Money Management

Setting Up Your Finances

Here is a step by step guide on how money should be allocated. Each step should happen in successive order until you reach step 5 and 6 which happen simultaneously.

Checking – 2 months of expenses
Savings (emergency fund) – $2,500 (2025)
Pay off debts charging more than 12%
Increase the $2,500 Savings into a Rainy Day Fund – 6-12 months of expenses
*Next two happen simultaneously
Pay off debts charging less than 12%
Brokerage – all surplus cash for investment

Step One: 2 Months Expenses

Step One: 2 Months Expenses
The first step is to fully funded checking account. Your goal here is to keep the equivalent of two months’ worth of average expenses available at all times. This acts as a buffer to protect you from the short-term ups and downs in your income or spending. If a paycheck is delayed, a bill hits sooner than expected, or something just slips through the cracks—you won’t be scrambling to cover it or falling into costly overdraft fees.

The easiest method to discover your average monthly expenses is to review your checking and credit card statements for the amount of money being withdrawn for the past several months then divide by the number of months. That number becomes your baseline. This isn’t money for investing or spending—it’s cash on standby, keeping your day-to-day running smoothly no matter what.

Step Two and Four: Emergency Fund – Rainy Day Fund

Step Two: $2,500 Emergency Fund
This is your first line of defense against unexpected but critical short-term financial hits—think car repairs, medical bills, insurance deductibles, or a last-minute flight home. These kinds of emergencies may not be life-altering, but without a safety net, they can derail your financial plan. Borrowing money in a crisis is often expensive—and sometimes not even possible. That’s why this fund needs to be in place before trouble shows up. Keep it in a separate account, completely isolated from your everyday spending. Out of sight, out of mind—until the day you truly need it.

Step Four: 12 Month Rainy Day Fund
The fourth step is to grow the Emergency Fund into a six to twelve months’ Rainy Day Fund. Six to twelve months worth of living expenses is your insurance policy against bigger life disruptions like losing a job, needing to relocate, or a prolonged medical issue. Just like your emergency fund, this Rainy Day Fund should sit in a safe, liquid account and remain untouched unless you’re facing a genuine large-scale financial emergency. This isn’t for impulse purchases or home upgrades—it’s for major life curveballs that require time and cash to recover from.

Step Three, Five and Six: Debt verse Investing

Step Three: Eliminate High-Interest Debt (Above 12%)
Once your emergency fund is in place, the next focus should be on aggressively paying off any debt with an interest rate above 12%. These high-interest debts—often credit cards or payday loans—are financial quicksand. The cost of carrying them far outweighs the average return of any investment, making them the top priority to eliminate.

Steps Five and Six: Balance Debt Payments with Investing
After clearing all debts charging more than 12%, the next steps will vary based on your financial situation and the current economic climate. These two steps—paying down moderate-interest debt and investing—should be tackled simultaneously and strategically.

As a general rule, any debt carrying an interest rate between 6% and 8% (as of 2025) should be prioritized before directing excess funds into a brokerage account. That’s because paying off debt at 7% is effectively locking in a 7% return—risk-free—whereas investing in the stock market offers an average return of 8–9%, but with volatility and risk.

Once your remaining debt is below that 6–8% threshold, surplus money should be split between continued debt reduction and investing. A common approach is a 60/40 allocation:

60% of surplus cash goes toward paying off remaining debts
40% is invested into a brokerage account to begin building long-term wealth

This balanced approach allows you to grow your assets while still lowering your liabilities, creating a more stable financial base moving forward.

Examples of Debts and Expenses

Student Loan Debt (2019)

Students can pay for college utilizing private bank loans (not recommended) or federal loans through the government. Federal loans are from the U.S. Department of Education and come in two forms, Subsidized and Unsubsidized. While attending university Subsidized Loans have the accruing interest paid by U.S. Department of Education where Unsubsidized loans accumulate interest to be later paid by the borrower. (A lot of this might have or will change but the idea stays the same. 2025)

All loans provided by the federal government have flexible and favorable repayment terms where private loans do not. If you run into financial difficulty you have the ability to request Forbearance, Deferment, Income driven repayment or refinance with a private lender.

Forbearance – This option temporarily stops the required payments but does not stop the interest from accruing on the loans. Mandatory forbearance must be provided as an option and General forbearance is at the discretion of the loan provider. Financial difficulties, medical expenses, or changing jobs are justifiable reasons to apply for forbearance.

