Just like a lot of my friends in Computer Science, I’m graduating in a few months and have a high-paying gig lined up. From what I’ve been seeing however, most of us don’t really know what to do with our finances - we haven’t seen that much money before. Unlike college life, there won’t be anyone to guide us with the money.
I’ve been doing a lot of research into personal finance and wealth-building. I want to share what I’ve learnt with you, to give you an upper hand. These are just some of the things I wish colleges taught us about managing our money.
Save regularly, and save early
Make saving a habit. No matter how you do it, save at least 30% of your net income. Software engineers can easily save upwards of $30,000 per year. A much better way is to use your company’s 401k (and IRA, HSA or other accounts, if available). They deduct a some money from your paycheck, and make it that much easier to save.
I also recommend using services like Weathfront (referral link) and Betterment. You can set it to take some fixed amount every month and invest according to your risk tolerance.
Making saving a regular, unconscious exercise.
Consider two scenarios:
You save $100 every month for 30 years. With a 5% growth rate, you end up with about $83,000 with interest.
You save $100 every month for 40 years. With a 5% growth rate, you end up with about $152,000 with interest. That’s almost 2x more money in only 30% more time.
These two graphs also show the power of compound interest. I think a lot of people undermine compound interest.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett
If the richest man in the world says it, it has to be true.
Pay off your high-interest loans first
Once you understand the power of compound interest, you will realize how expensive loans are. Credit cards come with a ~21% compounding rate. There is no one, I mean no one, who can get that kind of a return from any investments - except for the banks.
Clear your soul of the high-interest loans before you go shopping for a car or a house, or even a new phone. Then never, never get into credit card debt.
There’s nothing else to add to that.
Without having an understanding of how systems work, there is no way you can use it to your advantage. Understand how stocks work, how taxes affect you, calibrate your mind for the change. I recommend the following resources:
- The Intelligent Investor - Benjamin Graham
- The Compound Effect - Darren Hardy
- The Millionaire Next Door - Thomas J. Stanley, William D. Danko
- A Random Walk Down Wall Street - Burton G. Malkiel
Blogs / Websites
- The Simple Dollar - general personal finance
- The White Coat Investor - personal finance for professionals (higher income topics)
- Mad Fientist - advanced strategies for financial independence and early retirement
- Mr. Money Mustache - early retirement and frugality
- jlcollinsnh - early retirement advice from a retired guy
Disflate/Deflate your lifestyle
This comes directly from The Millionaire Next Door. The wealthiest (not the same as the richest) live below their means. With the high-salary of software engineers, living below our means isn’t very difficult, but resisting the urge to live extravagantly can be difficult. Higher income doesn’t always command for a higher status.
When you get a raise or a bonus, or enjoy and have a drink with friends. Then put all the extra money in your investment or savings account.
Where should my money go?
This graphic from /r/personalfinance sums it up.
Read more about it here: https://www.reddit.com/r/personalfinance/wiki/commontopics
Do you have any personal finance tips? Let the readers know by leaving a comment.