Introduction
4 min read.
Most of us fall into one of two camps in regard to our money: We either ignore it and feel guilty, or we obsess over financial details by arguing interest rates and geopolitical risks without taking action. Both options yield the same results—none.
—Ramit Sethi, I Will Teach You To Be Rich
Throughout my life, I fell on the “ignore it and feel guilty” group. I never knew how much money I had in the bank, didn’t care much about how it was invested and had no visibility on how my income was being allocated to spending and savings.
Recently, however, at the age of 27, I decided to take control of my finances to ensure that I’m on the right track to having the life I want to have. So I did some research, defined my financial goals, and built a savings-and-investment plan to achieve those goals. And now I’m sharing my conclusions with you, in hopes that you’ll too take an active role in managing your finances and reach your true potential.
This guide is mostly directed to young adults in their 20s and early 30s, who will face some big expenses soon like buying a car, putting a down-payment for a house, paying for a wedding and/or a first child, and who have a long time to prepare for retirement. I’ll go into detail on the investment decisions I’ve made, and because these decisions depend on the country you’re in (more on this later), it’s particularly directed to my fellow Portuguese people. Nevertheless, if you’re from another country, going through my decision process will help you learn how to approach investing in your country as well. A lot of my insight came from reading on how to invest as a citizen of the US and UK and adapting to my situation.
Managing your finances entails many aspects, namely: earning more, spending consciously, getting better deals on big-ticket purchases such as a car or a house, and investing your savings. In this guide, I’ll only cover investing your savings because it’s both relevant to do right now and can be quite complicated, especially to people that did not have any education in economics and financial markets. To get a broader approach on how to manage your finances, I encourage you to read I Will Teach You To Be Rich by Ramit Sethi.
In summary, we’ll define our financial objectives and set up a plan to achieve them. We’ll first set up two savings-accounts: one for the short/medium-term, to cover foreseeable big expenses (car, house, wedding, etc.); and a second savings-account for the long-term. The long-term savings are to only be withdrawn at our retirement, to allow us to enjoy our end of life more freely. Then, we’ll choose where to invest with each account, and finally, decide how much of our savings (both the accumulated until now and future savings) we’ll allocate to each account.
We Won’t Become Financial Experts
Before we start building our personal finance system, an important note. Don’t think that you’ll have to get every single part of your finances in order before truly getting started managing your money. This thought will paralyze you. Just like you don’t have to be a master chef to cook for yourself or your loved ones, you don’t have to become a financial expert to take your first steps towards controlling your finances.
Getting started is more important than becoming an expert. (…) The easiest way to manage your money is to take it one step at a time—and not worry about being perfect. I’d rather act and get it 85 percent right than do nothing. (…) It’s better to make [the mistakes you’ll unavoidably make] now, with a little bit of money, so that when you have more, you’ll know what to avoid. (…)
Honestly, if you’re twenty-five and just starting out, your biggest danger (…) is being lazy and overwhelmed and not doing any investing at all. That’s why it’s important to understand the basics but not get too wrapped up in all the variables and choices.
—Ramit Sethi, I Will Teach You To Be Rich