Where To Start With Your Money

At A Glance – Are you feeling stuck with your finances? Do you wonder where to start with your money? Here is a step-by-step guide to help get your finances in shape. No matter where you’re starting, this guide will help.

Getting your finances in order can be a scary task. Where do you start? Who do you trust? What if you get it wrong?!

Don’t worry, I’ve experienced all these emotions, and I did sometimes get it wrong! After all, most of us weren’t taught any of this personal finance stuff.

So, I’ve put together a step-by-step guide to help you get on track with your money. This is based on my own experiences and what I’ve learned. It’s not complicated and it is totally doable.

For me, the first step was changing my mindset about money. I learned to be in control of my money decisions and not let my money control me. I learned to be intentional. Every dollar that left my hands was scrutinized. Now, most of my money decisions are on automatic.

There are stand-alone articles related to most of the steps below. If you’d like to dive deeper into any of these topics, just click the link.

Step 1: Evaluate Where You Are Right Now

The best place to start managing your money is to evaluate where you are now. No guilt, no shame. Just look at where you are. This involves adding up all your debt (what you owe) and all your assets (what you own). The difference between those two numbers is your Net Worth. This gives you a feel for where you stand.

Here’s a guide and spreadsheet to help you determine your Net Worth: Figuring Out Where You Are Right Now.

Step 2: Track Your Spending

Your next step in evaluating your current situation is to track your spending. You need to know where your money is going. Every dollar that leaves your hands needs to be looked at. Track your spending for at least 3 months. Six would be even better. Life is lumpy and no two months will be exactly the same.

This article includes a spreadsheet to show you how to Track Your Spending: Tracking Your Spending And Why You Should.

Step 3: Use A Budget (At Least For A While)

I know, I know! For some people, budget is a dirty word. But it sets up your mindset and your money for success! You don’t have to use it forever, but for a season, it’s a good plan. There are many good reasons to use a budget. I still use a budget and track my spending. For me, it puts guardrails on my decisions so I don’t lose focus. Put together a budget that you will actually use. It can be pencil and paper, a spreadsheet, or an app. You choose.

Budgeting articles with spreadsheet: 1. How To Do A Budget and 2. Benefits Of Using A Budget.

Step 4: Set Up An Emergency Fund

An emergency fund is essential for you to be successful with your money. At first, it can be a baby Emergency Fund of $1,000. Then later your can fully fund your 3-6 months of living expenses in your EF. How good would it feel to have $1,000 in the bank!

Most Americans cannot handle a $400 emergency. If your car breaks down and you have to put the repair on a credit card, you have just unwound all the good you’ve been working for. An EF helps you get through life’s bumps.

This explains the Emergency Fund: Why You Need An EF And How To Get One

Step 5: Get Your Employer Match

If you have an employer plan, like a 401k, you need to get the match. Deposit enough money in this fund to get whatever match your employer offers. This is free money!

Step 6: Get Out Of Debt

All your non-mortgage debt needs to be paid off. Debt is the enemy of wealth and you will not be successful with your money if you are paying out 10, 20, or even 30% interest on your debt. It needs to be paid as quickly as possible. This is a Hair On Fire situation!

Debt Pay-Off Articles: 1. How To Pay Off Debt, 2. How To Pay Off Credit Card Debt, 3. How Credit Card Debt Can Get Out Of Control

Step 7: Start Saving Money

After all non-mortgage debt is paid, look at your budget and see how much you can save. How aggressively you save is up to you. The higher your savings rate, the faster you will reach a place of comfort with your money. How much you do or don’t sacrifice now is up to you. Put your savings on automatic whenever possible. That way you’re not tempted to spend the money on something else.

A getting started guide to Saving Money: How To Save Money

Step 7B: Save For Large Purchases

Along with saving for retirement and your awesome future, save for large purchases and pay cash. This is another tactic for financial success. Save up for the next car, set of furniture, or home remodel and pay cash.

The Sinking Fund: Coming Soon!

Step 8: Don’t Buy New Cars

A new vehicle depreciates dramatically in the first few years. According to industry experts, the value of a new vehicle drops by about 20% in the first year of ownership. Over the next four years, you can expect your car to lose roughly 15% of its value each year – meaning the average car will be worth just 40% of its purchase price after five years.

Buy a good, clean, and well-maintained used car – for cash. Let someone else take the depreciation hit!

Step 9: Start Investing

Your money can grow and work as hard as you do. The most common places for investing your saved money are in the stock market or rental real estate. I personally invest 100% of my retirement savings in stocks, bonds, and treasuries.

Investing: How To Start Investing – A Beginners Guide

Step 10: Keep Learning!

Keep learning. I do. Read books, listen to podcasts, and get an accountability partner. You know, that person who is willing to say the hard things because they care about you.

One great resource for someone just getting started is the ChooseFI Foundation’s FI 101 course. It is a self-paced online course that covers the basics. The best part is you’re not alone. There is a great online community where you can ask questions and share your wins.

If you haven’t already, please consider signing up for my monthly newsletter. It includes tips, life hacks, info about my latest articles, and a frugal and healthy recipe. I promise your email address will not be sold and I will not spam you!

What Does The Bible Say?

Here are a few examples of verses on frugality, saving, Emergency Funds, and wise money management.

When they were filled, He said to His disciples, “Gather up the leftover fragments so that nothing will be lost.” John 6:12

Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine. Genesis 41:36-36

There is precious treasure and oil in the dwelling of the wise,
But a foolish man swallows it up. Proverbs 21:20

She looks well to the ways of her household,
And does not eat the bread of idleness. Proverbs 31:27

Key Takeaway – Use these 10 Steps to help get a handle on your money and build a better future for you and your family.

Assignment – Start with Step 1 and work your way through Step 10. Your future self will thank you!

Coming Soon – The Sinking Fund

How To Start Investing – A Beginners Guide

At A Glance – Learn how to start investing and growing your money. Investing in the stock market is easier than you think.

What Is Investing?

Investing is when you purchase assets that you expect to earn a profit in the future. These assets could be anything you believe will rise in value, such as a home or collectible. Although investing commonly refers to buying stocks and bonds.

The goal of investing is to put your money to work today so it will grow your money over time.

What Is The Stock Market?

First, let’s define a stock. A stock is a type of asset that represents fractional ownership in a company. When you buy stock in a company, you own a piece of that business. If you own a share of Amazon, you are a part-owner of Amazon!

Publicly traded companies are companies that issue stock that can be purchased by individuals or organizations. The stock market is made up of all publicly traded companies.

A stock market or stock exchange is a place where people buy and sell stocks. There are several of these in the U.S., but the two best known are the New York Stock Exchange (NYSE) and the Nasdaq.

There are “indexes” that give you a feel of how the overall market is doing. These indexes are a basket of stocks that are averaged to indicate overall performance. The most popular indexes are the Dow Jones Industrial Average, The Nasdaq Composite, and the S&P 500. The Dow Jones tracks 30 large, significant U. S. stocks. The S&P 500 is a much broader base of 500 large companies. The Nasdaq is more oriented towards tech companies.

Why Invest In The Stock Market?

What we all hope to gain with our investing is more money over time. Since our investing plan should always be long-term, our money will be invested for decades.

Because of our long investing time horizon, we must consider inflation. Inflation is like a termite that eats away at your wealth. If you bought $100 worth of groceries 10 years ago (2011), they would cost you approximately $120-130 today. You can see that taking your hard-earned savings and putting it in the mattress is not a good plan! Also, the current (2021) interest rates on savings accounts or money market accounts will not keep up with inflation. So, savings accounts are not the place for money invested long term.

We need an investment that will do better with our dollars. The stock market is one of the best wealth-building tools we have available. But many new investors are afraid of the stock market. Is the stock market volatile? Yes. Is it still the best place to invest my money to grow my wealth? Again…Yes.

The stock market goes up and it goes down, but over time the market always goes up. There has been disaster after disaster that has caused the market to go down – sometimes significantly. But over time, the market always goes up. If you look back over its history, the market has averaged roughly between 8% and 10% per year. You can see this is significantly better than most other investing choices.

Let’s look at two examples of how your money can grow. The first chart shows three different investment amounts with no additional money added. We will use an average return of 8% per year for 30 years. Say, age 30 to age 60.

