What I Didn’t Learn at Wharton About Personal Finance
By: Casey Botticello
Tags: Personal Finance, Business, Entrepreneurship, Productivity, Financial

1. Establish The Basic Consumer Banking Accounts and Services

Many people open a bank account after turning 18 or during college. However, a shocking amount of young adults don’t have basic bank accounts (and some are still sharing a custodial account with a parent or guardian).

All young adults should open their own bank account. Ideally, both a checking and savings account, with no monthly fees.

Not only is this good experience in and of itself, it’s important to learn more about the ancillary services your bank offers.

Your bank account will likely come with checks and a debit card.

Learn how to write a check! It may seem antiquated to some, but eventually, you will likely need to write one for a deposit, utility, or a landlord that does accept credit cards or direct deposit.

If your bank offers safety deposit boxes, this can also be a good time to inquire about one.

Many banks are reducing their physical footprint, and as a result, you may need to get on a waiting list.

Why do you potentially need a safety deposit box?

There are some documents and personal items that you want to keep the original version or protect it from fire or damage at home.

Examples of this include:

Social Security Card

Passport

Titles to vehicles or property

Copies of important documents

Physical photographs

Extra keys

Analog media that you haven’t taken the time to convert to digital format

Family heirlooms

Jewelry that is valuable/you don’t wear often

2. Develop A Plan to Maximize Your Credit

Note: If you cannot control your spending, and will not be paying off your entire balance every month, do not get a credit card!

Assuming you only use a credit card for purchases that you can easily pay off in full, getting a credit card is critical for most young adults, when building their credit.

Their are many myths about credit cards:

One of the worst myths is that you have to use a credit card on a regular basis or carry a balance to build credit.

You do need to use credit products to build a good credit score, but you can use them very sparingly. That can be as simple as opening a credit card, charging a small amount with it 2–3 times per year, paying it off immediately every month, and otherwise keeping the card in your dresser drawer.

If you feel comfortable using the card more regularly, you can compare different credit cards, and try to find a rewards structure that you like.

Generally though, you should not be getting a credit card that has annual fees (unless you absolutely know you will be spending enough money to justify the credit card rewards/spending ratio). Even then, this can be a slippery slope into encouraging increased spending. So just stick with a card that has no annual fees.

3. Avoid Grad School Unless Absolutely Necessary

For college graduates, there are generally three tracks that would lead you to pursue graduate education:

Some professions require graduate school. In most cases, you cannot become a doctor, lawyer, university professor without a graduate degree. Assuming you are passionate about these professions, you can usually justify the cost. There is little choice in this scenario in getting the graduate degree, unless you reconsider the entire profession. However it get much more murky with the wide range of jobs, which may not require a graduate degree, but a graduate degree is something that may seem essential to succeed. For example, if you want to work in certain management level positions in business, you may realistically need an MBA depending upon how competitive a position is/company culture. You may also be able to get a lower level job, at the same company, demonstrate your value through work experience, and get promoted into such a role. It may even be the case that companies who otherwise require MBAs for external hires will waive these requirements for an internal candidate that they really want to retain.

In this second case, you need to be careful. While graduate degrees are typically a clearly positive factor from a hiring perspective, many young adults fail to weigh this against the true cost of continuing with education.

Debt, especially student loan debt, is very restrictive. While I can’t advise you one way or the another about whether you should go to graduate school without knowing the intricacies of your situation/life goals, I can say with certainty that the debt you will likely incur, will be something that you will likely have to adjust your life around for years if not decades.

3. Typically the third reason for considering graduate education is a career switch. This is similar to the second reason in that the debt you incur needs to be factored into the equation properly.

4. Emergency Fund

Once you are working and able to save money, you should focus on building an emergency fund.

An emergency fund is a readily available source of assets to help one navigate financial dilemmas such as the loss of a job, a debilitating illness, or a major repair to your home or car. The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses, as well as reduce the need to draw from high-interest debt options, such as credit cards or unsecured loans — or undermine your future security by tapping retirement funds.

An emergency fund should contain enough money to cover between three and six months’ worth of expenses, according to most financial planners. Note that financial institutions do not carry accounts labeled as emergency funds. Rather, the onus falls on an individual to set up this type of account and earmark it as capital reserved for personal financial crises.

I tend to agree that 3–6 months is a good amount for an emergency fund if you have a stable source of income.

However, if you are a freelancer, entrepreneur, or are paid a large percentage of your salary as a bonus or work on commission, I would suggest saving a larger amount.

5. Dealing with Debt

In general, you should be avoiding most consumer debt. But if you do have consumer debt (credit cards, auto, store debt), you should almost always prioritize paying down this debt before building your savings. This is because consumer debt (especially credit cards) tend to have very high interest rates.

Credit card issuers can lure you in with a low introductory APR and gleaming credit line. But that introductory APR offer will eventually expire. When it does, you can find yourself staring at an overwhelming pile of debt if you didn’t manage your new credit card account the right way.

The reason revolving debt can be so overwhelming is because credit card interest rates are typically really high. So, if you’re just making the minimum payment each month, it will take you a long time to pay off your balance — possibly decades. During that time, you’ll also pay a lot of interest.

Let’s say you charge $8,000 on a credit card with 17% APR, and then put it in a drawer, never spending another cent. If you make only the minimum payment on that bill each month, it could take you almost 16 years to pay off your debt — and cost you nearly $7,000 extra in interest!

