Background: my parents never taught me anything about personal finance, so when I got my first job out of college I was quite shocked to learn that some of my peers were already very financially savvy. Over the last couple years, I've absorbed a lot of knowledge from other people and learned independently to get up to speed. Here I'm sharing my most important rules for personal finance, with the goal of paying it forward to any post-grads who are inexperienced at managing their finances.
1. Track your finances in a spreadsheet
It's so important understand your financial position and see how much money is coming in and going out every month. When you diligently track your monthly income and expenses, it becomes harder to rationalize spending money on stupid things that you don't need, because you'll see the impact in your spreadsheet. You can't just push it to the back of your mind.
2. Use a credit card for all your purchases to build credit and earn cash back
Most people use a credit card to buy things they can't afford, but if you use it wisely and always pay your bill on time, you can start building a good credit score, which will be important later in life if you need to borrow money for a house/additional education. Also, some cards offer up to 2% cash back on every dollar you spend. If you're still using a debit card linked to your bank account for everyday purchases, you're leaving money on the table by not getting cash back.
3. Aim to save at least 25% of your post-tax income
Not a hard and fast number since it will vary for everyone depending on how much money you make. But as a first-year analyst in a high-COL city, I was able to save over 25% of my base salary and still bank my bonus.
4. Contribute enough to your 401(k) to maximize the amount that your company will match
This is literally free money, and I can't fathom any reason not to take advantage of it.
5. Invest your savings in a well-diversified portfolio with a long-term orientation
It's critical to earn money on your savings; if you work in finance, you should understand the power of compound interest. Additionally, since inflation is roughly 2% annually, you're losing money by keeping it in your bank account. Every month I deposit a set amount into a brokerage account that holds strictly ETFs, consisting roughly of U.S. equities (50%), foreign equities (25%), and bonds & cash (25%), and I don't plan to withdraw anything for at least 10 years.
6. But make sure to manage your liquidity
I operate with a somewhat arbitrary rule of thumb: keep ~3 months living expenses in my bank account for day-to-day expenses, and ~6 months living expenses in a high-yield savings account (can also be converted to cash very quickly, but earns slightly more interest). Everything else is in my brokerage account and 401(k) for medium to long-term investments. If you have all your money in investments and an emergency expense comes up, you'll have to withdraw money and potentially incur less favorable tax treatment by foregoing long-term capital gains.
7. Avoid depreciating assets
The primary example here is a car. I'm fortunate to live in a city where I don't need one and I understand this is unavoidable for some people. But the fact remains that cars are bad investments; they decrease in value the second they leave the lot. Add in the cost of gas and insurance, and this can be a huge drain on your finances when you're just starting out.
8. Keep an eye on lifestyle inflation
It happens to everyone to varying degrees and isn't a bad thing in and of itself. I think the important thing is to upgrade in areas that meaningfully improve your quality of life. A good example would be upgrading to an apartment closer to your office for a shorter commute. I also think anything that improves your health and fitness is money well spent.