Deferment – This option temporarily stops the required payments and may stop the interest from accruing on the loans.

Income driven repayment plans – There are four options all base payments solely on your income and family size with no relationship to the loan amount or interest rate.

Income contingent repayment
Income based repayment
Pay as you earn
Revised pay as you earn

Income contingent repayment

Based income minus 150% of the poverty line
Or twenty percent of discretionary income.

Income based repayment

Payments are 15% of discretionary income
Only plan FFEL loans are eligible
Has a cap on payments of 10 year standard payment
Taxable forgiveness after 25 years

Pay as you earn

Payments are 10% of discretionary income, not eligible if loans prior to 2007 or no loans after 2011
Taxable forgiveness after 20 years of payments
Cap on payments of 10 year standard plan after residency
Could still be best plan for those considering public service loan forgiveness and married to another earner

Revised pay as you earn

Payments are 10% of discretionary income
Taxable forgiveness after 20 years of payments for undergrad loans
Taxable forgiveness after 25 years of payments for graduate loans
No cap on payments, if your income goes up so will your payments
0.5% of accumulation interest, after money payment, is forgiven
- Effectively subsidizes your interest rate
Much better than deferment or forbearance

Refinancing with private lender

Many programs that can help with this¹
This is an excellent option for existing private loans
Rarely if ever a good option for federal loans
May have a lower interest rates
No flexibility in repayment options
More details covered in section titled Creating a Financial Plan subsection A financial plan focused on debt consolidation

Home: Rent vs Own

To decide if you should rent or buy a home, consider the following.

How long will you be residing in the home, < 3 years, answer rent
If in the near future a job opportunity may require you to relocate, answer rent
Do a cost comparison between Renting and Home Ownership²
- Rental Costs:
  - Security Deposit
  - Monthly Rent
  - Renters Insurance
- Home Ownership Costs:
  - Closing Costs typically range between 2-5% of the purchase price of the home. Following items are cumulatively considered part of the closing costs.
    - Credit report
    - Loan origination fee
    - Attorney
    - Home inspection
    - Appraisal
    - Survey of property lines
    - Title Insurance
    - Title search
    - Escrow deposit
    - Pest inspection
  - Cost of Ownership
    - Homeowners insurance
    - HOA Homeowners association fees
    - Taxes – are based on the city’s assessment, not what you paid for it.
    - Maintenance

If you do decide to buy a home you will need to know how much is reasonable to spend on that home. Lenders look at the following ratios and expect to see your total debt-to-income ratio, including your mortgage payment, should be 36% or less. The total house payment to income ratio should be around 28% or less.

Mortgages include 30-year, 15-year, and (ARM) Adjustable Rate Mortgages. In a low interest rate market³ it would be wise to choose a 30-year mortgage with the intent to pay it off in 15-years.⁴ This will provide a low rate of interest for the longest period of time along with the lowest monthly payments⁵ just in case hard financial times hit and a lower monthly payment is required. It is most ideal to look for a house where the payments of a 15-year mortgage are affordable as this will reduce the amount of interest payments paid over the life of the loan, preventing the buyer from buying too much house and allow them to get out of debt in 15-years rather than 30 years. An ARM is a good idea for a falling interest rate environment as every so many years the rate adjusts to the market rate. During a falling interest rate market the ARM will adjust downwards and the buyer saves on interest. This can easily work against the buyer if the interest rates start to rise and increase the required monthly payments.

Car: Lease vs Buy

DO NOT LEASE⁶ a vehicle. It will never make financial sense.
Buying a car outright with cash is the only financially smart idea.

Never buy a car that will cause financial distress if it gets totaled and you are forced to buy an immediate replacement
Fully owning your car negates a monthly car payment removing any required monthly payments
Fully owning your car removes the need for full coverage insurance and allowing you to adjust the coverage as desired
When buying a new car from the dealership always take the cash offer if the interest rate is not 0% financing
Always personally sell your car as the dealership never pays top dollar for trade-ins

Transportation alternatives⁷ are available if a vehicle is not needed on a regular basis. This removes the need to own a vehicle along with all of the liabilities and costs.

