenses tucked away into a savings account or high-yield CD.

How can you start accumulating that cash? At the risk of sounding repetitive: Earn more, spend less. Let’s look at both options.

The two best ways to supercharge your income are:

  • Angle for a promotion at work.
  • Develop a lucrative “side hustle.”

Since I haven’t had a “day job” since 2008, I tend to focus on the second option: hustling during the evenings and weekends.

  • Afford Anything reader Erika, who works full-time and attends grad school, earns an extra $20,000 per year by hustling during her very-limited downtime.
  • By hustling during the evenings/weekends in my early twenties, I earned enough money to travel the globe for two years. (My higher-earning friends said they’d love to travel, but “can’t afford it.” #Excuses)
  • These days, I run an online marketing company during the daytime, and invest in rental properties as my “side hustle.” This side-income produces an extra $35,000 per year, which is now totally passive.

I can hear the complaints already: “But I don’t want to work harder! I’d rather watch Dancing with the Stars!

Yes, you’ll have to hustle. Most people aren’t willing to do that. Most people are broke.

If you want to attack the “spend less” side of the equation, focus on your housing costs. Housing is the single biggest expense that people endure. The average American spends between 28 to 33 percent of their take-home pay on housing. Chop this in half, and you’ve just increased your savings by around 15 percent.

How to Max-Out Your Retirement Accounts:

Here’s the simple formula:

  • Contribute to your 401k up to your employer match.
  • Pour every dime into paying off your debt.
  • Afterwards, max-out the remainder of your retirement accounts (401k, IRA, HSA, etc.)

As a general rule, I recommend maxing-out your Roth accounts first (Roth IRA) before turning your attention to your Traditional accounts (401k). The only exception, of course, is capturing your employer match.

Where does this money come from? I hope that by now you’re spotting a pattern: The key to all of this is to mind the gap between your earnings and spending.

If you devote your life to buying generic brands, bisecting dryer sheets, and waiting in line on Black Friday for discount TVs, you’ll save maybe a couple thousand bucks a year. That’s better than nothing — but it’s not going to move-the-needle.

If you boost your income by $330 per week, you’ll have an extra $17,160 annually — almost enough to max-out your 401k.

(That’s working 15 hrs/week at $22/hr.)

Shave an extra $500 per month from your housing costs — that’s $6,000 annually — and you’ve just maxed-out your IRA, as well.


Now that you’ve maxed-out your retirement contributions, how should you invest this money? Should you listen to your cousins’ best friends’ brothers’ hot-stock-tip recommendation? Hell no.

Here’s the world’s simplest, easiest investment plan:

Rule 1: Adopt a three-fund portfolio.

Choose index funds (or commission-free ETFs) from Vanguard, Schwab or Fidelity. These brokerages offer very-low-cost funds. If you’re going to embrace frugality in any aspect of your life, be frugal about your investment fees.

If you use Vanguard, stick with these three:

  • VTSMX — Total (US) Stock Market Index
  • VGTSX — Total International Stock Index
  • VBMFX — Total Bond Market Index

If you use Schwab, stick with these three:

  • SWTSX — Total (US) Stock Market Index
  • SWISX — International Index Fund
  • SWLBX — Total Bond Market Index

If you use Fidelity, stick with these three:

  • FSTVX — Total (US) Stock Market Index
  • FSIVX — Total International Stock Index
  • FSITX — Total Bond Market Index

Rule 2: Subtract 110 minus Your Age. Put this percentage of your portfolio in stock funds; put the rest in bond funds.


A 20-year-old would put 90 percent in stock funds; 10 percent in bond funds.

A 30-year-old would put 80 percent in stock funds; 20 percent in bond funds.

A 40-year-old would put 70 percent in stock funds; 30 percent in bond funds.

A 50-year-old would put 60 percent in stock funds; 40 percent in bond funds.

A 60-year-old would put 50 percent in stock funds; 50 percent in bond funds.

If you’re an aggressive investor: modify this formula to 120 minus your age. If you’re a conservative investor: modify this formula to 100 minus your age.

