Disclaimer: This is no professional financial or investing advice, the products, stocks, and services recommended are just the ones I personally chose after spending hours of research. You can (and should) do your own research before following what I’ve outlined here. Use this blog post as a starting point in your journey towards financial literacy.
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When I came to the US at age 17, I barely knew the difference between a checking account and a savings account. It took me almost 5 years to understand index funds, how to maximize my credit card points for traveling, and how to open my retirement account or get a mortgage.
I wrote this guide for my 17-yr old self and hope it’s valuable for you, wherever you are in your financial literacy journey.
Also remember that the goal is not to be the richest guy in the graveyard but rather live a life full or rich experiences (great friends, travels, food). The aim to become more financially literate should be so that you can contribute more to your family, your community and make a larger impact in the world. Hope you agree.
Credit Cards
You’ve probably heard (from your parents or maybe someone else) that you shouldn’t incur in any credit card debt. This is not necessarily good advice. You shouldn’t incur in credit card debt you can’t repay.
Why is it better to use a credit card instead of a debit card?
Because credit cards often offer higher purchase protection, give you sign-up bonuses and give you points that you can redeem for cash, travels and other experiences.
An additional benefit of using a credit card is that it helps you build credit score, which helps later on when you are looking to get a mortgage and are looking for a cheap interest rate.
What is the credit score?
It is a number between 300 and 850 that helps loaning agencies understand how good you are at repaying your debt. (The higher your score, the better).
Your credit score (also known as FICO score) is composed of the following 5 factors:
- 35% is your payment history (late payments, revolving debt, etc)
- 30% is your credit utilization (in other words how much % of your available money have you borrowed. If your credit line is $10k and you spent $4k, that is a 40% utilization rate. Most people cite a 30% or less credit utilization rate to be ideal)
- 15% is the length of your credit history (how long you have you had your accounts open and active)
- 10% is the types of credit used (having a mortgage, student loan and credit cards mix is good)
- 10% is due to new credit (how many new accounts you have and how many credit score inquiries you’ve made recently)
Which credit cards should I use?
If you are a student or new to credit cards, you might want to look into credit cards with no annual fees (usually $99). You could also sort by different metrics that are important to you such as no international transaction fees or high sign-up bonuses. A good website to find a credit card to compare is NerdWallet.
How I use my credit card(s)
I pay everything I can with my credit cards (groceries, amazon, flights) because this earns me points or cashback.
I also build a strong credit score by having 2-3 credit cards that I use for different occasions. Remember that credit mix is important.
I have all my credit card payments automated with a direct withdrawal from my checkings/savings account so I never miss a payment. (This is very easy to set up with your bank)
Savings and checking accounts
Since this is a Finance 101, I want to make sure I clarify the difference between a savings and checking account.
A checking account is a place where you store money for everyday transactions (Pro tip: I only use it for my Venmo account or any random utilities, everything else is paid with my credit card and later repaid from my savings). I also use this account with my debit card if I ever need to withdraw money from an ATM.
A savings account is intended for the money you want to stash away for 6-9+ months. Here’s is where I keep some money in case I were to lose my job, had a medical emergency or were saving to buy a house or car.
Checking accounts usually pay little to no interest, whereas savings pay a little more (but still not enough).
Checkings usually let you withdraw money as many times as you need, savings only lets you do 3-6 withdrawals each month.
Both your checking and savings accounts might have some minimum balances you need to keep in order to avoid monthly fees.
Which bank to choose
If you were like me a few years ago, you probably thought that your account at Bank of America or Chase was good.
However, it turns out there are better places to store money.
Enter online banks.
Online banks pay slightly higher interest because they don’t need to deal with the overhead of having a staff, physical offices or many of the bells-and-whistles of traditional brick-and-mortar banks.
Out of all the savings account out there, you should pick a High Yield Savings account.
The best savings accounts can be found here.
At the time of this writing, Marcus.com pays the higher interest (1.70%). Compare that to Bank of America’s 0.04% (~43x higher).
How I have my banking structured
- High Yield Savings Account at Marcus.com -> because it simply pays the highest interest rate (from this account I pay my credit card debt or tuition)
- Checking Account at Schwab -> because I occasionally need to write a check, or present a financial statement and Marcus can’t do it. Schwab lets me withdraw money from any ATM worldwide for free.