Larger cities have some public transportation options
RideShare carpooling apps
Short term car rentals like Zipcar and Turo
Ride Hailing apps like Uber and Lyft

Car Insurance⁸ considerations⁹

Increasing the deductible lowers the monthly premiums
Full coverage is not recommended unless you have an expensive luxury vehicle
Consider insurance carriers that are not promoted by mainstream media

Insurance

Insurance: Protect Against Financial Catastrophes Only
Insurance should be used as a shield against the events that could financially devastate you—not as a safety net for minor inconveniences. The goal is to cover only the scenarios that have the potential to bankrupt you. These include:

Long-Term Disability
Death (if others depend on your income)
Major Liability
Significant Property Loss (home, business, etc.)
Serious Health Events

Insuring against anything less is usually a waste of money. Over-insuring drains your cash flow, leaving you with little to nothing to invest—which is where your wealth actually grows.

To lower your insurance premiums, raise your deductible to match the amount you’ve set aside in your emergency fund. This keeps your coverage intact while reducing the monthly cost.

#1 Rule: Always purchase insurance through independent agents. These agents can quote policies from multiple companies and aren’t tied to pushing a single provider’s products. This gives you better pricing, better options, and someone working in your best interest—not the insurance company’s.

Long Term Disability

Individual Vs Group

Individual plans are more expensive but provide better coverage and can be transferable if you change employers.
Group plans are cheaper and better if you have poor health.

Premium Payment Options

Level premiums provide same premium over the life of the policy
Graded premium starts off super low but then rises over the life of the policy. This can be a good way to save some cash if you plan on reaching financial independence early then cancel the policy.

Insurance Tips

Buy insurance that is occupation specific,¹⁰ the definition of disability is the most important part
Make sure to have the future purchase rider as this will allow you to add more coverage without having to prove physical health in the future
Residual disability rider is necessary as it will cover partial disability and cover the road to recovery
Acquire the non cancelable policy preventing the company from canceling the policy or change the price
Inflation adjusted rider (cost of living rider): this is important early in your career, if you become disabled in your 30-40s and this pays you all the way until you are 65, inflation will eat up the disability fast. Make sure you have this rider if you buy a policy early in your career. If your buying a policy when your 55 you do not need this rider as inflation will not really hurt you much

Life Insurance (Death Insurance)

Life insurance¹¹ is not necessary when you are financially independent or single with no children with no cosigners on your loans. Otherwise it is a necessary evil to insure those left behind are not financially affected negatively.

Term insurance is the only form of life insurance required.

Various scenarios need to be considered when contemplating how much insurance is required.

If you never want your spouse to work again then multiply your annual expenses by 25, then subtract how much you currently have in your retirement portfolio
The cost of raising children plus their college expenses need to be added. Typically this is $500,000 – $750,000 per child (2025)
Their is a cost of maintaining a household with one less parent, add the cost of converting the remaining parents income into part time or add housekeeping and childcare

Term4sale.Com will show you the price of life insurance without needing to give personal info. Put your info in, print out the list, take it to an insurance company and ask them to write you a plan for the cheapest one. In general you want it to last until the beneficiaries are financially independent. You want a term (20-30 years) level premium policy. Which means the cost stays the same no matter what for 20-30 years.

Property Insurance

If you can’t afford to replace it without financial hardships buy insurance on it. For most people this will be their house, an expensive car or boat. Review your coverage every one to two years. Look into natural catastrophes that happen in your area such as floods, earthquakes, tornados, hurricanes, sinkholes, wildfires and so on.

Look over what is covered and what is not, for example hurricane insurance only covers wind damage and not flood. Homeowners insurance will often exclude jewelry or firearms above a certain dollar amount. Keep a video walkthrough of your house documenting your valuables along with their purchase receipts every year and keep it in a safe location (cloud storage).

If the house burns to the ground – that will help you remember everything you owned and prove that you owned it
Make sure you are paying a little extra for the REPLACEMENT cost. you want them to pay you how much it costs to replace the item. Not just how much it WAS worth. Insurance companies will give you the depreciated value.
If your car is worth less than 10K, switch the insurance on it to liability only once you are financially capable of comfortably affording to replace it if destroyed.

Examples on How to Save on Expenses

Cost Saving Websites
Great information to supplement this content can be found in the book titled The Only Investment Guide You’ll Ever Need by Andrew Tobias. (The 2020-2023 pandemic has greatly affected the Airfare and Hotel information in this travel section.)