6. Develop Savings and Spending Patterns

In our “treat yourself/YOLO” culture it is easy to forget to prioritize saving and developing good spending habits.

Start with a spending log. Yes, you have heard this advice before. This exercise is eye-opening if you do it diligently. With online banking you will have access to a visual record of all your spending. This is a great way to begin to spot patterns and decide where you can cut back.

Analyze your online account statement (four weeks is ideal) to help you determine where your money is going. Review your log without judgment. What you have done, in terms of your spending, does not matter — at least not yet. What does matter is that you get a firm hold on your expenses. For example, how much money do you spend on eating out each week?

Next, write down all sources of income. With a list of your income and expenses in hand determine your priorities. Begin your budgeting process here. Obviously housing and other fixed costs will figure prominently on your priority list. Now, take a look at the conveniences that represent variable expenses. This is likely where you will find room to make changes. For example, if you buy coffee each day, can you bring it from home a time or two each week? Or would you be willing to purchase a smaller or otherwise less expensive cup? Can you clip coupons or eat out a little less?

Remember, developing any new habit takes practice. In time you may even learn to love your new healthy spending habits. It is liberating to be in control of your finances. So take a serious look at your savings/spending. Create a budget and stick to your savings goal.

7. Developing Multiple Sources of Income

This topic is a bit more advanced, but only because so few people are taught this.

Developing multiple streams of income is essential to achieving financial independence.

This could consist of someone creating a new source of active income. An example of this would be someone who works as an office manager during the week (their primary job) but begins driving for Uber on the weekend to make some extra money. This is also an additional income stream.

This could also consist of someone creating new streams of passive income. I am a huge proponent of developing passive income streams. The basic difference between passive and active income is that active income requires the direct trading of time for money. Passive Income is generally defined as a stream of income earned with little or no ongoing effort needed from the individual receiving the passive income in order to grow the stream of income. Passive income is income that is not proportional to the time you physically put into acquiring it.

I’ve written a fairly detailed article with a number of passive income ideas that I have tried:

Regardless of whether its active or passive income, diversifying you sources of income will make you feel more secure and financially stable.

8. Investing

Once you have a well stocked emergency fund, and your savings account begins to grow, it is time to start strategically investing that money. Many people are scared of investing. But luckily, the rise of index funds have made cost effective investing much easier than it was a generation ago.

Index funds are a type of mutual fund where thousands of investors pool their cash to purchase shares in a fund that mimics a benchmark index, such as the S&P 500 (hence the name “index fund”).

This simpler approach — known as passive investing — has proved more profitable for the average investor than active investing, for two reasons: Markets tend to rise over time, and index funds charge lower fees, allowing investors to keep more of their money in the market. As a result, many investors now flock to passive funds.

All investments carry risk, and Vanguard index funds are no exception. For example, investors in Vanguard’s flagship S&P 500 Index Fund saw the fund’s value drop more than 4% year over year after the market tumult in 2018. But the fund’s 10-year average annual return was 14.3%, thanks to the second-longest bull market in history.

Passively investing in index funds is so popular because most actively managed funds fail to consistently outperform the market. For example, from 2002 to 2017, only about 11% of actively managed stock funds beat their designated benchmark, according to Vanguard and Morningstar data.

9. Begin Retirement Account Contributions

Even if you have never considered retirement, don’t feel like your ship has sailed. Every dollar you can save now will be much appreciated later. Strategically invest and you won’t be playing catch-up for long. Note: This topic is too big to cover in this section alone, but hopefully it will serve as a primer for the larger topic.

The first place to start retirement planning is by saving and investing money through one or all of the available options offered through employment and personal investments. Many employers offer retirement planning options such as pension plans, 401(K) plans, or a combination of various plans. However, you do not have to rely solely on company-sponsored plans. You can choose to invest on your own with or without the help of financial planners.

Employer-sponsored retirement plans

Employer-sponsored retirement plans include benefit plans such as pensions; contribution plans such as 401(k), Roth 401(k), 403(b), 457(b); and Thrift Savings Plans.

401(k) can be one of the best tools for creating a secure retirement. It provides you with two important advantages. First, all contributions and earnings to your 401(k) are tax-deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, many employers provide matching contributions to your 401(k) account. The combined result is a retirement savings plan you cannot afford to pass up.

403(b) plans are only available for employees of certain non-profit, tax-exempt organizations: 501c(3) Corps, including colleges, universities, schools, hospitals, etc. If you are an employee of one of these organizations, a 403(b) can be one of your best tools for creating a secure retirement. It provides you with two important advantages. First, all contributions and earnings to your 403(b) are tax-deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, many employers provide matching contributions to your 403(b) account which can range from 0% to 100% of your contributions. The combined result is a retirement savings plan you cannot afford to pass up.

Individual retirement plans

Individual retirement plans include traditional IRAs, ROTH IRAs, spousal IRAs, myRAs, and rollover IRAs. Contributing to a traditional IRA can create a current tax deduction, plus it provides for tax-deferred growth. While long term savings in a Roth IRA may produce better after-tax returns, a Traditional IRA may be an excellent alternative if you qualify for the tax deduction. Always check with your tax advisor prior to making any investments.

Retirement plans for self-employed and small business owners

Retirement plans such as SEP, SIMPLE, and Payroll Deduction IRAs are for individuals or small business owners with employees.