Brent Walther

Personal Finance Philosophy

Background

Since becoming an adult, I’ve become more and more interested with the world of personal finance. I started browsing /r/personalfinance wiki to learn about the basics of managing your finances as an adult. In particular, this flowchart made it very clear how I should be directing money to set myself up well financially. The mantra is pretty simple: reduce expenses, pay off (high interest) debts, and save+invest your unspent money.

The ‘mantra’ is pretty easy to understand but isn’t easily implemented. I, like many others, do spend money on things I enjoy: eating out, purchasing material goods I like, doing activities (bars, concerts) with friends and family, and going on vacations. In order to have a clear picture of where you’re at financially and to be able to set realistic/achievable financial goals, I think any individual should know:

I’ve gone deep enough into the personal finanace rabbit hole to also become deeply fascinated with the idea of Financial Independence (called FI, FI/RE, FIRE); it’s the idea that once you are generating enough passive income through investments (enough to cover all your expenses), you are no longer required to maintain a job for primary income. Achieving FI is not easy though - you need to do a lot of saving and reduce your expenses to make the numbers work. The topic is faily complicated (though this is a good starter) but a simplified way of looking at it is that you need about 25 times your yearly expenses invested to consider FI. That means if you spend $50,000 per year (on everything), you need 50k x 25 = $1,250,000 invested!

Budgeting

Setting a budget is an important step in personal finance but an honest and thoughtful budget must allow you to know where your money is going. You need to be tracking your expenses in categories. Below is an example budget (very similar to the one I use) where you would fill a value in each of the cells in the “Amount Spent” column on a monthly basis:

Category Budget Amount Spent
Housing $1500 ???
Bills $500 ???
Restaurants/Bars $500 ???
Groceries $400 ???
Car/Gas $400 ???
Shopping $200 ???
Travel $100 ???
Entertainment $100 ???
Doctor/Dentist $75 ???
Total $3875 ???

Trying to keep track of a budget with this many categories is difficult and without any type of automation also quite time consuming. To make this easier on myself, I’ve automated many parts of it - I’ve developed spreadsheets with pivot tables to automatically sum categories by month and written scripts to convert CSV files downloaded from credit card companies and banks to their expense categories. This allows me to rigorously keep track of every single dollar in every account and know whether the budgeting goals are met.

Investing

Investing can seem like a pretty scary topic for people who haven’t done very much research. However, there are a few simple rules to follow if you want to do yourself a lot of good with minimal effort. They are:

  1. If your job has a 401k (or similar e.g. 403b) investment account with a company match, always invest enough to get the full match. The match is free money; why lose out on it?
  2. Diversify your money in low-cost index funds. Do not pick individual stocks (e.g. AMZN, TSLA) to invest in. Put simply, this means looking through the fund options your plan/brokerage has and trying to find funds with the lowest Expense Ratio (ER). Don’t be fooled into pretty graphs that claim a “higher return” – they often have much higher ERs that will eat away at your money over time. Do not pay for a financial manager, they’re expensive at best and lose to index investing at worst.
  3. Set up automatic investments to keep your account growing, preferably via paycheck deductions. It’s much easier to save when you never have to think about it.
  4. Don’t ever panic and sell your investments if the markets are down – selling means you’re realizing a loss! Let the markets recover.

Speaking with a little more detail, the easiest way to invest is to build a simple three-fund portfolio consisting of domestic stocks, international stocks, and bonds. Better yet, consider investing in a ‘target date’ fund if your brokerage offers one (just as long as the expense ratio is not really high). If you’re young (20s or 30s), you should consider allocating the majority of your investments (as much as 90-100% if you’re under 30) in stocks and keep a 60/40 or 70/30 ratio off domestic/international stock. Stocks have more risk but more reward - since you’re young, you can take on much more risk since generally speaking you would never sell and realize a loss if the markets were down. Rather, you’ve got 10s of years to let the markets recover and your investments compound.

If you have investments in different kinds of accounts (401k, Roth IRA, IRA, taxable brokerage), you should also begin considering tax efficient fund placement which essentially boils down to: (1) keep income-generating investments in tax-deferred accounts (e.g. bonds and REIFs in 401k) and growth investments (stocks) in taxable accounts. You should always pick an allocation and stick with it (summing all assets across all accounts). That might mean you have 100% stocks in your taxable account and more than your overall allocation of bonds in your 401k.

To be concrete, here’s the allocation I target at 27 years old:

Holding Goal Allocation Actual Allocation
US (domestic) stock 55% 63.8%
Internation stock 35% 26.6%
Bonds 9.5% 9.1%
Cryptocurrency 0.5% 0.5%

Pitfalls

These are some personal finance pitfalls that I think a lot of people fall in to: