Learning about personal finance can change your life for the better. As a software engineer, I love learning about systems, and personal finance is a system that affects us all.

It’s hard to see how choices we make early in life can change our future. For example, we learn not to touch a hot stove because it hurts right away. With personal finance, mistakes may not hurt until later.

Take compound interest, for example. If Person A invests $100 a month from age 25 to 35, and Person B else invests $100 a month from age 35 to 65, they’ll both have about the same amount at 65. That’s the power of starting early!

Good habits can help you but debt can grow quickly and work against you. The earlier you start, the better chance you have to reach your goals.

Disclaimers

  • Not financial advice: I’m not a financial expert. This post is for just for sharing info. Please do your own research.
  • Consult a CPA or financial planner: If your finances are complicated, it might help to
    talk to a professional. Fee-only planners are a
    good option, because they don’t make money by managing your investments. NAPFA is a place to find them.
  • Not just for engineers: Even though I’m a software engineer, this advice should work for everyone.
  • US-centric perspective. I know more about the US, so if you live elsewhere, it may differ.

Make a budget

One of the first steps in managing your money is making a budget. I know it’s not exciting or fun. Without a budget, it’s easy to spend more than you realize.

Budgeting Tools:

  1. Spreadsheet or pen-and-paper. Simple and effective.
  2. You Need a Budget: Helps you track your income and spending. Great for specific goals like buying a house.
  3. Monarch (affiliate link): I use this to keep track of accounts and spending.

Pay yourself first

Try to spend less than you earn each month. When you get a raise, increase your savings instead of your spending.

Setting up automatic payments and investments can help. When the money goes straight towards savings, it’s easier to learn to live without it.

Investing in yourself, like education or health, is also a good way to spend wisely.

Make a Plan

Do you have goals like buying a car or getting out of debt? Your goals help you decide how to spend and save.

Once you have a budget, you can follow a flowchart for recommendations.

In short:

  1. Pay your bills
  2. Pay off high-interest debt
  3. Save for retirement (like a 401K match if your company offers it)
  4. Invest based on your goals

Investment Policy Statements

Having a plan helps! An Investment Policy Statement (IPS) can outline how you want to manage your money. If you want to make changes, write them down and wait 30-90 days before acting. This can help you avoid making decisions based on emotions.

Dealing with emotion

Speaking of emotions, money can be emotional. Even if you think you can handle a big loss, seeing it happen can feel very different. The best way to makange this is to stick to your plan.

Long term savings: Pretax vs Post Tax vs Taxable

When saving for retirement, it’s helpful to know the difference between pre-tax, post-tax, and taxable accounts.

These are the most common accounts you’ll use:

  • 401k (Pre-Tax): An employer-based retirement plan where you save money before taxes, which lowers your taxable income. You pay taxes when you take money out in retirement.
  • Roth IRA (Post-Tax): A retirement account where you save after-tax money. Your savings grow tax-free, and you don’t pay taxes when you take it out.
  • Brokerage account (Taxable): A regular account where you buy and sell investments. You pay taxes on any earnings each year.

Investment Choices & Philosophy

When you’re ready to invest, here are a few things to keep in mind:

  • Diversify: Spread your investments across different types of investments to lower risk.
  • Stock vs bond: Stocks can make more money and are riskier. Bonds are safer and typically earn less. Choose a balance between these based on your risk tolerance.
  • US vs International: Investing in other countries can give you more opportunities and diversification.
  • Passive funds over active management: Research shows that passive funds, like index funds, often do better over time because they cost less.
  • Target date funds: These funds adjust over time, getting less risky as you near retirement. They’re a good option if you want a simple, hands-off investment.

Advanced Topics

Want to go deeper? Here are some advanced topics to explore:

  • Company stock: If you get stock from your job, think carefully about how much to keep. Holding company stock could be risky if the company has problems. You could be laid off and lose your investments at the same time.
  • Backdoor Roth IRA: A way for high earners to contribute to a Roth IRA, even if they wouldn’t normally qualify.
  • Mega Backdoor Roth: A way to save even more in a Roth account through your employer’s retirement plan.
  • 529 Plans: Accounts that help you save for education costs, often with tax benefits.
  • Donor-Advised Funds: A way to give to charity and get some tax advantages.

Learning More

I hope this post helps you start your personal finance journey. Here are some books I recommend:

For more learning, check out these forums:

Thanks for reading, and good luck with your financial goals!