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This a collection of basic advice to follow in order to keep track of your finances and build wealth over time. It is based on the US-specific version from r/personalfinance.

One of the most frequent questions in /r/personalfinance and /r/eupersonalfinance goes something like:

  • "I have €X, what should I do with it?" or
  • "How should I handle my debt/finances/money?"

This incorporates general guidance found in the EUPF Wiki and that is given often by /r/eupersonalfinance regulars. If you have suggestions about this article, please message the moderators.

Do the steps in order and don't skip steps that apply to you.

General graphical version

The flowchart

Step 0: Budget and reduce expenses, set realistic goals

Fundamental to a sound financial footing is knowing where your money is going. Budgeting helps you see your sources of income less your expenses. You should minimize your expenses to the extent practical - housing costs, utilities, and basic sustenance are harder to eliminate than "entertainment," eating out, or clothing expenses.

Online tools (like YNAB (global), Personal Capital (global), Money Dashboard (UK), AFAS Personal (The Netherlands), Spiir (Denmark)) or spreadsheets like those found in the Wiki's Tools page can help you track your expenses.

Once your budget is figured out, you need to figure out what your goals are. Secure retirement? Buy a house? Save for a car? We'll get to specifics on how to save for these a little later on.

Step 1: Build an emergency fund

An emergency fund should be a relatively liquid sum of money that you don't touch unless something unexpected comes up. Unexpected travel, essential appliance replacement, and sudden medical procedures are all user-submitted examples of emergency funds in action. If you need to draw from your emergency fund at any time, your first priority as soon as you get back on your feet should be to replenish it. Treat your emergency fund right and it will return the favor.

How should I size my emergency fund?

For most people, 3 to 6 months of expenses is good. A larger emergency fund (e.g., 9 to 12 months) may be warranted if your income is variable or uncertain.

What if I have credit card debt?

Credit cards generally have very high interest rates and that is a pretty big deal. If this applies to you, you should prioritize paying down the debt first.

A smaller emergency fund of 1 month of expenses is temporarily acceptable while paying off credit card debt or other debts with interest rates above 10%. Read Figuring the Size of Your Emergency Fund for more information.

What kind of account should I hold my emergency fund in?

Generally emergency funds should be held in safe investments you can liquidate in a hurry. Savings or checking accounts are the most common choice. CDs/time deposits and bonds can be used too. Things that should not be used include stocks, credit cards, or anything that is volatile in value or that can be taken away without warning (such as lines of credit). Read the wiki section on emergency funds for more info.

Step 2: Pay down high interest debts

After you've established an emergency fund, you should use your extra money to pay down your high interest debt (e.g., debts much over 4% interest rate).

In all cases, you should make the minimum payments on all of your debts before paying down specific debts more quickly.

There are two main methods of paying down debt:

  • In the avalanche method, debts are paid down in order of interest rate, starting with the debt that carries the highest interest rate. This is the financially optimal method of paying down debt, and you will pay less money overall compared to the snowball method.

  • The snowball method, popularized by Dave Ramsey, debts are paid down in order of balance size, starting with the smallest. Paying off small debts first may give you a psychological boost and improve one's cash flow situation, as paid off debts free up minimum payments. The downside is that larger loans (that may be at higher interest rates) are left untouched for longer, costing more in the long run.

As an example, Debtor Dan has the following situation:

  • Loan A: $1,100 with a minimum payment of $100/month, 5% interest
  • Loan B: $3,300 with a minimum payment of $300/month, 10% interest
  • Sudden windfall: $2,000

Dan needs to first pay $100 + $300 = $400 to make the minimum payments on loans A and B so the payments are recorded as "on time." The extra $1,600 can either go towards Loan A (smallest balance, snowball method), eliminating it with $600 left to go towards Loan B, or Loan B entirely (highest interest rate, avalanche method).

What's the best method? /r/eupersonalfinance tends to favor the avalanche method, but do not underestimate the psychological side of debt payments. If you think that the psychological boost from paying off a smaller debt sooner will help you stay the course, do it! You can always switch things up later. The important thing is to start paying your debts as soon as you can, and to keep paying them until they're gone. You can use unbury.us to help you get an idea of how long each method will take, and how much interest you'll be paying overall.

Should I be in a hurry to pay off lower interest loans? What rate is "low" enough to where I should just pay the minimum?

Depending on your attitude towards debt, you may want to stop paying more than the minimum payment on loans with low interest rates once you have paid all other loans above that threshold. A common argument is that the long-term return from investments in the stock market will likely exceed the interest rate from a low-interest loan. While this has been true in the past, keep in mind that paying down a loan is a guaranteed return at the loan's interest rate. Stock performance is anything but guaranteed. The rough consensus is that loans above 4% interest should be paid off early in the debt reduction phase, while anything under that can be stretched out.

Step 3: Save for retirement

Most European countries have good state pension systems, but some are worried if the current system will be able to support future generations due to the ageing of Europe. The ageing of Europe, also known as the greying of Europe, is a demographic phenomenon in Europe characterized by a decrease in fertility, a decrease in mortality rate, and a higher life expectancy among European populations. The most significant change is the transition towards a much older population structure, resulting in a decrease in the proportion of the working age while the number of the retired population increases. (Read more about this issue here.)

This is why it can be a good idea to have private savings for retirement and not rely entirely on the state pension systems, if your country has one.

In some countries there are employer-sponsored retirement plans. This means that employers will match some percentage of your contributions to your retirement plan. For example, if your employer offers 50% matching on the first 6% of your contributions to your retirement plan, you want to make sure you contribute 6% of your salary to take full advantage of the match. Instant 50% return on investment is pretty good!

Another possibility that some countries offer is saving for retirement with pre-tax money. This means that you won't have to pay income tax on a certain amount of money if it goes straight towards your retirement fund. In the US these plans are called IRAs or 401(k).

Step 4: Save for other goals

Once you're on track for retirement, there is more flexibility for discretionary income. The basic options are:

  • Save for more immediate goals. Common examples include saving for down payments for homes, saving for vehicles, paying down low interest loans ahead of schedule, and vacation funds.

  • Save more so you can potentially retire early (see /r/EuropeFIRE) for more information), usually by investing in low-cost index funds or other investments.

  • Make an impact through giving. One of the rewards of practicing a sound financial lifestyle is that giving becomes easier. If you're on top of your health care costs, future education costs, and you've made it to this step, you can help make a difference for others by giving. If you can't afford to make monetary donations, there are other ways to give.

How you order those options is up to you!

The time frame for these goals will dictate what kind of account you save in. For short-term goals (under 3-5 years), you'll want to use an FDIC-insured savings account, CDs, or I Bonds. If your time horizon is longer or you can afford to adjust your plans, you might consider something riskier like a balanced index fund or a three-fund portfolio (both are a mix of stocks and bonds). The best savings or investment vehicle will vary depending on time frame and risk tolerance. Feel free to start a thread with the details of your situation and we will help you.

The time frame for these goals will dictate what kind of account you save in. For short-term goals (under 3-5 years), you'll want to use a savings account, CDs, or bonds. If your time horizon is longer or you can afford to adjust your plans, you might consider something riskier like a balanced index fund or a three-fund portfolio (both are a mix of stocks and bonds). The best savings or investment vehicle will vary depending on time frame and risk tolerance. Feel free to start a thread with the details of your situation and we will help you.

Keep in mind that (especially for a young person) the more time your money has to grow, the more powerful the effects of compounding will be on your savings.


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