Personal Finance

In a nutshell, all personal finance comes down to this single rule:

Spend less than you earn.

That's the hard part. Once you've done this, here's what I would do with the surplus:

  1. Pay down any credit card or high-interest debt.
  2. Save $4,000 in a high-yield checking account.
  3. Use $3,000 of the $4,000 you've saved to open a Roth IRA. Specifically, choose the most appropriate Vanguard Target Retirement fund, and open a Roth IRA directly with Vanguard. Save $1,000 as an emergency fund.
  4. If your employer offers a matching 401(k), invest everything in a diversified fund in the 401(k) until you get the maximum match.
  5. Try to max out your Roth IRA contribution (currently $5,000/year). Remember that you can withdraw the principal (but not the appreciation) from a Roth IRA in case of emergencies.
  6. Once you've maxed out your 401(k) match and your Roth IRA, add to your savings until you have 3-12 months of expenses in your emergency fund.
  7. If you still have money to save, do one of the following:
    • If you have long-term debt, like a mortgage or student loan, pay down the principal.
    • If you still have a 401(k) available, save more for retirement.
    • Invest in a low-cost mutual fund, like the Vanguard Total Stock Market Index or Vanguard Total Bond Market Index. Also consider International, Money Market, and possibly REIT funds to diversify (see below for my target diversification strategy).
    • Donate to charity or lend via a microfinance site like Kiva.
    • Save more in your emergency fund.
    • Live a little :)

My Target Diversification

Note that I'm currently 28, so according to the traditional rule of thumb I should have about 72% stocks and 28% bonds. Here's where I aim:

  • Cash equivalents (e.g. money market fund): 5%
  • Bonds: 25%
  • Stocks: 70%
    • US Stocks: 45%
    • International Stocks: 20%
changed February 2, 2009