How should you split the “stock fund” portion between US and international? The rule-of-thumb is between 20 to 40 percent of your stock funds should be invested in the International Index Fund, with the other 60 to 80 percent of your stock funds in the Total (US) Stock Market Index.

To keep it simple, let’s say you’re going to invest 30 percent of the stock portion of your portfolio in International Funds. Here’s how it would break down:

A 20-year-old would invest 63 percent in the Total (US) Stock Market Index; 27 percent in International; 10 percent in the Total Bond Market Index.

A 30-year-old would invest 56 percent in the Total (US) Stock Market Index; 24 percent in International; 20 percent in the Total Bond Market Index.

A 40-year-old would invest 49 percent in the Total (US) Stock Market Index; 21 percent in International; 30 percent in the Total Bond Market Index.

A 50-year-old would invest 42 percent in the Total (US) Stock Market Index; 18 percent in International; 40 percent in the Total Bond Market Index.

A 60-year-old would invest 35 percent in the Total (US) Stock Market Index; 15 percent in International; 50 percent in the Total Bond Market Index.

Your stock/bond diversification will change over time, as some funds rise and others fall. Once a year, “rebalance” so that you’re back at your ideal percentages (shifting slightly for your age).

And … that’s it. It doesn’t need to be any more complicated (or expensive) than that.

The Beginner Formula

The three steps above are beginner baby steps.

You’ll notice that I didn’t discuss investing in sector-specific funds, or allocating a small percentage to individual stocks, or buying rental properties. I specifically advocated a three-fund portfolio: I didn’t discuss diversifying based on size (large-cap/small-cap), style (growth/value), and geography (developed/emerging/frontier).

There’s a good reason for this.

The Three Beginner Steps are the equivalent of writing a chocolate-chip cookie recipe that says:

  • Turn on the oven.
  • Divide store-bought cookie dough into chunks.
  • Place on baking tray.

Can you develop more elaborate recipes? Of course.

Will they taste better? Only if you get it right. If you get it wrong, the cookies will taste horrid. (Yuck.)

Don’t try to bake from scratch if you can’t yet turn on the oven.

The 80/20 rule says that we get 80 percent of our results from 20 percent of our efforts. Buying store-bought cookie dough represents that 80 percent. It propels us from “not eating cookies” to “eating cookies.” For most of us, that’s good enough.

If you want to further optimize, you can start testing recipes that involve baking soda, vanilla extract, and expeller-pressed oils. The financial-geek equivalent is investing in REITs, tax liens, and ultrashort bond durations.

If you’re devoted enough to dig “in the trenches,” you’ve earned the right to take those risks.

But don’t jump the gun. (I know — I’m mixing metaphors. Cookies and guns.) “Done” is better than “perfect.” This isn’t a guide for advanced or intermediate investors; it’s a guide for beginners. And if you’re getting started, the most important move is to START.

Start small. Start simple. Start slow.

Start now.

Don’t Jump the Gun (and/or Burn the Cookies)

The single biggest mistake that beginners make is forgetting that they’re beginners. Too many people try to jump from “beginner” to “advanced” without taking the intermediate steps.

That’s the financial equivalent of burning an entire tray of cookies.

As a beginner, be neither swayed nor scared.

Don’t Be Swayed — Don’t be swayed by some get-rich-quick hot stock tip. (And please NEVER utter the phrase: “I’ll live in this house, and then maybe rent it out for awhile, and hope that it’ll rise in value.” That’s not a business strategy; that’s gambling.)

(“But I know someone who …!” Yeah, and I know someone who won at blackjack in Vegas. So?)

Raise your right hand, and make the following pledge: “I will ONLY buy a rental property AFTER I learn how to calculate net operating income, cap rates and the cash-on-cash returns.”

Don’t Be Scared — Don’t be scared away by the talking heads who want you to believe that you need to diversify into 50+ different mutual funds, based on criteria such as size, style, geography, duration, bond-rating, liquidity, sector-specific, precious metals, commodities, and management style.

Many people in the financial industry like to overcomplicate things. Probably because they know you’ll eventually throw your hands in the air and say, “Oh, just f*** it. This is too complex. You handle it. Make decisions for me. Here’s 1 percent of everything I’ve got — keep it as your fee.”

