Money For Adults
Who Skipped
Class.

Track everything.

You can't manage what you don't measure. Before you optimize, capture three months of every dollar in and every dollar out.

The 50 / 30 / 20 rule

Elizabeth Warren's framing in All Your Worth (2005). Of after-tax income:

RULE OF THUMB · NOT DOGMA

Adjust ratios. The point is the discipline of categories, not the exact split. Renters in NYC may need 70/15/15. Empty-nesters in Ohio may save 40%.

The buffer.

Before investing, before paying down anything but the worst debt, build 3–6 months of essential expenses in a high-yield savings account (currently ~4–5% APY at Marcus, Ally, Wealthfront, et al.).

Why? Because life happens — car dies, layoff, medical. Without a buffer, every shock becomes a credit-card balance, which becomes a 25% interest spiral.

RULE"You will need it. You won't know when. The only certain savings is the one already saved."

If you have unstable income (gig work, commission), aim for 6–12 months. If you're dual-income with stable W-2 jobs, 3 months may suffice.

Fig. 1 — Emergency fund · concept · approximate

Pay it off.

Not all debt is equal. The interest rate determines whether to attack or carry.

Avalanche vs. Snowball

WARNINGNever co-sign a loan you couldn't afford to repay yourself. Co-signing is borrowing.

The eighth wonder.

"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." — Apocryphally attributed to A. Einstein

The math: $1 invested at 7% real return becomes $7.61 in 30 years. The same dollar at 10% becomes $17.45. Time is the currency that buys returns.

RULE OF 72: years to double = 72 ÷ rate

At 7%, money doubles every ~10 years. At 10%, every 7. At 4%, every 18. Lower rates compound dramatically slower.

Just buy the market.

John Bogle launched the first retail index fund (Vanguard 500) in 1976. The thesis: most active managers fail to beat the market after fees, and you can't reliably pick which won't fail in advance.

SPIVA scorecard: over 20-year periods, ~90%+ of active U.S. large-cap funds underperform the S&P 500. The ones that beat it tend to switch each decade.

The three-fund portfolio

Three funds. Rebalance annually. Done. This portfolio beats most hedge funds over rolling 20-year windows after fees.

NOTEExpense ratios matter. A 1% fee compounds to ~28% lost over 30 years. Pay 0.03–0.10% (index) not 1.0% (most active).

Account alphabet soup.

Typical priority order

1. 1. 401(k) up to employer match (free money — never skip)
2. 2. Pay off high-interest debt (>7%)
3. 3. Max HSA if eligible
4. 4. Max Roth IRA
5. 5. Max 401(k) above the match
6. 6. Backdoor Roth, mega-backdoor, taxable brokerage

By life stage.

Old rule of thumb: bonds = your age. Modern view (Bengen, Bogleheads): given longer lifespans and lower bond yields, equities should run higher for longer.

SEQUENCE-OF-RETURNS RISKIf you retire and the market drops 30% in year 1, you're forced to sell low to fund spending. Ten years of contributions can't undo it. This is why allocation matters most in the 5 years before and after retirement.

The 4% rule.

William Bengen, 1994. Studied historical U.S. data 1926–1976. Found that withdrawing 4% of a 60/40 portfolio in year 1, adjusted for inflation thereafter, would not deplete a 30-year retirement in any historical period.

Implication: save 25× annual expenses and you can stop working.

FIRE — Financial Independence, Retire Early

Variants: Lean FIRE (~$1M, frugal), Fat FIRE ($5M+, comfortable), Coast FIRE (have enough invested that compounding alone reaches retirement target — work just covers spending).

CRITIQUES4% may be high for early retirees (50+ year horizons). Many planners now use 3.3–3.5% for FIRE. Healthcare costs in the U.S. before Medicare are the silent killer.

Tax for civilians.

The marginal vs. effective trap

Your marginal rate is what your next dollar is taxed at. Your effective rate is your total tax ÷ total income. They are different. Earning more never reduces your take-home — only the dollars above each bracket are taxed at the higher rate.

Capital gains

Long-term (held >1 yr): 0%, 15%, or 20%. Short-term: ordinary income. Tax-loss harvesting = sell losers to offset gains; deduct up to $3,000/yr against ordinary income.

PRO TIP: hold > 366 DAYS

What you actually need.

• Health insurance. Always. A single ER visit can be $50k uninsured.
• Auto liability. State minimums are too low. Consider 100/300/100 if you own assets.
• Renters / homeowners. Cheap. Replaces stuff and provides liability.
• Term life. If anyone depends on your income. 20- or 30-year level term, 10× annual income. Skip whole life unless an estate planner specifically recommends it.
• Long-term disability. Underrated. Probability of disability before 65 > probability of death.
• Umbrella. $1–5M coverage for ~$200/yr if you have meaningful net worth.

SKIPextended warranties, identity-theft insurance, credit-card insurance, mortgage life insurance. Most are profit centers for the seller.

The classic blunders.

• Carrying a credit-card balance to "build credit." It does not help. Pay in full.
• Buying whole life as an "investment."
• Day-trading the rent.
• Cashing out a 401(k) when changing jobs (10% penalty + tax).
• Taking Social Security at 62 without doing the math (delay = 8% raise/year).
• Financing a depreciating asset over 7 years.
• Buying as much house as the bank will lend.
• Believing a hot tip from a stranger.
• Lifestyle inflation that absorbs every raise.
• Not having a will or beneficiaries set.

What to read.