Amount InvestedMarket GainTotal
$ 10,000$ 99,357$ 109,357
$ 50,000$496,786$ 546,786
$100,000$993,573$1,093,573

The next chart shows a more real-life example. We will start with $0 and add money every month from savings. Again, the money is growing at 8%.

Amt Invested/mo.Time PeriodAmt InvestedTotal
$ 10030 years$ 36,000$ 150,030
$ 25030 years$ 90,000$ 375,074
$1,00030 years$360,000$1,500,295

These examples assume that any interest or dividends your stock receives is reinvested and not withdrawn. This shows how compounding works for you over time. You can see from these examples the stock market is a much better way to grow your money.

Can I Lose My Money?

Returns in the stock market are not guaranteed like the interest rate on a savings account. There is risk associated with investing. So the short answer to the question “Can you lose money?” is yes – over the short term.

Can you lose money if you leave it in for the long haul? Unlikely. Don’t forget, your stock market investments are long term. This is a marathon, not a sprint. This is not get rich quick. History has shown if you save, invest and leave it alone, you will build wealth.

What Are Stocks, Bonds, Mutual Funds And ETFs?

Stocks – As stated above, a stock is fractional ownership in a company. Money is made with stocks in two main ways. One, the price of a stock can go up as the company does well. You make money if you sell the stock for more than you paid for it. Second, the company may pay dividends. This is how the company shares profits with its stockholders. Dividends are typically paid once a quarter. The dividends can be left in the investment account to buy more shares.

Bonds – When you buy a stock, you are buying part ownership in a company. When you buy bonds, you are loaning money to a company or government agency. A bond could be thought of like an IOU. Bonds are used by companies, municipalities, states, and governments to finance projects and operations. A bond issuer promises to pay the bond or loan back in a specified time at a specified interest rate. An example would be bonds issued by your local school district for a new building.

Mutual Funds – A mutual fund is a basket of stocks. Mutual fund managers decide what and how many stocks to buy. These funds come in all flavors. It can be, for example, a basket of all large companies, small up-and-coming companies, or all healthcare sector companies. There are thousands of mutual funds to choose from. The major advantage of a mutual fund is diversification. You don’t have to decide which individual stocks to buy, you just pick the flavor you want. The disadvantage is they can have high fees attached to them. There is a person managing the buying, selling and decision making and they aren’t cheap. Their fees will eat away at your profits, but the diversification that mutual funds bring to the table is a good thing.

ETFs – an ETF or Exchange Traded Fund is very similar to a mutual fund. Their main difference is the way they are bought and sold during the hours the stock market is open.

How Can I Invest In The Stock Market?

Choose An Investment Firm

So you’re ready to invest some of your savings. Now what?

You will need to open a brokerage account. To trade on the stock market, you will need an account at a brokerage or investment firm. There are many brokerage firms out there, but the ones I would recommend are Vanguard, Fidelity, and Charles Schwab. I personally use Vanguard. You can open an account online in a matter of minutes.

When you first open your account, you will be asked how you will initially fund this account. You can send money from your bank, rollover money from an employer retirement account like a 401k or transfer money from another brokerage firm.

After setting up your account, you can tie your brokerage account to your checking or savings account. This allows you to move money back and forth online. One huge advantage of this connection is making your savings and investing automatic. You can decide how much money is going to investing each month and have it sent there automatically. Your emotions and temptation to spend it just got removed!

Choose The Type Of Account

You can set up different types of accounts. The main types of accounts are a taxable brokerage account, a retirement account such as a Traditional IRA or ROTH IRA, or a 529 Educational account. IRAs and 529s are tax-advantaged accounts. A taxable brokerage account is a plain investment account with no special tax treatment. Stephen and I have a joint taxable account and we each have Traditional and ROTH IRAs.

Choose The Type Of Investment

Here is the big question! And I really can’t tell you what to do – partly because I’m not licensed to do that nor am I an expert. But, I can tell you what I do.

I like to KEEP IT SIMPLE. As J. L. Collins says, “Simple is good. Simple is easier. Simple is more profitable.”

I invest in low-cost index funds and bond funds. Index funds track a particular index, like the S&P 500.  There are many advantages to index funds like high performance, low cost, and very low volatility. 

