Money 101: A Basic Financial Plan For Those Starting Out

by Silicon Valley Blogger on 2012-02-1918

If you subscribe to the do-it-yourself approach to managing money, then we’re on the same page. Many people have asked me through the years the same questions: What should I do with my money? Should I borrow more and build my credit? How do I invest what I have? How did YOU create your financial plan?

For me, it all started right after I got my first job, with my mother handing me a book called Making The Most Of Your Money by Jane Bryant Quinn and some other book that covered financial topics and concerns for people under 30. The title escapes me now, but it was geared toward the younger crowd. But when all this came to pass, there was no internet so I gleaned all my information from books, magazines and periodicals.

After my first few readings, I was inspired to get myself started with a *very* simple plan. By tackling these matters, I was confident that I was establishing the foundation I needed to get myself on track with my finances. The basic financial plan that I worked out for myself is rooted on the following points:

Personal Finance Planning Basics: Make Your Own Financial Plan

  1. Pay off all debt.

    I’m the type of person who prefers to have no debt whatsoever. It’s no surprise then that I would advocate trying to get rid of debt as much as possible. But if you have it, then try to get rid of the bad debt before the good. Bad debt involves high interest, prepayment penalties and depreciating property. Good debt has tax advantages, low interest and covers possibly appreciating property. So borrowing to buy a house is typically good financial sense, while borrowing on credit cards would be something to avoid.

    I try to pay off my credit cards in full each month and if I notice I’m unable to do so, I stop buying stuff I don’t need. It’s darn tough though!

    Some people use good debt as a financial strategy for getting rich — what is otherwise known as getting rich with OPM (other people’s money) or using leverage. Really study your options before going down this route due to the risk it entails.

    My story: I’m looking into using some leverage to enter the real estate investing game. The pros: great, incredibly low interest rates, deflated property values. The cons: holding debt is always risky and many folks have discouraged me from going down this path. But we’re paying down our mortgage very soon and we’re already in a better position than we were during the recent real estate mania. What a difference a few years makes!
  2. Adhere to a budget.

    The nice thing about budgets is that it’s something you make up. I’ll be honest — I’ve never really “budgeted”. The most basic way I would save money is by going without (also called “abstaining from spending”). Throughout the years, I’ve typically cut back on travel or new things. I love accepting hand me downs, and a car will usually last me 6 years, at the very least. But budget? It’s for informational purposes only. Now as I navigated the years, I found myself doing reasonably well as somehow by “doing without”, I found some extra money to invest in the 90’s bull market. Steady contributions did more for me than watching a budget like a hawk. But I don’t discount the power of setting boundaries either. Budgeting has worked well for many people.

    Tip: If you are interested in a great budgeting tool, check out YNAB (You Need A Budget). They’re ranked very well compared to other budgeting tools out there.
  3. Start an emergency fund in a savings account.

    After getting rid of bad debt, set aside some amount, typically 6 months’ worth of living expenses (or more) for the proverbial rainy day fund. In case of emergencies, use the funds here to bail you out. There are those who don’t have such funds and decide to use their credit cards as backup and the money they would otherwise use for emergencies is spent elsewhere. During the 90’s bull market, I even knew people who would shovel all available cash into the stock market; they rationalized that the risk of an emergency is worth covering with a credit card and the money would be better off growing in an equity account somewhere. Those crazy market years are long gone, but the traditional advice still rings true.

    The bottom line is that I keep my emergency fund in a stable, liquid account, say in one of the best high interest savings accounts available. Who knows when you’ll need it? Don’t get caught scrounging for cash once a tree crashes on your house!

    Tip: Check out EverBank, FNBO Direct or any other online bank or credit union that offers better yields compared to other cash options. Often, these online banks have lower fees and higher rates than traditional brick and mortar institutions.
  4. Don’t pass up free money!

    Take advantage of all benefits and financial breaks that are available. If you have a generous employer, then use all the employee benefits that you are entitled to. Check on your company benefits and take advantage of them. Perks such as a 401K plan, insurance plans, health care coverage, ESPP (Employee Stock Purchase Plan) and such can add up to 10% to 25% of your salary. Some even have employee tuition reimbursement programs. So don’t let these juicy benefits go unused — start contributing to your 401K plan today! In addition, be aware of what the government has made available to you: if there are tax shelters you can use and tax breaks you can take based on IRS guidelines, then find out what you qualify for. Don’t pass up free money.

