Updated: Jun 16, 2021
Wednesday, May 26, 2021
Before you start investing it is important to understand where you stand. Here is how I set up my personal finances and I highly recommend it.
First, we are going to build up an “emergency” fund. This money is not to be touched unless it is an absolute emergency. Car breaks down, flat tire, medical procedure. This fund is really for “easily” accessible cash you can get in a pinch. Everyone will tell you a different amount to save but I settled on $2,000. People will argue both sides and say this is either too much or too little.
Next, I recommend a high-yield savings account. This is for any other money left over after the $2,000 emergency fund. The goal of this is to let your money start working and compounding for you. A normal bank savings account will give you .02% on your money over the year. A high yield savings account will give you about .5% over the year. It doesn’t sound like a big difference but let's look at the numbers:
$10,000 x .02% = $2 per year or a measly $0.16 cents per month
$10,000 x .5% = $50 per year or about $4 per month
Again, $4 a month doesn’t sound like much but as the savings grows, that number grows too, and you will start to see the compounding effect.
That brings us to our next topic. Compounding. In the most simple terms, imagine I gave you a m&m and said everyday this M&M will double. You start with 1, then 2, then 4,8,16,32,64 and so on. You can see this grows pretty quick. Well, this is what we are going to do with your money that is already sitting there.
The major points here are: one, let your money work for you and; two, try to keep up with inflation.
We have finally moved around the money we already have - so now it is time to really understand what our monthly income and expense look like. Below is a simple excel file where you plug in your income in the yellow fields as a positive number, and expense in the green fields as a negative number, and as the balance in the right column updates, at the end of the month, you see your savings in the bottom-right. It's important when trying to accomplish anything in life to visualize it. If you are trying to lose weight, write down what you eat. If you have personal goals, write them down. Its one thing to visualize in your head another to see it on paper:
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Now that we have the cash balance at the end of the month it's time to start investing. With that left over balance, decide what percentage you want to go to your HSA and what is going to go into investments. Right now I run about an even 50/50 split. This will all depend on your goals.
Congrats! You just took a step in your life that many don’t do till it's to late or never do at all! You are on your way to living a sound financial life.