Chapter 10: Finding financial independence

Table of contents

10.1 Introduction

A man reading a book sitting on top of coins.

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While not always taught in schools or discussed openly, personal finance skills are key to achieving your goals, finding independence, and protecting yourself from unexpected life events. This is why we dedicate a full chapter to personal finance fundamentals, so you can understand and leverage financial tools to meet your goals. 

In this chapter, you will learn the basics of personal finance, finance terminology, how to design a financial plan to achieve your goals, and more. Let’s get started!

Disclaimer: Please keep in mind this is an educational tool and is not meant to provide financial advice.

10.2 Personal finance 101

In order to understand your financial situation and define your financial goals, it’s important to establish an understanding of different financial terminologies, tools, and resources. Some of these you may already be familiar with, especially after reading Chapter 2. While it may seem complicated and unfamiliar, understanding the basics of personal finance is critical to help you find independence and navigate your future.  In this section, you will gain a basic understanding of:

  • Different types of bank accounts
  • Credit card pros and cons

10.2.1 Banking basics

Banks can help you manage and access your money. As mentioned in Chapter 2, it’s important to ensure your finances are secure, available, and that you control who has access to them. Creating your own bank account can help you do this.

Checking accounts

A checking account is the typical account where you keep most of your living expenses. It’s the type of account you provide for your employer to deposit your paycheck into, and where money is withdrawn from if you write a check or use your debit to pay for expenses. A checking account may pay you some interest, which is sometimes referred as APY: Annual Percentage Yield. But, for checking account, the APY is so small – often less than one-tenth of a percent – that you won’t notice a difference.

Savings accounts

A savings account helps you set aside money that you don’t need for routine expenses. You can use a savings account to set up an emergency fund for unexpected expenses or put aside money for other goals, like a big trip, car down payment, or general savings. You can even have multiple savings accounts for long- and short-term savings goals. Savings accounts will often accrue an interest slightly higher than checking accounts (closer to 0.5% APY).

When opening a savings account, look for “High-Yield” Savings accounts, some of which pay up to 4.0% APY. This means that if you hold a $1,000 balance in the account for a full year, the bank will pay you $40 in interest. Free money! For this reason, it’s a good strategy to keep enough funds in your checking account to meet your monthly expenses, and then put any extra money you have into high-yield savings to earn interest. The no-fee online banks mentioned before — like Ally, Capital One, Discover, and SoFi — are great places to start when looking to open a high-yield savings account. To help you grow your savings, you can often schedule monthly transfers from your checking account into your savings to automate the process.

10.2.2 Credit cards

Be sure to read the introductory section on “Credit Cards: Risk and Rewards” in Chapter 2. Credit cards aren’t for everyone, but for those who understand how they work and follow a consistent payment schedule, credit cards can offer convenience and perks. 

Credit card benefits

  • Earn perks. Many credit cards offer some form of between 1-5% cash back, travel points, or some other benefits. If you open up a card with a $0 annual fee and pay off your balance in full every month, you are earning free money that you wouldn’t get through a debit card or through cash. 
  • Build your Credit Score. If you intend to buy a house or apply for an apartment, a credit report is often required. A credit card can help you build a strong credit history if you regularly pay your credit statements on time. This can help raise your credit score over time to position you for a lower interest rate on a mortgage or other loans. Just keep in mind that if you fail to regularly make your credit payments, it will hurt your credit.
  • Assess convenience and protection. The modern world is becoming increasingly cashless, which at times can make a debit or credit card necessary. Most credit cards also offer fraud protection, so if your card information or wallet is stolen, you can cancel your card and dispute charges you didn’t make. 
    • If you lose your wallet and someone empties your checking account using your debit card, that money is generally not recoverable. Meanwhile, you can report a stolen credit card if unauthorized charges on a credit card can be reported and voided. Though credit theft is always a risk with credit cards, many companies provide monitoring services. 