  5. Discover your financial profile.

    Suppose you’ve got the basics down and you’re successful about maintaining a zero balance in your credit card accounts, plus have enough stuff saved up for short term needs. Then you’re ready to start investing. Before delving into investing, know what kind of investor you are first. Take some quizzes, answer some questions and determine your comfort level with investing. The more you know about how much risk to take, the better you can keep with an investment plan. Fiscal discipline and resolve will come into play especially during tough times when the market goes wild.

    Tip: For some people, knowing their financial profile actually means analyzing their behavior towards money. You may ask: am I a spender, debtor, saver or investor? Knowing your strengths and limitations can be the first step towards improving your financial picture.
  6. Know your financial goals.

    What would you like your money to do for you? Aside from paying for your day to day living expenses, survival or even luxuries, if you’re like most people, you’d like to figure out a way for money to cover the big ticket items that we all dream of having. For most people, they’d like money to:

    • Buy them a house.
    • Plan for their children and their schooling.
    • Build their retirement nest egg.
    • Grow indefinitely (no real concrete goals here).

    If you know what you are saving and investing for, then you’ll be able to determine what kind of investments to get into. Service your short term goals with short term vehicles such as money market funds, liquid or no-penalty CDs, CD laddering, and short-term to medium-term bond funds. Long term goals can be addressed by stock funds, equities, long-term bond funds, REITs and more aggressive investments.

    Unfortunately, not everyone is capable of setting money aside for funding all these goals. Sometimes, you’ll need to make tradeoffs. But I believe it’s a great thing to hold on to a dream. Life has a funny way of working out those dreams.

  7. Invest in a diversified portfolio.

    Once you’ve earmarked investment funds, then look into equities, bonds and real estate. Once you know what you are investing for, then you can start choosing what types of investments to get into. I’d start with index mutual funds. Get into more advanced investing only after you’ve gained some investment experience and have survived through a few market cycles. I prefer to keep it simple and am quite happy with tracking the indexes through various mutual funds and ETFs (exchange traded funds). Real estate will require more money and mettle (unless you are using REITs). Try that once you have more capital to work with.

Of course, there are other financial matters to be aware of: for instance, having enough insurance, knowing how to optimize your taxes and creating an estate plan should also belong in a basic plan, but most people starting out don’t occupy themselves with these matters right away, especially if they already receive medical insurance from their employer. But at some point, you’ll want to delve into these issues as well.

So this is how I mapped out my future in my 20’s. Once you’ve got your own plan, then it’s all a matter of execution! And there’s the rub. The good news is that for many of us, there are several decades or even an entire lifetime to put such a plan into action.

Created November 1, 2006. Updated February 19, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 18 comments… read them below or add one }

John Wilks November 6, 2006 at 11:06 am

Great post.

Financial Imbalance January 1, 2007 at 4:07 pm

Excellent post for beginners and the experienced investor looking to take control of their personal finances.

Ranjan February 27, 2007 at 11:36 pm

I’m on a similar journey of planning my finances and the post gave me a lot to think about. Thanks and keep it going. March 20, 2007 at 5:21 am

#1 really depends on what kind of debt you have. Is it a student loan, a mortgage or credita card debts? As far as I know, a student loan or a mortgage loan are much better for your credit history than owing mmoney to credit card companies.

db April 28, 2007 at 9:13 am

It’s true that student loans and mortgages are “better” than unsecured debt, but they are still debt and they are still expensive.

Personally I don’t like to think of them as “good” debt. Thinking of them as “ok” debt — debt that has a value added benefit of helping you increase your net worth through your career and ownership is a better way to think of it.

But don’t forget that even at low interest rates, student loans and mortgages have a cost!!! Here’s an example from my personal life: on my hefty student loan ($191K), I’ve paid out over $10,000 in interest (at 4.75%) over the past 12 months. The balance on the loan??? It’s gone down by $500.

Every month I pay on that student loan is going nowhere except to keep the loan at a level amount, and I don’t have any choice but to pay it. That is money not free to invest. Clearly my best choice is to pay any amount extra that I can afford to accelerate the student loan repayment, even if it’s a small amount.


db April 28, 2007 at 9:19 am

P.S. — Being late on a student loan or mortgage payment messes up your credit history just as effectively as being late on a credit card BTW. I know because the bad marks on my credit rating all come from a) having too high a student loan balance and b) having had times when I couldn’t afford my student loan payment and had late payments reported to the credit bureaus.

Also, carrying a large enough student loan damages your eligibility to get good rates on a mortgage.