As I said: If you’re going to be frugal in just one aspect of your life, be frugal about your investing fees.

It doesn’t need to be complicated. Or expensive. Or dependent on a “hot tip” from your second-grade-teachers’ uncles’ dog-sitters’ third-cousin.

Just stick to the beginner recipe. Eat cookie-dough from the wrapper. Live debt-free, with cash reserves and a solid retirement. You’ll be fine.


  1. says


    Thank you for another great post. This stuff is soooo important and I wish more of my friends thought this way, because I feel that they’d be in a much better position if they did. Especially since getting into these habits NOW at age 25 would pretty much set us up for life! I think I’m on my way there, but I’m one of the lucky ones… I was brought up in a super frugal family, so that’s all I know. Besides, hustling is in my nature! I’m all about working your tail off to achieve your financial goals – besides the $, it is such a rewarding feeling! I think as long as you don’t make $ your be-all, end-all, and take the time to have fun along the way too, you are set :)

    Again, great post!


  2. says

    Another great article! I’ve seen lots of Vanguard recommendation but I have my investments in Fidelity-would I be better off switching to Vanguard?

    • says

      @Isabel — Fidelity is also a low-cost brokerage: The expense ratio on their Total Stock Market Index Fund is only 0.10 ($1 per every $1,000), which is awesome. I’d have no problem in sticking with Fidelity. :-)

      • says

        Fidelity now “suggests” funds that are similar to the funds you select that are “non-fidelity” so one could certainly choose any of those. However, do you have any specific recommendations for the 3-fund Fidelity portfolio?

        • says

          Hi Cheryl —
          I like the FSTVX (Spartan Total Market Index Fund), FSITX (Spartan U.S. Bond Index Fund), and FSIVX (Spartan International Index Fund). All of these are broad-market funds — the first one represents the entire U.S. equities broad market; the second represents the entire Barclay’s Aggregate Bond Index, and the third represents the total return of all foreign stock markets. I’ve also updated the blog post to reflect these funds.

  3. says

    What a great article. Succinct. Simple. And to the point.

    Well done – everyone just starting their first job should read this – it would set them up for life!

  4. says

    another good one. KISS keep it simple stupid. I worked two jobs while finishing my real estate license, not easy but better than working as in apartment leasing and delivering papa johns pizza. I focused on saving just in case of slow sales, which is almost impossible if you really try in Austin Texas. Got a Roth with Edward Jones, started stacking cash weekly into Lending Club and Etrade monthly dividend stocks (picked two and stayed with it).

  5. says

    Great post, Paula! Your guide is great and it’s amazing how simple it really is. Thanks for sharing the post about your reader who is KILLING IT with a job, grad school, and a successful side hustle. Super inspiring!

  6. says

    This is a great article. I really want to get more information on savings, investing & having your business vs working. I established my rental business just 2 months ago, have my 401k and plan to stay working both, full time & part time as well as going to school till I reach my goal. I agree on expenses that if you don’t really need it don’t buy it. I use the strategy of 60/20/20. 60% are allocated to all my payables, 20% on the investment & 20% on savings.

    Any advise from you is greatly appreciated.

    Thank you so much for posting this article, I am looking forward to future valuable articles from you.

  7. says

    This a great article Paula. I don’t have credit card debt but I’m still paying off my student loans. Then I’ll begin saving for a house.

  8. says

    Great tips and simple formula for beginners to follow. Once the debt is paid off, and others learn the importance of living without debt, saving money is not difficult. At that point anyone can easily save 35% or more.

  9. says

    High-yield CD… thanks for the laugh. :)

    But yes, eventually interest rates will rise and rate competition will be something banks will consider. And writing about ‘high-yield CDs’ will make this article more timeless (thus more useful to future readers) so that’s definitely ‘awesomessauce’. :)

    I’m liking the blog!

    • says

      Haha — Yeah, CD’s aren’t what they used to be. But fortunately, inflation isn’t what it used to be, either, so the difference in ‘real return’ (in purchasing power) isn’t as dramatic as it might appear at first flush. (CDs definitely don’t create strong returns, of course, but it’s not as bad as it might seem from the surface, once you adjust for inflation.)

