This is the version of Home posted April 12, 2013.

What should I be doing?

  • Develop and specify your financial goals
  • Track your expenses
  • Keep an emergency fund
  • Make a spending plan (aka budget)
  • Increase your income
  • Reduce your expenses
  • Pay off your debt
  • Save for your goals
  • Throughout all of this, become more financially literate so that you'll recognize which parts of this general advice don't apply to your situation, and what's the right order to do these things in

BrainSturgeon made a simple graphic that hits most of these points: r/PF in one simple image

How do I track expenses or make a spending plan?

Do whatever you'll actually do (that is, whatever you'll stick with long-term). Here are methods r/PF seems to like:

  • Mint
  • YNAB ($60, but people love it)
  • Spreadsheets (check out the links in the sidebar, or search r/PF for examples, like this)

How should I pay off debt?

  1. In your spending plan, identify how much you can spend on debt service
  2. Make minimum payments on all of your obligations
  3. If there is not money leftover, increase your income or reduce your expenses, and then revise your spending plan
  4. Once there is some debt-service money leftover after obligations are met, pay all of it on one loan
    • If you are committed to being debt free as soon as possible and/or you really like math, pay on the loan with the highest interest rate
    • If you are reluctant to pay down your debt and would rather spend the money on fun stuff, pay the loan with the smallest balance (that is, the one you can pay off fastest) to help motivate you to stick with your debt payoff plan
  5. Once that loan is paid off, pick the next highest rate or lowest balance and pay on that
    • Since you have one fewer loan, your monthly payment on the target loan will be higher now, since it will include the minimum obligation plus all the money you were paying on the previous target loan
  6. Repeat step 5 until all your loans are gone
    • No one's going to blame you if you don't rush to pay off loans with rates under 5% or so (since you can usually get a better return than 5% by investing), but there is quite an emotional rush to becoming completely debt-free, so consider paying off everything, even your 3.7% mortgage or your 2% student loans

What types of accounts should I save in?

Note: the type of account is completely separate from the investment itself (except that certain accounts can only contain certain kinds of investments). The account type depends on the type of financial goal you're saving for, since different account types have different rules about how/when you can use the money, and how they are taxed. Pick the account type based on the type of financial goal. Pick the investment based on the time horizon for that goal.

  • Put your emergency fund in a savings or checking account, ideally at a bank with no ATM fees and lots of convenient ATMs
  • Consider saving for education goals (for you or anyone in your family) in a 529 plan
  • If you qualify, save for medical expense in an HSA
  • Save for your kids in an UGMA/UTMA account
  • Save for retirement in retirement accounts (described below)
  • Save for all other financial goals in a taxable brokerage account

What's the best way to save for retirement?

  1. If your employer matches some of your 401k contributions, contribute as much to your 401k as they'll match
  2. Pay off any high-interest debt ("high" meaning anything over 5%, and anything over 0% if you want to be debt-free)
  3. If you qualify for an HSA, consider using one as a super-IRA
  4. If you want to save more and your income is low enough to qualify, save in an IRA
  5. If you have reached the maximum contribution limit for your (and your spouse's) IRA(s), contribute the max to your 401k
  6. If you want to save even more for retirement, use a regular (taxable) brokerage account
    • If your goal is to retire early (before age 60) you will need enough in your non-retirement (taxable) accounts to last until age 60, when you can get at the money in your IRAs
    • If you retire at (or after) age 55, you can start withdrawing from your 401k without penalty as long as you don't roll it over to an IRA
    • You can withdraw from an HSA for non-medical expenses starting at age 65 (you'll pay ordinary income tax on those distributions, just like a traditional IRA)

Which brokerage should I use?

Any big-name brokerage should offer no-fee accounts with minimums you can meet easily, and as long as you aren't paying fees, it doesn't really matter which one you use.

  • r/PF loves Vanguard, and you will too
  • Some other popular ones are Schwab, Fidelity, and TD Ameritrade

How should I decide what to invest in?

See the note above explaining the difference between account types and investments. Pick the account type based on the type of financial goal. Pick the investment based on the time horizon for that goal.

  • Determine an asset allocation that matches your risk tolerance and your goals
  • Use low-cost index-funds (mutual funds or ETFs, it doesn't really matter) to achieve that allocation
  • If you can't figure this out on your own, post some specifics and we'll help you

Can you just recommend something extremely specific to get me started?

Sure, but you really need to understand what you're buying. It won't take you long to study up on index investing, and the gains you'll miss out on by waiting a few days are tiny. However, if you can't find motivation to study up and end up procrastinating the investing for a few years, that would be a mistake, so here's a relatively simple index-investing strategy to get you started, Schwab's "Moderate" allocation, which I personally use for the vast majority of my portfolio. If you can't trade these funds at your current brokerage for free, find a similar fund (e.g., by comparing them in Google Finance and making sure the lines over the last year are right on top of each other) or switching to Schwab or Vanguard, where my example tickers are from. Whatever funds you buy, you're looking for ones with "index" in the name.

  • 35% large-cap US equity. SCHX, VLACX, VLCAX, or similar.
  • 10% small-cap US equity. SCHA, VSMAX, VSISX, or similar.
  • 15% international equity. SCHF, VFWAX, VEU, or similar.
  • 35% fixed income. SCHZ, VBTLX, or similar.
  • 5% cash.

Whenever you add money, instead of adding them in these proportions, add the money in such a way that after you add money, your portfolio is in these proportions. If you don't add money at least once a year, or if you don't add enough to re-balance as close as you want, log in once a year and sell off the "winners" that are worth more than their proportion, and buy the "losers" that are worth less than their proportion. You don't have to hit these proportions exactly. Getting within a few percent is fine.

Once you have studied up a bit, if you're under 45 you'll probably want to be more aggressive and hold less cash and fixed income, and more of the others. Or, you might want to subdivide these classes, and separate out fixed income by short-term, long-term, inflation-protected, international, etc. This is just a simple allocation to get you started.

What books do you recommend?

Check out my Recommended Reading page for non-book recommendations, but here are the books:

  • Total Money Makeover by Dave Ramsey, especially if you are in more debt than you want to be
  • The Richest Man in Babylon by George Clason, for timeless advice
  • A Random Walk Down Wall Street by Burton Malkiel, especially if you aren't convinced that index-investing is right for you
  • The Millionaire Next Door by Thomas Stanley, especially if you have high expenses
  • The Bogleheads' Guide to Investing by Taylor Larimore, which covers the whole philosophy espoused by most of r/PF
  • Your Money or Your Life by Vicki Robin, especially if you want to change your emotional relationship with money
  • The Money Book for the Young, Fabulous & Broke by Suze Orman
  • I Will Teach You to be Rich by Ramit Sethi

And the bit of r/frugal inside me strongly recommends you get them from your library.