Credit card risks

  • Increased Spending: For some, using a credit card can make it tempting to spend beyond your means, or up to the monthly limit. If you do not pay your bill out if full each month, you will be charged interest that can rapidly snowball, costing you more money and hurting your credit score. If you don’t diligently manage your card, maintain enough money in your checking account to pay it off on time and in full, you can incur late fees and interest that quickly overtake the perks of your card. 
  • Credit card theft: As mentioned earlier, credit theft is on the rise. 

If you understand the tradeoffs and decide you want to open a credit card, you could continue using a debit card or cash to cover most of your expenses, and simply charge a small amount to your credit card each month to build your credit, establish your payment schedule, and take advantage of some credit card benefits.

There are many simple, beginner friendly credit cards to help first-time card holders build credit, and you can set up automatic payments through to avoid late fees – just be sure that your payment defaults to the Statement balance – not the minimum payment.

  • Why? If you only pay the minimum, you will be charged interest on the rest until your next statement is due. This is often as high as 25%. You can see how for a statement balance of $500, if only the minimum payment of $40 is paid, the remaining balance of $460 will grow with significant interest.

10.3 Define your financial goals

Now that you understand personal finance fundamentals, let’s think about how these financial tools can promote your goals. You likely have many competing priorities, which may include paying off debt, building an emergency fund, starting a retirement account, or saving for a significant purchase like a car or downpayment. Before you can make a monthly budget, it’s important to step up and understand your financial priorities, so you can allocate your money effectively. 

Notes on retirement and competing priorities

When there are so many different expenses and competing priorities, it can be overwhelming to understand what to do with it. Should I be focused on paying off debt, saving for tuition, or building an emergency fund?  The tradeoffs are everywhere, and everyone’s situation and priorities are different.

If you are making an income, meeting your bills, find yourself with extra assets, and are wondering how to best use them, the below visual may provide a useful framework to help you set your priorities. This is just one approach to help you manage where you put your money, but it’s a good starting point because it does the most work for you:

The first three boxes above are the most relevant for most people. The priorities suggested here include:

  1. Set some emergency funds aside.
  2. If you are employed and your employer provides a 401k/403b match program, contribute just enough to get your employer’s match – that’s free money!
  3. Once you have an emergency fund and met your employer’s 401k/403b match (if applicable), then focus on paying down debt. You can also budget saving for upcoming purchases or tuition here.

10.4 Make a budget

Now you have a sense of your goals, let’s map out a long-term plan to get there.

10.5 Recap: personal finance checklist

You made it! Hopefully now you have a greater understanding of financial terminology and tools, a sense of your financial goals, and a tactical plan that gives you more confidence to navigate financial matters. If you are still feeling intimidated or overwhelmed, see the steps below for a recap of your first steps toward greater financial independence.

  • Understand your assets and obligations. Do you have any savings? Do you have any debt?
  • Define your financial goals for the next year. See exercise 10.3.
  • Create a budget and create your monthly net “Cash Flow”. Remember, net cash flow = monthly income – monthly expenses. The goal is to develop and stick to a budget where your monthly cash flow breaks even or is positive. You can find your net cash flow at the end of the workbook provided in Exercise 10.4.2.
  • Open a bank account(s). This can include a checking and saving(s) accounts. Look for a bank provider that has no fees – there are many great online options mentioned in Chapter 2.
  • Open an emergency fund. An emergency fund will help protect you in the case of unplanned expenses or losing your job. Remember to take advantage of high yield savings accounts to earn more interest.
  • Pull your credit report. See more in Chapter 2.
  • Consider contributing to a 401k/403b if provided by your employer. You could also consider opening an individual retirement account (or IRA, traditional or Roth) if you’d like to start saving for retirement. 
  • Continue to build your knowledge by checking out these resources.
    1. Books: “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated”, by Helaine Owen and Harold Pollack. We recommend this for its common-sense financial advice.
    2. Podcasts: NPR Money LifeKit. We recommend this for exploring retirement accounts and investing in greater depth
    3. Website: NerdWallet. We recommend this for side-by-side comparisons of different financial services providers, credit cards, savings accounts, etc.
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