Airfare Websites

When traveling domestically or for the first leg internationally the following websites are a good starting point. If you are traveling to multiple destinations or the traveling itinerary might change it is best to book all of the flights separately. This is because when traveling on a multi-leg flight if you miss one leg of your flight the remaining legs of your flight are automatically cancelled without refund.

Primary Picks:

Google.com/flights – Great for generating ideas of possible travel destinations as it provides a global view of possible destinations that can be filtered by price point. There is also a calendar view of pricing if there is flexibility on dates of travel between the two airports. You can choose to book directly through the Google website or with the air carrier itself.
Expedia.com – After locating a few ideas of the best destination and timing of flight with google/flight going over to Expedia to double check and book the flight is recommended. Expedia also has a calendar view on pricing of flights.
SkipLagged.com – If you’re going to a city that is a popular connecting flight city this website will look for the best deal that incorporates that connecting city as a layover. Sometimes when flying long distances going directly to the end destination is more expensive than booking a ticket that incorporates the end destination as a layover city.

Secondary Picks:¹²

Kayak.com – This is an aggregator website that checks pricing on many alternative search engines for the best pricing. Similar to Google.com/flights this website provides a calendar view of pricing and global view of possible destinations.

Hotel Websites

Expedia.com – Top pick
PriceLine – If using Priceline first check out BiddingForTravel.com as it shows tricks on how to use PriceLine for best hotel deals.
Hostelz.com – Locate a hostel anywhere in the world
CouchSurfing.org – This is a person to person temporary traveler hosting website where you can request someone to free up their couch or spare room for a few nights.
HotelTonight.com – last minute hotel booking

Cell Phone Alternatives

Tello – Cheapest on all plans
Visible – Cheapest Unlimited plan
Twigby Mobile – second place on 2Gig and 5 Gig plans
Spectrum Mobile – third place on Unlimited plan
Mint Mobile – Cheap 5 Gig and 15 Gig plan
Fi.Google.com – Google utilizes several of the cell carriers network to create its own network for a low monthly cost that is beneficial for low data users. They no longer provide international coverage for free. (2025)
Skype.com – If you do not need a cell phone plan Skype can provide free Wi-Fi based calling service. There is no cost as you require Wi-Fi to make all of your calls.
Tracfone.com – There are many prepaid cell phone service providers, all of which are designed for people that hardly utilize a phone.

Landline Alternatives

These companies provide a steeply discounted rate for individuals that require a landline.

Magicjack.com
Ooma.com
Vonage.com

Educational Websites

Free education is everywhere on the internet. Depending on the subject matter and thoroughness of the information depends on where the best source is located.

Khan Academy – Khan Academy is a non-profit educational organization with the goal of educating students. They have app and web based educational tools that are free to help educate everyone.
Harvard University¹³ provides free online classes covering an increasing number of subject areas.
Several colleges¹⁴ are known for accepting all transfer credits providing access to a low cost Bachelor’s degree.
HomeSchoolCollegeUSA.com is a competency-based education program. Individuals able to pass 40 exams are able to acquire a degree.

Free Online Software and Helpful Websites¹⁵

TechGuy.org – free website dedicated for tech support
Public library – free audio books, books, meeting rooms, internet
Amazon.com – reduce cost of retail products purchased
Pricegrabber.com – comparison shopping
Retailmenot.com – promotional coupons to use or not
Uniqlo.com – cheap clothing
Rewards Network.com – points for dining out
Move.com – home maintenance, repairs, improvements
Angieslist.com – reviews on service companies

Taxes / Attorneys / Businesses

IRS.gov – All things IRS
Fairmark.com – Tax answers
Nolo.com – Sells books that are for Self Help on topics of legal and business
UpCouncel.com – Online marketplace to hire an attorney
Usa.gov – starting a business to contacting local representative
UpWork.com – online marketplace to hire out a project

Elderly Care

Eldercare.gov – government services available in your area
Brookdale.com – caregiver communities
Aginglifecare.org – manager of elder care
Medicare.gov – long term care choices
medicare.gov/nhcompare/home.asp – rate specific long term care
Comparelongtermcare.org – comparison shopping for long term care insurance
Elderlawanswers.com – financial laws on medicaid
Medicaid.gov
Naela.org – national academy of elder law attorneys

FIRE – What is Income

For the purposes of this discussion retirement is having adequate income to sustain the desire lifestyle without the need to perform undesirable work to generate income. If you enjoy your job and derive happiness or meaning from it and would continue to perform the job without being pay, this is not considered a job, its a hobby. Many individuals continue to work while in retirement as it provides structure, social interaction, entertainment, personal meaning or so on. As long as the money derived from this employment is not necessary for retirement it can be considered a hobby. For everyone else not at that point in life, gaining Financial Independence requires an understanding of Income vs Expenses and Assets vs Liabilities.¹⁶

Income vs Expenses

Understanding Income, Expenses, and the Path to Financial Independence
Income comes from two main sources: active employment and passive investments.

