Peter's Digital Garden

I’m not a financial advisor, but these are the rules I follow. This has investing advice, the other has savings advice. Read the other first.

• Choose what your safe balance is for your checking account, and only invest with what you have over that safe balance. A good starting point for a safe balance is enough to cover 2 months worth of expenses if something goes wrong. Each month, move anything over that safe balance into investments.
• Certificates of Deposit (CD) are safe, but have a very low rate of return. You give the bank either $5000 or $10,000 for 1 to 5 years, and they guarantee you get more money back. But, you can’t get access to that money until the CD finishes.
• Money market accounts are basically like a savings account, but require a higher balance, and have fees for withdrawals. You can generally move money in and out with 3-4 days notice.
• Mutual funds are where you start dealing with actual investing. In a mutual fund, someone else is managing which stocks, bonds, etc to purchase or sell, and when. All that you do is add your money to the pool they are working with and gain some of the benefits. Note that you can and probably will lose money occasionally. But year over year mutual funds do well.
• You can also push up the percentage on your 401(k) to invest more pre-tax. Your 401(k) takes money out of your paycheck before you pay income tax, and then you only get taxed when you take the money out of your 401(k), probably after retirement, when your income bracket is lower anyway.
• Equity matters. Your Equity is your Assets minus your Liabilities.
  • Add up your credit card balance and your loans (auto loan, student loan, home mortgage, …), that is your Liabilities.
  • Add up your checking and all your investments, including the 401(k), that is your Assets.
  • You are generally safe if your Equity is positive, that means you own more than you owe. If your Equity is negative, I would take a very close look at what you are spending money on and try to pay off the loans.
• Don’t bother with most other investment opportunities until you talk with an actual financial advisor.

Once you have the value of about 6 months worth of expenses in your investments, I suggest you ask to talk with your bank’s financial advisor to figure out what your next steps should be.

I have written everything in terms of months worth of expenses. That is because the monthly expenses for a single person sharing an apartment is very different from a family with their first child. If I had given exact dollar amounts, that would be based on my experience, and may not match your situation.