These are just things to think about and be aware of. Because I think there is a segment of the population that doesn’t take mortgage and student loan debt seriously enough. It’s better debt but it’s still debt.


Student Loan Consolidation Programs September 6, 2007 at 1:21 pm

Nice article and I agree with db that student loans are driving too many people into debt at a young age.

JP July 7, 2008 at 9:38 am

The financial world has changed since the last post on here. I would say 7 is possibly the worst place to have your money at the moment and wold recommend gold or oil but both seem to be in a bubble that leaves sticking it under the bed.

Silicon Valley Blogger August 1, 2008 at 9:33 pm

I tried to make the information here as applicable as possible to any kind of economic situation. We’re not talking about tactical investment strategies here — I believe that’s something for a different post altogether! But my strategy is purely long term, using a basic asset allocation with rebalancing approach. I don’t really dwell on timing and valuation as much when I adhere to this strategy. So far, it’s worked *very* well.

PayYourselfFIRST August 25, 2008 at 4:20 pm

I disagree with the order of the elements in this strategy. After having been more than once in the position of sacrificing any savings in order to pay off a CC and then being smacked with an emergency, I now believe that you should build your FULLY FUNDED emergency fund BEFORE you go into a mad dash to pay down debt.

I am in favor of saving more for the future and paying less on your debt, even if it means being in debt longer. I am a freelancer, so I don’t have a guaranteed paycheck at the end of each month. So, to me, the point at which I feel I can afford to speed up debt repayment would be when I have reliable sources of income AND my assets outweigh my liabilities.

M August 30, 2008 at 11:41 pm

I’m also someone who doesn’t float any debt even though that may be the more logical way to increase wealth. I don’t feel comfortable with debt, and I think anyone’s personal financial plan has to mesh with his or her own personality or else it is doomed to failure.

But like the above poster, I wouldn’t spend down my emergency fund just to stay completely debt free.

Silicon Valley Blogger August 31, 2008 at 8:36 am

You make good points. Some people pay down debt first and build an emergency fund after; others do it the other way around. Some do it simultaneously. It depends on what you’re comfortable with. As mentioned, I know folks who don’t have emergency funds and decide that their credit cards are “it”. Our goal is to make sure we do both.

Regina June 26, 2009 at 12:31 pm

This is very informative and comprehensive article. I agree with your point about paying off all bad debt first which includes debt accumulated by credit cards. I think everyone should make it a habit to set automatic payments to pay their credit cards as soon as they sign up for one. By doing so, they can avoid building up interest and pay-off their loans on time each time.

Stock Market 101 October 23, 2009 at 11:24 am

The problem with debt is that no one properly calculates the risk. They may consider what they expect to earn “more” than the interest rate of the debt. They may even consider the “what if” if the returns don’t happen. However, few people ever consider a change that would reduce their cash flow to the point they couldn’t make the minimum payments. When you factor the % chance of a total wipe out, your risk/reward doesn’t look as good.

Stefan L February 20, 2012 at 10:17 am

If you’re so compelled to invest any savings you have, here was a scheme I used in the past: I would build an emergency fund and apply it into investments once a once-in-a-lifetime opportunity presented itself. After which, I would build up short term savings (in the emergency fund) slowly again and take the risk of getting hit with an emergency in the interim. In the worst case, I would rely on my trusty credit card. In this case, I would have such savings that can do double duty as potential investment capital. Warning: this is definitely more risky and depends on experience, comfort level and ability to judge and time the stock market.

This used to work out pretty well in the past, but with recent developments and trends, not sure I’d recommend it. People are just more conservative about their money these days.

Tyler S. February 20, 2012 at 7:26 pm

This a great how-to for anyone just starting out! I still say there needs to be some sort of course like this in every high school. So many kids (myself included) have little or no financial instruction growing up!

Silicon Valley Blogger February 20, 2012 at 9:06 pm

Glad that this piece is helpful to you Tyler. I speak from my own experience and can attest to how well these points have worked out for us. Of course, we implemented this plan over 2 decades ago and we’re reaping its benefits today. Good luck to you as you work out your own personal finance plan!

Shil1978 February 21, 2012 at 10:59 am

I couldn’t agree more, SVB, all great points and excellent advice, especially for those who have many years ahead of them to still plan and reap the benefits of having a good financial plan. Thankfully, I am not too old and have already started off making my own personal financial plan. Some of the points in here, though, I hadn’t considered, so its great information to incorporate into my existing plan. Thanks for sharing – great work with this article!!

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