DISCLOSURE: This is an opinion and is for informational and educational purposes only. This is not investment advise. I am not a licensed financial adviser. I am not responsible for any financial outcomes after an individual reads the educational information provided
Here I outline general rules for personal finance, within the context of what has worked for me through trial and error. My intention is not to evangelize, but rather to share information with my juniors that may help them assess new ideas or point them in a direction they want to research further.
For me, the goal of personal finances as a young adult is to make my life functional and alleviate the emotional bearing that money has on us. At this point of our lives we may not be in a position to be financially stable or safely wallow in gratification, but ideally we want to handle our money in a way that we can sleep soundly at night. If things go well, we can even start thinking about the future and make moves that will pay great dividends in the long term (pun intended).
Short-term cash fund: The starting point to handling your finances is to have a steady pool of easily accessible money for the short term. Putting it simply, ideally you want to have enough money in your checking account to get through a month of expenses. This will not only help you sleep better at night knowing that your utilities won’t be cut, but will help you avoid overdrafts and the fees associated with it. A way to position yourself is be a month ahead money-wise, so that when your next paycheck comes in it’s basically paying next month’s expenses. If you are struggling to have this amount, you can consider holding off extraneous expenses and saving for a few paychecks until you have enough.
Emergency cash fund: Outside of this short term amount, you also want a an emergency fund. This is money that you will not touch unless there’s a true emergency, like unemployment or an unexpected bill you can’t cover with your monthly income. The emergency fund is meant to help you survive and tide you over in situations that would become costly if not handled immediately (e.g. homelessness or injury). Once you spend your emergency fund, your priority should be to replenish it. For a person with a good paying, long-term job it would be ideal to have an emergency fund to sustain them for six months of expenses. But for young adults that may not be realistic, and so you could look at funds that will help you get by for one or three months (which can still be life saving!). Multiple months of expenses can be thousands of dollars, but it is still a good “investment” in your personal well-being and something you should consider savings towards when you get an influx of income (e.g. your tax return or money gift from family). I would keep the emergency fund in a savings account so that you can easily access it but still get a modicum of interest.
Savings account: Something that may seem counter-intuitive is that saved money should not necessarily go into a savings account. Especially at present, the interest yield on savings accounts is relatively low. I personally do not place large sums in these accounts, because in the long term you are actually losing money to inflation. That said, a savings account is a great place to park money for the short term or when life is especially volatile (e.g. job and housing transitions).
Paying debt: Pragmatically speaking, one of the best investment returns we can achieve is by paying off debt. Because interest rates on debt (e.g. credit cards) can be pretty high, you will have more money in the long run by paying it off than by placing this money into other investment vehicles.
Discretionary money: Discretionary income can be used for “extra” expenses such as vacations, material luxuries, or large purchases like a house. Before adulthood, many of us saved money especially for things that we wanted. Part of being an adult is realizing that there is a hierarchy in how we handle our expenses, in that needs take priority over wants. While experiences like trips and material purchases can bring comfort and excitement, it is important to plan expenses in a responsible manner. A concept to remember is that “a dollar now is worth more than a dollar tomorrow”. Money in the present can be invested and multiplied with time. In practice, what this means that you may be better off saving and investing today to afford things tomorrow. This is especially the case for expenses like buying a home or a car.
Investment vehicles: Money can be invested via many vehicles. Some vehicles you may have heard of can be stocks, bonds, real estate, metals (e.g. gold). Types of vehicles you may not be familiar with are mutual funds, exchange-traded funds (ETFs), CDs (not the kind your parents listened to!), REITs, options, and cryptocurrency. In future blogs I plan to talk about traditionally good investing vehicles, as it relates to their pros and cons.
Investing account types: For some investments like stocks and bonds, these have to be purchased and managed in specific types of accounts. As your investments make money, they may be liable to taxation (e.g. brokerage accounts) or not (e.g. retirement accounts), in addition to other requirements such as when you can withdraw the money. In future blogs I plan to talk about the types of investing accounts that young adults may consider.
So that about covers the basics! To summarize, a money-spending hierarchy that has worked for me is as follows:
1) Have money to get by in the short term
2) Have money for an emergency
3) Pay off debt
4) Have money in investment vehicles
4) Save money for discretionary expenses (e.g. trips, new computer)
Undocumented Physician Scientist in Training 