This article is dedicated to several important lessons I’ve learned in personal finance (hopefully I’ve gleaned something after working in the finance industry for eight years!), including where best to keep your money.

These teachings have helped me immeasurably in earning the freedom to indulge several of my long-term interests, like quitting my job to travel, being closer to my family, and dedicating my full focus to working on my passions / hobbies. So far, I am much happier for it.

That being said, if you asked me 8 years ago – fresh out of college, earning a $55,000/yr salary, and sitting on over $100,000 in loans – if I thought I’d be quitting my job at age 29 with 2-3 years’ expenses in the bank, zero debt, and a good retirement egg – I’d tell you that you’re completely off your rocker.

I accept that a large amount of my good fortune has been just that – sheer luck coupled with a very fortunate hand. But without these lessons, I can say with full confidence that I would be in a much different place than I am today.

A financial train wreck

According to a recent study by the US Bureau of Labor Statistics, Americans are working longer hours – and taking fewer vacation days – than those in any of the world’s other 10 largest economies [1] [2] [3]. They also retire later.

As of 2016, most Americans are now living paycheck-to-paycheck, student debt is on the rise, and the retirement age continues to increase.

In terms of savings, the majority of Americans don’t have $500 in liquid assets [4], and the median retirement egg for a 32-37 year-old in 2013 was just $480 [5] (note: while mean savings were significantly higher, median is arguably a more indicative measure here).

retirement savings vs age

Median retirement savings by age (source: [6]

Among soon-to-be-retirees (ages 55-65), a recent online survey demonstrated that while the average participant expected to receive ~$45,000/yr during retirement, the amount that they had actually saved would only yield an estimated $9,150/yr – an expectations gap of nearly 500% [6] [7].

And yet, financial literacy appears to be at an all-time low. A 2016 survey demonstrated that 62% of Americans failed to understand basic financial concepts such as compound interest, risk, and inflation [8].

Is this where you’d like to be? I didn’t think so.

So… what can you do about it?

Lessons in personal finance

The best possible answer I can give to this question is: take steps to understand basic personal finance and its implications for your future.

Of course, equating money with freedom isn’t necessarily fair; freedom can also be experienced through other means. For example, you could always be like this guy and live without any financial obligations whatsoever.

But, if you choose to remain a willing participant in today’s commercial economy, you’ll need a plan to cultivate your own stockpile.

Lesson 1: Money is for freedom

The most important lesson I’ve learned about money: money isn’t for spending – it’s for freedom – and for generating more money.

Take a moment to let that sink in…

As I touched upon in my post about money and happiness, while money itself won’t necessarily make you happy, having money can certainly go a long way toward helping you chase down your interests, and mitigating any unexpected scenarios that may arise.

Lesson 2: Expenditures drain your freedom

If money equates to freedom, then expenditures are, well… confining. They also increase your dependence on money. Money is supposed to work for you – not the other way around.

Understanding your expenditures, and how much happiness each one is really bringing you, is important, and is one of the topics in my other post. A relevant excerpt is below:

Does paying for a $100/mo cable TV subscription make you happy? If so, how happy? At age 21, cutting this $100/mo bill could save you $190,000 by age 64 (a $1200/yr investment at 5% inflation-adjusted interest), according to my compound interest spreadsheet (link below). At a flat $55,000/yr salary (also inflation-adjusted), this amounts to roughly 3.5 years of wages – years that you could have spent retired and spending more time with your family. Is having cable TV really worth sacrificing 3.5 years of increased freedom in your adult life?

Lesson 3: Understand compound interest from a young age

If you don’t have a solid understanding of compound interest, or why it is especially relevant to you at a young age, or why every dollar you spend at age 25 could instead be worth 7 times as much at age 65 (even after accounting for inflation!), read this post – it will help.

Even if you are comfortable with this concept, it may be worth doing a couple of “what-if” exercises to help plan for your future. For this purpose, I have provided this spreadsheet for calculating the ballooning effects of compound interest over the course of your lifetime.

Lesson 4: Learn where to put your money

There is a definite order-of-operations for where to place your hard-earned cash, and it varies greatly depending on your particular situation.

This is arguably one of the most important lessons in personal finance. Being able to understand each step, and the reason for its position relative to others (think: maximizing positive interest!), will equip you to make many cogent financial decisions throughout your lifetime.

For the in-depth write-up on where to place your money, see this post.

Lesson 5: Have a retirement goal, and understand it

Having a goal for retirement is important (“I’ll work until I’m 65 and hope for the best” doesn’t count).

If you don’t fully understand why having a $1,000,000 balance in your retirement account allows you to retire indefinitely at age 35 (or any other age) with $40,000/yr passive income, read on.

A 1998 study by three professors at Trinity College established that you may withdraw 4% from your retirement nest egg each year during retirement with a 96% confidence of not running out [9] [10]. To this end, a $1M retirement fund can “safely” yield an income of $40K/yr.

To estimate a baseline retirement goal, first figure out how much money you’ll need per year during retirement, then multiply it by 25. For example, if you plan to live off of $30k/yr, your retirement goal should be at least $750k.

Interested in learning more about this topic? A treasure trove of information and discussion can be found in Reddit’s /r/financialindependence community.

Lesson 6: Keep working on yourself

Never lose sight of your main objective: keeping yourself and your loved ones healthy, happy, and fulfilled.

Throughout this process, take the time to invest in yourself, and re-evaluate whether your current trajectory is enabling your best possible self.

While being financially prepared for your hopes, dreams, and aspirations may be important, focusing on nothing else is a surefire way to miss the point. A cautionary tale by a self-proclaimed “save-a-holic” can be found here.

As they say, life is about the journey – not the destination.

Closing thoughts

Hopefully you’ve been able to glean something useful from the above lessons. If nothing else, I’d like you to feel empowered by them – comforted in the knowledge that with a few simple tweaks, you might end up with more freedom for chasing your dreams than those who enjoy double- or triple- your current salary, but are slowly succumbing to the insidious nature of lifestyle creep.

And while I don’t claim to have all the answers, hopefully this article will benefit you as a primer for your continuing curiosity on the subject. Do your own research – don’t just take my word for it. Being able to understand and make informed decisions based on basic personal finance is importantespecially when you’re young – as the effects it can have on your later years are – by definition – exponential.

Camping out on BLM (public) land in the New Mexico desert