      At any rate —

      I keep most of my cash savings in a savings account — the highest interest rate that I’ve found as of now (summer 2014) is at Everbank, which gives a 1.1 percent yield for the first six months and just shy of 1 percent as an overall annual.

      Putting money in a savings account will ALWAYS cause you to lose to inflation … but savings aren’t investments. They’re security. :-)

      Here’s an article I wrote about it —

      And another one about the time I lost money in a CD —

  10. says

    Wow- I’m so psyched to find this site. This is my 1st time here also and and I’m really digging it. I’m not a young’in like most but need as much help as a young’in would. I’m mid40’s and have NO savings at all. Got wiped out with a family death in 2012 and still trying to scratch and claw my way back on my feet. Luckily I’m working but no 401k offered. Times are tough and I’m just glad to have a gig that I like. Hoping to make big bank in next ten years cuz honey is talking retirement already!! Granted he’s got twelve years on me, but still… YIKES!!

  11. says

    Super article! My first time on this site and boy am I more motivated to save than ever before! Got a lot of digging out of credit card debt from a downsizing almost three years ago and the burial of my dad two years ago but I am also greatful to have had them for an emergency until I could get another job. My dreams to be financially debt free are not unobtainable in my minds eye. Presently I am working full-time and a part-time job three days a week. It has not been easy but I know I have to make more to pay off more. Truly it has been a slow process but to hear comments from others who are doing it makes me more enthused even when my body is plum tired. Thank you for the inspiration and keep up the good work. Look forward to reading more of your work in the near future.

  12. says

    Do you have an article that explains these concepts?
    “I will ONLY buy a rental property AFTER I learn how to calculate net operating income, cap rates and the cash-on-cash returns.”
    Would love to start being a landlord, though I’m not clear on what you’re referring to in these terms. Thanks!

  13. says

    As a general rule, I recommend maxing-out your Roth accounts first (Roth IRA) before turning your attention to your Traditional accounts (401k). The only exception, of course, is capturing your employer match.

    What’s the reason behind this statement? Thanks Paula

    • says

      @Even Steven — As you may already know, you pay income tax on your Roth account contributions today, and in exchange, you gain complete freedom from paying a dime in taxes on that money in the future — including taxes on dividends and capital gains.

      For most people, Roth tax advantages are better than Traditional tax advantages, for the following reasons:

      1) The money in your Roth account grows rapidly (via investments), doubling roughly every 8-9 years if it compounds at an 8-9 percent annualized interest rate. This means you’ll be on the hook for a massive tax bill in retirement, since you’ll need to pay dividend and capital gains taxes on all those gains, plus income tax on the original amount. Investing in a Roth frees you from this tax burden.
      2) People’s income tends to rise over time (both in nominal and inflation-adjusted terms) as they progress throughout their careers, meaning most people are likely to earn more in the future than they are today. Therefore, it’s better to pay taxes today, when you’re likely to be in a lower tax bracket.
      3) Roth investments simplify retirement planning, since your withdrawals will be tax-free (you don’t need to plan around the tax burden).
      4) Federal tax rates are currently at historic lows, and may rise in the future (what’s the likelihood of the government lowering the tax rate?)
      5) Most importantly: You can invest MORE through a Roth account than through a Traditional account.

      “But Paula, how can I invest more? Both Roth and Trad IRAs have a $5,500 annual contribution limit (as of 2015).”

      Yes, but think about it: If you invest $5,500 in a Roth IRA, and you have an effective tax rate of 25%, you’re contributing $6,875 of your pre-tax income.
      On the other hand, if you invest $5,500 in a Trad IRA, you’re contributing only $5,500 of your pre-tax income.

      Investing in a Roth account, in other words, allows you to invest more of your pre-tax income than investing in a Trad IRA (even if the raw contribution amounts are equal).

  14. Ines says

    Great explanation, very inspiring. Do you have any tips on how to do this formula for somebody that is not from the US?

    • says

      @Ines — All of my experience and knowledge comes from the U.S. — I’m not comfortable educating around non-U.S. countries, given that their laws, financial systems, tax structures and retirement structures are so different.

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