Introduction
I wrote this book as a resource to help guide my children and their children in their financial decision-making. When my children entered college and started working, they began asking questions about taxes, benefits, budgets, and more. As I interacted with their friends, I realized these questions were common among young adults. I have helped some of my children’s friends choose their benefits options and decide on retirement contributions for their first jobs. In addition, I have had conversations with adults in my age group who faced similar financial questions as the younger generation.
A few Christmases ago, my young adult children asked me to teach them about personal finance. Together, we created a list of topics they thought would benefit them and their friends. This list formed the basis for the subjects discussed in this book.
Some may wonder what qualifies me to write a book on personal finance. I am an engineer by profession, with a PhD in electrical engineering and an MBA. I avidly consume financial news and educational materials. The knowledge I have gleaned and implemented from my learning has enabled me to live completely debt-free for the past 10 years. In the pages of this book, I share my informed and lived experience in personal finance.
My engineering background has taught me how to simplify complex topics and disseminate them in a way that is easily understandable and digestible for the masses. I have applied this approach to discussing the various topics in this book. Although I have targeted the content toward people in their early 20s to 30s, an eighth grader can easily understand the material.
Over the years, I have used many online tools to help me make financial decisions. I have included over 150 links to these tools and learning opportunities for those who want to explore the topics covered in the book more deeply. Selfishly, this also allows me to have a catalog of the useful financial tools I have used in one place! In addition, I have introduced several real-life examples and simulations to help explain some of the more difficult concepts. As I read books, I occasionally encounter quotations relevant to the topic at hand. Similarly, where appropriate, I have included wisdom from the Holy Bible that reinforces various discussions in this book.
I begin the book by discussing budgeting as the blueprint for directing your money and your financial path. You will learn how to determine your living needs and properly allocate money to address them. I will guide you in creating a spending plan that helps you live within your means. I will emphasize the importance of viewing savings as another essential expense. The goal of maintaining a well-structured spending plan is to live debt-free. However, if you are in debt when starting this journey, I will discuss strategies to tackle and eliminate it as quickly as possible. I will also cover various types of insurance you might consider to protect yourself from the cost of unexpected life events.
In the savings chapter, I start by explaining compound interest. This is perhaps the most crucial financial concept for young people to grasp. Understanding compound interest will help you grow your money and avoid helping other entities profit from your debts. I discuss various savings instruments and how to use them effectively in your financial plan. To truly grow your money in the long term, you must make financial investments. However, because of the risks involved in investing, you must understand some basic investing concepts. I will walk you through what you need to know to become a savvy investor. Then, I will provide a path for constructing your own investment portfolio that aligns with your financial plan.
Credit and debt are integral to American financial culture, so understanding their effect on your financial well-being is crucial. In this chapter, I describe how credit works and how credit card companies and credit bureaus operate. Your credit score influences many aspects of your life, from insurance rates to loan interest rates. I will explain how credit bureaus determine your credit score and the important factors to consider when boosting it. If you choose to use a credit card, I will help you understand how they work and how interest payments to credit card companies affect your overall indebtedness.
In the taxes chapter, I will help you understand the purpose of taxes and how they support government activities. I will guide you through the various taxes deducted from your paycheck and how you can use tax-advantaged accounts to reduce your tax burden. I address other taxes most Americans face besides payroll taxes. Every April 15, all tax-paying Americans must file a tax form to determine if they have overpaid or underpaid taxes for the previous year. I have prepared a flowchart to guide you through the tax-filing process if you choose to file your own taxes. I conclude this chapter by raising awareness about various scams and frauds surrounding the tax-filing process.
In the chapter on Career and Income, I focus on aspects of your employment that could affect your financial health. I discuss negotiating a salary when you get hired for a new job and during performance evaluations. When you accept a position that offers employment benefits, you must decide which benefits to sign up for and your level of participation. I explain the rationale for participating in the typical benefits offered by employers and the level of participation based on your financial and life stage status. I discuss how to set yourself up for income growth in a hired position and how to manage additional income streams on the side if necessary to meet your full financial obligations.
Next, I address the topic of housing and whether to rent or buy, and how to look for housing. If you decide to rent, it is important to understand the key elements of a lease, which I will explain. If you decide to buy, I cover various topics that can help you make the right financial decisions to fit your financial plan, such as credit requirements, interest rates, loan terms, down payments, and closing costs. I then describe the steps you should expect when buying a house. The chapter also includes strategies to limit the amount of interest you pay on your mortgage. I end the chapter with a list of activities to maintain the value of your home and limit exposure to unexpected repairs.
In Chapter 8, I walk you through the process of buying or leasing a car that fits your automobile needs. With a view of staying within your financial goals, I help you explore what kind of vehicle meets your needs and how much you should consider spending on a vehicle. If you decide to finance the purchase with a loan, it is important to understand how auto loans work before showing up at the point of sale. I describe how to shop for the best interest rates and loan terms based on your financial situation. Next, I talk about the process of shopping for a vehicle, what to look for while inspecting and test driving a car, and how to negotiate a good out-the-door price once you have decided on a car. You will also learn about the meaning of various prices (e.g., MSRP, list price, dealer invoice price) you would encounter while shopping for a vehicle. Finally, I describe several ownership responsibilities to maintain your vehicle.
In the chapter on retirement, I highlight the importance of starting early to save for retirement. I explain how the Social Security program works and the parameters that determine the benefit amount you can expect to receive. Personal retirement saving is necessary because Social Security, the primary source of income for many retirees, does not provide enough money to cover all expenses. I walk you through determining how much you need to save now to cover your expenses in retirement. Finally, I provide information and resources to help you build your “nest egg” for retirement. I recommend reading this chapter alongside the chapter on saving and investment for more details on how to save and invest for future needs.
The last two appendices contain bonus topics that young adults may not immediately need, but will become relevant as they age. These appendices cover (a) strategies for withdrawing from retirement funds and (b) Medicare, the health insurance program for people over 65. I wrote these appendices for my use and that of friends in my current life stage.
In Appendix A, I present different withdrawal options for retirees to fund their expenses while minimizing the risk of outliving their savings. Most of the focus is on the Bucket strategy, which I currently use to fund my retirement expenses. I provide an example of how a bucket withdrawal strategy might look and share my portfolio of exchange-traded funds (ETFs) for long-term retirement investments, along with the rationale behind it. I call this the “Frimpong Bucket 3 Portfolio.” Table 27 summarizes a typical withdrawal plan using the bucket strategy, which you may find useful if you choose to implement this approach.
Appendix B offers a high-level overview of the Medicare program, helping you understand what to expect before and when you sign up. I emphasize the importance of timing when first signing up for Medicare, as missing the deadline can result in significant ongoing financial penalties.
Each chapter concludes with a summary highlighting the key discussions from every section. This summary offers readers a quick reminder of the chapter’s contents. At the end of the book, I have included an index to help you easily locate any topic of interest.
I wrote this book to provide a financial literacy resource for myself, my friends, my descendants, their friends, and anyone seeking a practical explanation of personal finance topics. After reading this book, I hope you will feel confident making informed decisions on financial matters and know which areas you can handle independently, and which require professional help.
