The Ultimate Beginner’s Guide to Financial Awesomeness

beginners guide to financial awesomeness

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 most 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.

My favorite tactic is pulling your savings directly from the top, and forcing 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.

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. I prefer Everbank accounts (aff link), which (at the moment) offers a 1.4 percent savings account rate, for the first six months, with a 1.01 percent APY. It pledges to always provide the top 5 percent of yields in the nation.

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.

Yippee!

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.

Example:

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 that you can make 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.

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25 Responses to “The Ultimate Beginner’s Guide to Financial Awesomeness”

  1. Tiffany
    10. Jun, 2014 at 6:19 pm #

    Paula,

    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!

    Tiffany

  2. Elizabeth
    10. Jun, 2014 at 7:49 pm #

    Any thoughts on sites like betterment.com to simplify the investing part even more?

  3. Isabel
    11. Jun, 2014 at 2:21 am #

    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?

    • Afford Anything
      11. Jun, 2014 at 10:57 am #

      @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. :-)

      • Cheryl
        13. Jul, 2014 at 8:42 pm #

        Thanks. I had the same question re Fidelity index funds.

      • Cheryl
        14. Jul, 2014 at 12:57 am #

        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?

        • Afford Anything
          31. Jul, 2014 at 2:41 pm #

          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.
          Thanks!

      • Afford Anything
        31. Jul, 2014 at 2:44 pm #

        (P.S. I updated the blog post on 7-31-2014 to reflect three Fidelity index funds that I’d go with, if I had Fidelity funds.)

  4. mistersquirrel
    11. Jun, 2014 at 4:20 am #

    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!

  5. Aldo
    11. Jun, 2014 at 1:36 pm #

    These are great tips for beginners. If you do nothing else but these three things, you should be set.

    Great article.

  6. Julie @ The Family CEO
    11. Jun, 2014 at 1:50 pm #

    Awesome, as usual. I’m forwarding this to my daughter who just graduated college and started her first full-time job.

  7. Ericka
    11. Jun, 2014 at 5:12 pm #

    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).

  8. Addison @ Cashville Skyline
    12. Jun, 2014 at 2:17 pm #

    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!

  9. Steve | Live Smart Not Hard
    12. Jun, 2014 at 10:53 pm #

    Index funds are where it’s at. Low cost and you don’t need to pick specific stocks.

  10. Maria
    14. Jun, 2014 at 3:01 pm #

    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.

  11. Venice
    14. Jun, 2014 at 7:15 pm #

    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.

    • Afford Anything
      16. Jun, 2014 at 7:43 am #

      Thanks Venice, and I’m excited about your plans! You sound like you’re on the right track. :-)

  12. Connie @ Savvy With Saving
    18. Jun, 2014 at 10:43 am #

    Thanks! These are great tips. I’m a 20-something that doesn’t know enough about investing and this is a great guide to get started.

    • Afford Anything
      25. Jul, 2014 at 11:11 am #

      Thanks Connie! I’m glad you liked it. The most critical thing is to START — I’m a big believer in the expression that “done is better than perfect.” :-)

  13. EL
    25. Jun, 2014 at 9:20 am #

    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.

  14. Will
    26. Jun, 2014 at 8:02 pm #

    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!

    • Afford Anything
      25. Jul, 2014 at 11:10 am #

      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 — http://affordanything.com/2014/01/08/blindfolded-monkey-throwing-darts-stocks-beat-experts/

      And another one about the time I lost money in a CD — http://affordanything.com/2011/08/29/how-i-lost-money-with-a-bank-cd/

  15. Andrew
    30. Jun, 2014 at 3:02 pm #

    I need to find side money to really pick this up.

    I put money away in all these areas, but the extra cash is key.

  16. Spencer
    30. Jun, 2014 at 6:40 pm #

    Amazing article! this is my first time to Afford Anything. This is a very informative and basic guide to money and wealth. Thank you!

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