The index fund I use is a Vanguard Total Stock Market Index Fund or VTSAX. It tracks the entire stock market. This means I own a small piece of every publicly traded company in the stock market. This is where the majority of my investments are – 70% currently. Index funds have extremely low costs because they are not actively managed. They just track the market. They are high-performing because those active managers cannot consistently “beat the market.” And their fees eat away at your returns.

The bond fund I invest in is the Vanguard Total Bond Market Index Fund or VBTLX. Just like VTSAX, the Total Bond Fund is a broad base of bonds. This fund includes investment grade (top quality) bonds with widely differing maturity dates and a broad range of terms.

Why hold stocks and bonds? Stocks provide the best returns over time and serve as a protection against inflation (inflation hedge). Bonds provide some income and serve as a deflation hedge. Also, bonds are less volatile than stocks. They smooth out the wild highs and lows that can be seen in the stock market. You won’t make as much money from bonds as you do stocks, but they make the roller coaster a little easier to ride.

TIP: I like to keep things simple and I have only given you the very basics when it comes to investment info. I would HIGHLY recommend you read J. L. Collins book, The Simple Path to Wealth, Your Road Map to Financial Independence and a Rich, Free Life. It helped us when we didn’t know what we were doing or where to turn. Jim explains the stock market, how it works, how to use it to grow your money, and how to not be afraid of it. Buy the book, check it out from your library or you can check out his Stock Series on his blog jlcollinsnh.com. Do it! His book helped us more than any other one thing we have done for our finances, short of getting our mindset changed.

How Much Should I Invest?

In my article, How To Save Money, I talk about your short, medium, and long-term needs. Everything you are putting in long-term savings should go into investments. This is the money you will want working for you for decades.

If you are starting late as I did, you need to be saving aggressively and investing wisely. The number of years before retirement may be short, but even in retirement, you could have a 20 or 30-year investing horizon.

When Should I Invest?

Now! Don’t wait for the market to drop or wait until you understand every nuance about the stock market. Formulate your simple plan and get started.

If you have a company match with your 401k, BE SURE you are getting the match. That’s free money! Also, look at the investing options in your employer’s plan. Do they offer low-cost index funds? You might check into making a change.

TIP: Your taxable brokerage account, 401k, IRA, HSA or 529 plan are just buckets to hold your money. Just because you or your employer deposits money into those accounts does NOT mean it’s invested. It might just be sitting there in cash until you tell them how you want it invested. YOU have to make the choice of investments. Check every account you already own and make sure the money is invested.

What If The Market Goes Down Or Has A Crash?

Don’t panic! And don’t sell! The market will go down and it will come back up. The market is higher today (June 11, 2021) than it has ever been. This includes all those ugly events. The Wall Street Crash of 1929, Black Monday (1987), Dot.com bubble (2000), 911 (2001), Financial Crisis (2008), and the latest and shortest-lived crash of 2020 – thank you COVID! The market goes down and it always comes back up.

This chart shows the cumulative returns from the S&P 500 from 1960 to 2021. There are a few significant dips in the line, but the overall trend is up.

If you are in the wealth accumulation stage, these downturns are your friend. Stocks are on sale, and besides, you don’t need the money right now anyway.

Remember, we’re investing for the long haul. Most people treat a stock market downturn like going to your favorite store, everything is on sale, and the customers run out of the store screaming! Don’t panic. Be calm. And don’t pay attention to all the “noise” from the media.

Conclusion

If you want to grow your wealth for the future, the stock market is one of your better choices. Consider low-cost, broad-based index funds. If you choose the “Simple Path” to grow your money, you can almost put your investing on auto-pilot.

Key Takeaway -Learn how to start investing and growing your money. Investing in the stock market is easier than you think.

Assignment 1 – Read The Simple Path to Wealth

Assignment 2 – Check any existing investment accounts like 401ks, HSAs or IRAs and make sure the money is invested and not sitting in cash.

Assignment 3 – If you don’t already have one, open an account at an investment firm. Decide how much you can send to it automatically every month. Choose the funds you want to invest in and start buying shares.

Coming Soon – What is FI?