Adulting 101 (personal finance part 1) (Us edition)

The flow-sheet for personal financial freedom here

          With this series of blog posts ill be launching my new series titled Adulting. This blog post is all about personal finance. Lets face it the sooner the better, when it comes to setting yourself up financial and the only person that can do that is you. So it don't really matter if you start this off at the age of 18 or 28 just so long as you start. 

• Investing. Lets face it bank interest won't make you rich. The good news  is investments can make you rich. Really rich; current millionaire rich.  It takes decades, and you have to put in significant money regularly. This why you start right away. A good introduction to investments is something called a Target Date Fund, where you buy shares of a mostly stock-based index fund that is designed to be worth a lot more when you retire, at the target date 40+ years in the future.  These accounts gain something like 6% annually after inflation, though it can vary (tremendously in some cases) . That means your money doubles every 12 years, and goes up by 10X in 40 years. (More than that, since these numbers are net of inflation.) So that $5000 you put aside at 22 could easily be worth $50,000 of today's dollars at 65. (But, there could be years where you temporarily lose 10%, 20%, even 30% of all your retirement savings. It will come back eventually.)
• Retirement contributions. You should invest for the future and perhaps reduce current taxes by letting your employer contribute a percent of each paycheck to your 401k account (or similar things with different names for government employers). A good round number to pick for our purposes is 10%, but it's up to you; more is better, but you can't go above $18,000 annually. The one cardinal rule here isTake The Match if you have one. A typical employer might add 3% of your salary if you contribute 6%, so that's like Free Money. Take The Match. (Your actual match, if any, depends on your employer's rules.) All of this contributed money is invested for you as you designate, and you can take it out without penalties when you retire after age 59.5 (usually.) If you change jobs, the money stays with you. The downside of a 401k is that you can only invest in what your employer offers. Most employers have target date funds, so choose those if you want an easy decision. If you need or want to, you can achieve an even better result with a bit more effort by picking from the available choices.
• Yet more retirement options: IRAs. Individual Retirement Accounts are the do-it-yourself version of a 401k. You set up an account with a company like Vanguard, Schwab or Fidelity, and give them money to invest for you, up to $5500 annually. You'll have more choices, target date funds as well as others. Depending on your income level and what your employer offers, you either get a tax deduction ("traditional") or not so much ("Roth"), but then you get the opposite treatment for future withdrawals when you reach 59.5. IRAs are your go-to option if you have no employer 401k. Even if you do have an employer plan, you still may (and even should) want to use an IRA, especially a Roth IRA. You can sometimes tap IRA and even 401k resources before retirement for certain good reasons, though it's not an amazing idea to do so because you lose future gains and might owe current taxes. If you do want raidable retirement savings, a Roth IRA is the best choice because it is untaxed and contributions can be taken out without penalty.

• Debt. You borrow money now so you can spend it, yay! But then you have to pay it back, and typically pay back more than you borrowed, boo! You've lost money as a result. The extra amount you repay is determined by the interest rate - the annual rate is called APR.
  3% APR student loan - You'll pay $300 annual interest on $10000.
  12% APR car loan- You'll pay $1200.
  23.9% APR credit card- You'll pay $2390.
  The longer you take to pay back the loan, the more interest you'll pay. You have to pay back the money you borrowed, too; that's called principal. The longer your loan term, the smaller each payment, but the more interest you'll then pay. that's the tradeoff.

• Taxes. Your employee income is taxed / withheld like so: 7.5% of the first $118K goes to payroll taxes.  Then your income is taxed at higher rates as you make more. Assuming no special deductions, 0% for the first 10K due to standardish deductions. Then 10% of the next 9K, 15% of the next 28K, and then 25% tax rate kicks in; this is your rate from 48K to 102K gross income, so a popular rate. It's only 28% up to 200K, as well. This is your tax bracket / marginal tax rate. Most states also have state income taxes of ~6% but they vary a lot. Note that higher brackets only affect your additional income; you never end up worse just because you go into a higher bracket from more income. You can also reduce your taxes by certain types of deductions.
• "What do you mean perhaps reduce current taxes?" Retirement savings are wery wery complicated. (Thank your congresspeople.) A "traditional" 401k reduces your current taxes because it exempts your contributions from your taxable income. But, when you take the money out, then you pay taxes on it. The good news is you delayed the taxes. The bad news is you still pay them. If you think that's a bad deal, you can reverse this in some cases. If your employer offers a "Roth" option, you can invest your 401k contributions paying taxes on them now, but then the money including gains is tax-free on retirement. The choice of what to do is complicated, but if you are below the 25% bracket, Roth is usually your best option.

(Emergency fund 101-Bonus topic)

 You don't want to be cashing in bonds or selling stocks to pay for a visit to the emergency room or car repair, so make sure you have liquid on hand. 

You want some cash around so you can quickly handle any relatively minor emergencies. You can go from there depending on how likely it is that you think you'll need the money. If you don't mind the effort, it's reasonable to create a tiered emergency fund where the upper tiers are earning a small amount of interest.

• checking: 1-2 months of expenses, enough to cover any normal emergencies aside from job loss, long-term medical issues, or other moderate-to-severe emergencies.
• savings / money market account: 2-4 months of expenses, enough to cover short-term job loss and moderate-to-severe emergencies.

It's 100% okay to keep your entire emergency fund in checking or a combination of checking and savings, but if the idea of low interest rates is too much to bear, you can consider a third tier of I Bonds or laddered CDs for emergencies that exceed 3-6 months of expenses. The issue with using I Bonds is that your purchase is locked up for the first 12 months so it is necessary to gradually add money over the course of a year (or more) in a way that guarantees you will always have 6 months of expenses quickly accessible.