Active income is what you earn from work—usually something you wouldn’t do unless you had to. It’s often the job you tolerate to fund the lifestyle you want.
Passive income is money earned in a way that doesn’t interfere with your ideal lifestyle. These investments or activities generate cash flow without requiring you to trade your time or energy in a way that drains you. In fact, the best passive income streams are ones you actually enjoy managing or being involved in.

Expenses, on the other hand, are anything that takes money out of your pocket without providing meaningful financial return. That includes everything from rent and subscriptions to impulse buys, lifestyle creep, and children.

Defining Financial Independence
You achieve financial independence when your passive income covers all of your expenses—or when you’ve saved at least 25 years’ worth of your annual spending. At that point, work becomes optional.

The quickest route to this freedom? Avoid letting your lifestyle grow in proportion to your income. Just because you make more doesn’t mean you have to spend more. The goal is to let your income and savings rate increase faster than your expenses, which speeds up the path to independence.

Lastly, thinking globally can be a game-changer. Exploring locations with a lower cost of living—whether in another state¹⁷ or country¹⁸—can allow you to maintain your desired lifestyle for less, helping you retire sooner than you ever thought possible.

Assets vs Liabilities

Assets are investments that generate positive cash flow that do not unduly increase the probability of financial losses or liability. Assets typically require little to no oversight. Examples include passively owned businesses, investment real estate, stocks and financial instruments.

Liabilities increase the chance of financial loss and do not have a positive cash flow. They either drain money from your pocket, increase your exposure to financial risk, or both, without producing any meaningful return. Examples are personal home, personal car, pool, pets, children. Yes, even your kids, while priceless, are financial liabilities in this context because they cost money rather than generate it.

When considering making any purchase it is important to identify if what is being purchased is a liability that will slow the progress towards gaining financial independence and determining if it is truly necessary to have. A good rule of thumb when finding something you want to buy is to wait on purchasing the item for a day and determine if you still want the item.

FinAid.org / Upromise.com / Loanconsolidation.ed.gov / Ibrinfo.org / Sofi.com ↩︎
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 ↩︎
Valuepenguin.com/mortgages/historical-mortgage-rates ↩︎
https://money.cnn.com/calculator/real_estate/home-afford/index.html ↩︎
https://money.cnn.com/calculator/real_estate/mortgage-payment/ ↩︎
KBB.com / Autobytel.com / Autoweb.com / Intellichoice.com / Autos.msn.com / Carbargains.com / Costcoauto.com / Edmunds.com ↩︎
Zipcar.com / Turo.com / Uber / Lyft / nerdwallet.com/blog/loans/9-new-ride-share-apps ↩︎
USAA / MetLife / mapfreinsurance.com/en / Geico / State Farm / nerdwallet.com/blog/insurance/car-insurance-basics/how-much-is-car-insurance ↩︎
daveramsey.com/blog/how-much-car-insurance ↩︎
Guardian / Standard / Principal / Ameritas / Mass Mutual / Ohio National ↩︎
Accuquote.com / FindMyInsurance.com / InsWeb.com / EvaluateLifeInsurance.org ↩︎
FareChase.com / FareCompare.com / CheapOAir.com / OneTravel.com ↩︎
online-learning.harvard.edu ↩︎
Charter Oak State College / Thomas Edison State College / Excelsior University ↩︎
Ninite.com / TechSupportAlert.com / OSalt.com ↩︎
HowToFire.com / reddit.com/r/financialindependence/wiki/faq / twocents.lifehacker.com/the-basics-of-fire-financial-independence-and-early-re-1820129768 ↩︎
BestPlaces.net/cost-of-living ↩︎
WorldData.info/cost-of-living.php / numbeo.com/cost-of-living/ ↩︎