Low-stress personal finance: 3 "tentpole" strategies to achieve it in 2020

Perhaps you're doing too much? Here's how to tell.

A green tent representing the three tentpole strategies to achieve low-stress personal finance

It’s time to get your financial house in order. If you’ve been putting it off for weeks, months, or years and don’t know where to begin, here is your opportunity to get into it.

Checking a few boxes, as Douglas Boneparth, a certified financial advisor and president of Bone Fide Wealth tells me, can help you “earn the right to invest.”

This article is a version of Strategy, a weekly newsletter from Inverse that offers readers insight on their life, career, and finances. Sign up for free to receive it on Thursdays.

The same questions are asked again and again about money management, especially in places like the r/personalfinance subreddit, says one active user, /u/_yes_its_him (he asked that we refer to him by his Reddit username).

Years ago, he and several other redditors created a wiki that could enable people to walk through the basics of personal finance, which they elegantly organized by life stage. That wiki also spawned this incredible flowchart about organizing your financial life. 

“The reddit wiki for personal finance is certainly a collaborative effort over many years for many people,” the user behind the /u/_yes_its_him account tells me. “My observation was that people, a lot of times, don’t know what question they should ask.”

1. A rock-solid foundation

The three experts I spoke with gave advice geared toward someone in their mid-20s, who makes a salary of $40,000-$50,000. But anyone can benefit from the advice below.

Every financial checkup starts with knowing your goals and understanding where every dollar goes.

These goals need to pertain to the short term, like, how will I pay my rent? They also should include the medium-term questions, like, could I see myself pursuing another degree? or would I maybe one day like to own a home? Finally, they need to include big things in life: What do I want my life to be like when I retire?*

Abed Rabbani, an assistant professor of personal finance at the University of Missouri, tells me that solid financial footing involves goal-setting on each of these three levels, even if the long-term goals seem out of reach.

“The long-term goals may sound long off, but for anyone, I think it’s imperative to pay attention to all those details,” he says. “It’s very important to save and invest early.”

From there you need to prioritize your goals and quantify them, says Boneparth. If you’re looking to buy a home, you’ll need to have a rough idea of when you might want that to happen and how much you might expect to need for a down payment. If you’re looking to pay off your living expenses, that means you’ll need to figure out how much everything costs.

Figuring that out comes down to mastering your cash flow — which means you know about how much you spend every month and where all of that money ends up. In previous Strategy newsletters, we ran through some ways you can get started on tracking your spending. Boneparth recommends you go back about six to 12 months to get a sensible picture of where your money goes.

Once you figure out how much you’re spending, you can put together a budget that covers the basics:

  • Your rent or mortgage (including insurance)
  • Utilities (water, heat power)
  • Food and groceries
  • Things you need to keep earning money (for most people, that probably includes your phone and internet bill)

Rabbani says you should also be factoring in health insurance, and how you’re going to pay down debts. You can find previous Strategy newsletters on student loan repayment strategy.

“Establishing a budget in my opinion is the first step,” he says. “Then, make a plan to eliminate debt if you have any. Then, it makes sense to create an emergency fund, when you’re more or less in a solid financial state,” says Rabbani.

From there, you can get a sense of how much money you can start putting away for the long term. And one of the first places that money should go is into an emergency fund.

Boneparth recommends that this fund be about three to six months of living expenses (and, because you’ve mastered cash flow, you’ll know exactly what those are). On Reddit, the flowchart suggests that you start with about one month’s expenses, and build toward three to six months over time.

“This is the rock-solid foundation that people need to become disciplined investors,” says Boneparth.

2. “Set and forget” options

If your foundation is made up of crystal clear financial goals, a budget can keep the lights on and a roof over your head (and cover a little bit of fun, too). The next step is understanding your “set and forget” options. These accounts work toward your long-term goals, like retirement, without much maintenance.

For retirement, that account may come from an employer-based 401(k) if you have the option or any number of different types of retirement accounts. We’re not going to dive into the minutia of each account here, but you can find detailed information on the r/personalfinance wiki. Just know a 409k isn’t one of them.

Most investors should aim to put away the equivalent of their salary by age 30. The general amount to consider contributing is about 10 percent of your salary to a retirement account like 401(k) — though that may feel like a lot. Boneparth agrees that that 10 percent is about a standard threshold.

“If you started working at 22, you put away money for eight years. Maybe you manage to get your investment to equal about your annual income at age 30,” /u/yes_its_him says. If you keep contributing by about age 60, he adds, “you should be retiring with 10 times your salary.”

That said, there are horror stories from 2008 where people watched their retirement funds plummet with the US economy. But barring disaster or societal collapse, they’re still a central part of most savings plans.

Rabbani agrees, but also advises that younger clients look beyond an employer-based 401(k) and consider other options to save for later life.

“Any form of retirement contribution, I would go for it,” says Rabbani. “On top of that, I would also advise contributing to an IRA or a Roth IRA if that’s possible. I mention Roth because of the huge tax advantages you can receive. These clients will be at the low tax bracket. It’s advantageous to pay taxes now,” he says.

The key to getting the most out of these accounts is consistency. Inevitably, you may leave your job and need to roll over a 401(k). But generally, these are funds you’re not going to touch too much.

“Usually the thing that causes people to mess up their future is that they do too much,” says /u/yes_its_him. “As long as you keep making regular contributions, you’ll be fine.”

3. Where can you get a little bit risky?

Here’s where we’re at:

1. You tracked your spending and developed a budget

2. You have a plan to tackle any outstanding debt, like student debt

3. You built your “set and forget” accounts and are contributing to them

4. You followed this flowchart, answering honestly

If you’ve got those boxes checked now, it’s time to think about taking the savings that remain and putting a bit of risk on it, in hopes of getting a return on that investment.

Any money that you anticipate needing in the next four to five years, Boneparth says, should go into a savings account where you don’t mess with it very much. Anything further out than that, he says, and it’s time to start thinking about an investment strategy where you can hope to get some returns in the long run.

“If you have your cash reserves; if you’re adequately funding all your short-term goals, like a house; and you’re maxing out your retirement plans, you’re superstar saver status. That’s when you start putting money into a taxable account.”

In that case, it’s time to start thinking about an investment strategy where you can hope to get some returns in the long run.

That strategy, which was mentioned by Boneparth, Rabbani, and is the general philosophy of r/personalfinance, consists of prudent investments in low-cost index funds: basically broad chunks of companies in the US economy in which you can buy stock, whether you’re working with $500 dollars or $5,000.

This article has been a version of Strategy, a weekly newsletter from Inverse that offers readers insight on their life, career, and finances. Sign up for free to receive it on Thursdays.

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