Shang's Principles Of Personal Finance
By Shang of Save my cents
I remember when I was a young child in my parents' home, sitting at the kitchen table, with the smells of my mother's delicious dinner still wavering deep into the night. The dishes are cleared away, I'm eating some leftover fruit, and my father is going over a yellow notepad with his brows furrowed. The left side of the pad are expenses, and the right side of the pad is him balancing the checkbook. Even back then, watching my father do our family's budget with such a low technology solution, left a clear impression on me that budgeting and being responsible with money, is an activity, and does not magically happen.
I had the great luck of having my college education at Harvard paid for because my father saved and invested so much money so that I could go. I'd later learn though, that he did not seriously start saving for my college, until he was almost 40 years old. So whenever people ask me these days whether it is "too late" to start saving for retirement, I always point to him and say, there is "early" and there is "later", but don't let regrets stop you.
During college I was lucky enough to land paying internships. And my first job after college gave me a signing bonus and a relocation bonus. Together, these bonuses were enough to pay for first month's rent and deposit, as well as the costs of moving my stuff from the midwest, where my parents lived, to Boston, where my first job was. With my first paycheck, I focused primarily on three goals: live on less than I earned, save for an emergency fund, and invest in my employer-sponsored 401(k) plan. To budget, I recorded how much money was first deducted for taxes, and then with what was left, I determined a 15% contribution to my 401(k), and would save and live off the rest.
From what I could recall, in my first year of working, my salary was in the high 5 figures, probably 20% went to federal and state taxes, I lived on 50%, and the remaining 30% was split in half. 15% to my 401(k), 15% to my emergency fund. I aimed to create a 6-month emergency fund, it took me over a year to build the fund fully, and I was very careful not to go into debt. Any bonuses I earned, went straight to savings. I don't really abide by any hard and fast rules as to how much one should pay for rent, because depending on where you are located, rent could be a lot, or very little, of your budget. Instead, I like to aim for savings percentages. If you can consistently save and invest 20% of your pre-tax paycheck starting in your 20s, and maintain that for the rest of your life, you have a very high chance of retiring comfortably. Over time, my salary and bonuses rose, and I also took on a side hustle. My savings rates increased over time as well to reach 50% in my late 20s. By age 31, I considered myself to be work optional - I could live off of the growth of my assets, in a low cost area of the country, for a long time.
None of this would have happened without actively budgeting. While I did not use a yellow notepad like my father did, I used my newfound Excel skills at work to create a budget in Excel. I would track my spending by category, and have an active counter that turned red in each category, if I went over-budget. I toiled away at this spreadsheet for weeks. I was almost obsessive with entering my purchases accurately, down to the cent. I probably spent an hour a day on personal finance in my 20s. Budgeting not only introduces order and discipline, it is a key habit to generate wealth. I don't know of any person who built wealth, who does not plan for and account for where their money goes. It does not just appear. It does not come naturally even if you make a lot of money. You have to work for it.
No matter where you are today when it comes to personal finance, it really comes down to just a few principles. Spend less than what you earn. Save and invest the difference. A category where a lot of people can cut and make a huge difference is rent. Take on house mates, roommates, give up a little privacy, a little comfort and amenities, be willing to commute a little longer, and you could realize hundreds of dollars of difference per month. That's a lot simpler and more impactful than trying to cut a coffee habit. Beyond rent, living in a low-cost state can also make a big difference. I make 6 figures now and I live in NYC, which has one of the highest state AND city tax rates in the country. If I moved to a state with 5% less in income tax, that would get me more than $5,000 back each year. It's quite tempting. Other habits I encourage for saving money include cooking at home, having a set budget for big events like travel and weddings, and taking public transportation or biking where possible. Watching your cents is important, because those cents turn into dollars and into a whole lot more. That's why I go by the name Save My Cents, because I did exactly that - I took care of my cents, until I became a millionaire.