Certificate of Deposit
If you won’t need the money for 9, 12, 24+ months and want to earn a much better interest rate than with a Savings account, you can also put your money in a Certificate of Deposit (CD).
The only caveat with a CD is that you can’t withdraw the money until your term is finished, or else you will incur early withdrawal fees.
The best rates for CDs can be found here.
Here Marcus.com’s CDs are currently paying 0.55% for 12 months.
(keep reading to find out how to potentially make even more than ~1% a year on your money)
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Investing
As cool as a High Yield Savings account might have sounded in the previous section with its whooping 1% interest rate, it turns out that this is a lackadaisical attempt at growing your money.
Inflation (which is defined as the % increase in the cost of goods and services from one period to another) has been on average 3.18% from 1913 to 2015. In 2020-2021, the amount of money printed by the Fed contributed to about a 15% inflation.
That means that even if you have found the highest-paying savings account out there, your money is still not beating inflation. This means that a year from now, you will be able to buy less goods with your money, effectively meaning that you have less buying power (i.e. money).
Therefore, you need a different strategy to grow your money.
Enter investing.
Investing is a great way to grow your money consistently. There are a few topics that we should cover before diving into how to structure your investments.
If you are early in your career (20s) then you can afford to be rather aggressive with your investments (i.e. heavier investments in stocks) with the goal of maximizing returns, if you are nearing retirement then you should be more careful with your money as there are not many years left to make up for any loses.
What are stocks?
Stocks represent a piece of ownership in a company. The total worth of a company (also known as its market cap) is the amount of shares outstanding times the price of each share.
By buying a stock, you assume the risk of betting on that company and hoping that it grows in the future.
There are two ways of making money with a stock:
- Buying low and selling high (i.e. buy AAPL at $50, sell at $100)
- Selling high and buying low (also called shorting, where you borrow someone else’s stock and sell it hoping that the price goes lower, so then later you can buy the same stock at a cheaper price and return it to the person you borrowed it from)
Additionally, there are many stocks that pay dividends to their shareholders.
We can further subdivide stocks into:
- Small cap stocks: companies with less than $2B in market cap, risky but with high growth potential.
- Mid cap stocks: companies with $2B to $10B in market cap
- Large cap stocks: companies with $10B+ in market cap, generally more stable, mature and growing slowly.
Where can you buy stocks?
Most of the stocks transactions are done through a broker, someone that matches a buyer with a seller. I use Robinhood because it has no transaction fees. Sign up with this link and get a free stock. (You can also read the post I wrote about Vlad Tenev, the CEO of Robinhood)
How to pick stocks?
Many of the world’s best investors (Warren Buffet, John Bogle, Peter Lynch, Carl Icahn) suggest the simplest of approaches to picking stocks: simply bet on the market. By betting on the market you spread your risk across many companies and you are not as exposed to the success or failure of any one company. You can do this by buying what’s called an ETF.
Index Funds or ETFs
ETFs (or exchange-traded funds) are a basket of stocks that have a common theme. For instance, a Tech ETF invests in all tech stocks, the SP500 ETF ($IVV) invests in the largest 500 companies in the US.
Benefits of index funds: broad market exposure, low fees, and low portfolio turnover. Most if not all ETFs are managed by algorithms.
Mutual Funds
Mutual Funds are funds that are managed by a money manager. Most money managers (whose entire job is to analyze the market day in and day out) fail to consistently beat the market.
Why you shouldn’t pick a mutual fund
First, there are excessive fees that go beyond the “1%” management fee advertised: rebalancing, additional loads, etc.
Second, there isn’t any clear historical data that shows that in the long run mutual funds outperform the market’s 9% annualized return.
I can confirm that this has been the case for me as well (i.e. my money manager underperforms the market).
If you want to dabble in stock picking
There are 2 main ways: Fundamental and Technical Analysis.
Fundamental analysis is studying the company’s “fundamentals”, i.e. their growth rate, sales, profitability, leadership, future cash flows, etc.
