Dear Tori,
I have been consuming a lot of financial advice and am having a hard time understanding what’s best for me. I talk to friends or co-workers sometimes about money, but they’re all in different life stages than me, so I don’t always feel like their advice would be a good fit. How do I determine what’s best for me and set financial goals without getting lost in what’s best for others?
My favorite, timeless personal finance advice is “personal finance is personal.” It’s never let me, my friends and family, or my clients down.
As much as financial experts can tout best practices, suggestions, and timelines, everyone’s financial life is a little different. Therefore, any idea that one person’s financial wins will be another’s is unlikely. With that in mind, I decided to use this question to speak more broadly on some financial goals and help you determine if they might be in line with your lifestyle and overall vision for your financial future.
Remember, personal finance is personal, so use this article as a baseline. Take what works – leave what doesn’t!
1. Saving: How much do I need, and where do I keep it?
More than anything else I get asked about, saving is always leading the pack. I get questions about how to save more, where the money should be kept, and when it’s time to stop saving traditionally and start investing instead. So here’s a quick breakdown of different types of savings, where to keep them, and where in your financial journey you might choose to prioritize them.
Emergency Funds
An emergency fund should be your first priority financially. Whether you’re 25 or 55 or 105, an emergency fund is in your best interest. This is the financial hill I am willing to die on. An emergency fund should be 3 to 6 months worth of your basic living expenses like rent, groceries, insurance, and the like.
Some people prefer a little more, saving up to a year or two of expenses. This might be a good idea if you a) work in an industry where if you find yourself laid off, it would be considerably difficult to find a new job or b) if you are planning to take a year off working sometime in the future.
An emergency fund should be kept in a high-yield savings account (commonly known as an HYSA). HYSA’s are usually offered by online banks and offer a higher interest rate than traditional savings accounts –– and especially with rising inflation, every extra dollar counts.
Sinking Funds
Sinking funds are one of my favorite little personal finance “hacks.” Think of sinking funds as piggy banks for all your big purchases. Sinking funds are great for saving for goals over a long period of time. So if you know your sister is getting married in Bora Bora next year and you want to save up the cash to enjoy it, you can start a sinking fund to help you get there.
The formula for sinking funds is the total you need divided by the number of paychecks between now and that time. For instance, let’s take the wedding example above. If you need to save $3000 in a year, and you’re paid twice a month, you’ll divide 3,000 by 24. This equals out to an even $125 a paycheck you’ll need to put aside into your sinking fund.
Another fun bonus to sinking funds? If you spend under in another area of your budget (say groceries), you can also transfer that extra into your sinking fund to help you get there faster.
Sinking funds can also be kept in an HYSA or a CD (certificate of deposit). Just remember that with a CD, you may not be able to pull the money until a specific date –– so it won’t work for most short-term fund goals.
Mid-term Goals
These goals include larger expenses, like a house downpayment or a new car. You have a few options for long-term savings goals.
Most experts recommend that you don’t invest any money you might reasonably need within three to four years, as it’s almost impossible to determine when the next crash or major dip can occur (hello COVID), and you may not have the value you were hoping for if you needed to withdraw funds within a specific time period. If you’re looking to save for a goal in less than three years, consider keeping your money in an HYSA or CD, where you’re guaranteed a certain rate of growth.
Read More: Saving Money For Long-Term vs. Short-Term Financial Goals
2. Spending: Do I need a budget?
The most shocking statement I’ve made as a personal finance professional is this: I don’t use a budget.
I know, I know, it does, in fact, elicit gasps from the peanut gallery –– but to be honest, I don’t need to. I have a firm grasp of my spending and know my limits well. However, I check with my credit card statements monthly and use Personal Capital’s free finance tools to make sure that I didn’t miss something or overspend in a particular area.
For some, budgeting is a lifesaver, and for others, it just doesn’t make sense. My best advice is to try out a few different methods to see what works for you –– and to make sure that you’re building your budget around the things you actually care about. If you live paycheck to paycheck and feel unsure of where all your money is going, using a budget can be extremely beneficial.
Personal Capital has a great budgeting tool that helps you keep track of your spending by category, and it’s 100% free to use.
3. Debt: What do I do about it?
Here’s an easy rule to remember –– high-interest debt is anything over 7%, and anything over that 7% threshold deserves your full attention. The most common debt in this category is credit cards, payday loans, and occasionally auto and student loans.
With high-interest debt, you’ll constantly be fighting a losing battle by only paying minimums, so that’s why I suggest prioritizing that debt first and paying it off as quickly as possible (after you have an emergency fund, of course). I prefer the avalanche method to the debt snowball, but regardless of which method you choose, make sure you’re tackling your debt one step at a time –– aka paying extra towards your highest interest debt while making the minimum payments to all others.
Paying off debt can be an exhausting undertaking. You have to prioritize your mental wellness during this process and make sure you’re still leaving room for enjoying small joys (please buy the latte and the avocado toast).
Calculate It: Debt Payoff Calculator
4. Investing: When am I ready, and where should I start?
Ah, investing – the best way to build wealth over your lifetime and set your future self up for a joyful retirement. But when is it the right time to start? Here’s a quick checklist:
Do you have a 3-6 month emergency fund?
Have you paid off all high-interest debts (over 7%)?
If applicable, are you currently taking advantage of your company match in your 401k?
If you answered yes, congrats! It may be time to start (or continue investing) in tax-advantaged or brokerage accounts. Most financial experts recommend starting with tax-advantaged accounts like your workplace 401k or 403b, or an IRA if you qualify. Work on maxing these out each year before branching into other brokerage accounts or types of investments.
But what about…
There are sure to be a myriad of other financial goals that come to mind. What about buying a home? What about opening a brokerage? What about buying a rental property?
Buying a home is just as much an emotional and logistical purchase as a financial one. Buying rental properties is its own strategy that’s best discussed with a financial advisor.
What I can tell you, once again, is that personal finance is personal. If you start with the basics –– the emergency fund, paying down debt, and investing, you’ll be well on your way to achieving the goals you’ve set.
One final tip: Personal Capital is the tool I check daily for tracking my net worth and my progress towards goals like retirement, debt payoff, and (yes!) saving that first $100k.
Get Started with Personal Capital’s Free Financial Tools
Personal Capital compensates Tori Dunlap of Her First $100k (“Author”) for providing the content contained in this article. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. Additionally, in a separate referral arrangement between Author and Personal Capital Corporation (“PCC”), Author is paid $70 and $150 for each person who uses Author’s webpage (www.HerFirst100k.com) to register with Personal Capital and links at least $100,000 in investable assets to Personal Capital’s Free Financial Dashboard. As a result of these arrangements, Author may financially benefit from referring potential clients to Personal Capital and/or be incentivized to present blog content that is favorable to PCC. No fees or other amounts will be charged to investors by Author or Personal Capital as a result of the Referral Arrangement. Investors that are referred to PCC and subsequently subscribe for investment advisory services provided by PCC’s affiliated adviser, Personal Capital Advisors Corporation (“PCAC”) will not pay increased management fees or other similar compensation to Author, PCC or PCAC as a result of this arrangement. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