Technical analysis is studying the company’s price action and how it compares to common price patterns, i.e. are we in bullish or bearish territory, what are support/resistance levels, etc.
I try to understand the intrinsic value of the company and its fundamentals. For instance, do I think Snap has the potential to grow with their current ideas? No. (Sorry, Evan Spiegel). Facebook has been successfully copying their features and their user base is much larger.
I am bullish on SHOP (Shopify), because I believe the ecommerce market will continue to grow with many more solo-entrepreneurs launching their own business. I also draw my conclusions from having used their platform to launch my ecommerce brand Flux Chargers into a $50k-100k/mo business, and also by having chatted with many other up-and-coming entrepreneurs.
I am also bullish on AMD (Advanced Micro Devices), NVDA (Nvidia), MU (Micron Technology), because I worked at Inston which was developing magnetic memories and I have extensively studied the growing market for AI chips and GPUs.
Disclaimer: Again, this is just what I like. I listed some company names so that you can see my thought process. You should do your own research.
Great books to read if you want to learn more: The Intelligent Investor, Common Stocks and Uncommon Profits.
What are bonds?
Bonds are IOUs from a company or government. Essentially, you lend them money and they promise to pay you back at a later date with some interest. There are many types of bond qualities from AAA (safest) to D (junk) with varying interest rates.
Great books to read if you want to learn more: The Complete Practitioner’s Guide to the Bond Market.
Other topics to research:
- What is the The S&P 500
- Dollar Cost Averaging
- Time Value of Money
- Time in the market is better than timing the market
Crypto
Bitcoin led the way in crypto by becoming the first decentralized digital currency. Then came Ethereum as a blockchain that allows us to execute “smart contracts”, essentially code that self-executes when certain conditions are met.
Since then, there are have been thousands of “alt-coins” created, each with sometimes different and sometimes very similar purposes.
Since this is a new industry, there is a ton of volatility in the price. Not to mention plenty of opportunities for scammers to take your money. Please inform yourself and only invest money you can afford to lose.
In my opinion, the fact that there are scams and price is volatile is no excuse for you to not (at the very least) get informed on blockchain.
You can buy crypto on Gemini or Coinbase.
Topics to research:
- What is a blockchain and how does it work?
- What are smart contracts?
- Different consensus algorithms: Proof of Work, Proof of Stake, etc
- What is Yield Farming – there are protocols paying insane APYs right now (i.e. OlympusDAO)
- What are DEXes?
IRAs (Investment Retirement Accounts)
An IRA is a taxable account that allows you to save and invest money for retirement.
My suggestion is to open a ROTH IRA first, max it out (currently at $6k/yr) then put any remaining money in a Traditional IRA. This is because it’s likely that when you are young you are making less money than when you are older. Roth has a $130k/yr income limit, also it’s more tax advantageous.
Topics to research:
- How to open a ROTH IRA (you can do it on Schwab)
- Difference between ROTH and Traditional IRA
Taxes
No financial post can be done without talking about taxes, which is perhaps the biggest expense that one incurs during a fiscal year.
If you have a business, you can deduct most expenses from your income and lower your taxes. This is what rich people do, and this is why they have businesses.
Use Turbotax to file your taxes. You’ll likely save money even if it costs $99 to file.
Mortgage
A mortgage is essentially a loan (money you borrow from the bank) to buy a house.
You usually need at least a 3.5% down-payment, although the higher the amount of money that you can contribute at the start, the less you will have to pay in interest. This isn’t necessarily the best, as current rates are quite low. In some cases, you can also deduct your mortgage interest payments from your tax liability.
The terms of your loan might be different, so speak with a mortgage professional to evaluate your situation.
A great way to get started with homeownership is House Hacking, which essentially means renting out a few rooms or a duplex in your first property. This helps you offset the cost of your mortgage. This is how I got started in Real Estate.
Topics to research:
- What is house hacking?
- Different types of mortgage loans
- Mortgage down payment assistant programs in your state
Conclusion
Hope this was helpful. I plan to add to this guide over time. If it was, please share it with a friend that can benefit!
As I mentioned throughout the guide, these are just my personal notes. Please do your own research and consult with a financial advisor and tax professional for your specific situation.
Wish you the best in this wonderful financial independence journey!
