Personal Finance Guide

If you're in high school or a recent high school graduate, you should be planning on attending college or earning a vocational certification of some kind. The best investment you can make is improving your future earnings potential.

• For cost-effective education, it's hard to beat community colleges. If you're not sure what to do about continuing your education, look into two-year degrees, as well as taking credits that transfer to four-year colleges.

• If you are looking to head straight to a four-year college, strongly consider going to a four-year state school.

• Do not go to a for-profit college as they are expensive, generally not well-respected, and credits are very difficult to transfer to an accredited four-year college.

• Make sure the college you choose is accredited and has the following listed on their website:

  • Average starting salary of graduates in their chosen field
  • Percent of graduates that receive a job in their chosen field within the first 6 months
  • A great career center that will continually help you find jobs, along with a successful career fair

• If you need money to continue your education, learn about student loans. This is a complicated topic with many options. Be careful what you do here, since these loans will be yours / your parents until they are paid off! People who find themselves in trouble later usually took out bigger loans (~$100,000) vs. smaller loans (~$20,000).

• Fill out the Free Application for Federal Student Aid by the end of June 30 of the year you plan to go to college so that you'll be eligible for grants and federally subsidized student loans. If you aren't quite ready for college, you can use the FAFSA 4Caster to estimate federal grants and loan approvals.

• Avoid taking on loans that exceed the future earning potential of the degree by too large of a factor. Use the debt/salary wizard to determine the suggested maximum amount of debt you should incur based upon your projected salary or what salary you should be earning based upon your current debt.

• Some people consider military enlistment or ROTC as a way to pay for college. That's a valid approach, but it is a big commitment. Talk to some people in the military or veterans other than your recruiter before you commit. Also note that dropping out of ROTC can be very expensive so you should probably not enter ROTC if you have any potential medical or mental health issues.

You ideally wouldn't go out and buy a car without doing a bit of research on what existing owners of that make and model had to say. Why would you get into five (or even six!) figures of debt without doing a similar amount of research? If you're at all on the fence about going to college, or your chosen major, it makes sense to find someone who's gone through your prospective degree program, take them to lunch, and get their feedback on how their path has treated them.

• Did their degree path make sense for them?
• If they could do it again, would they?
• What advice would they have for someone considering following in their shoes?

Once you've done this, it would behoove you to gather additional data points. Don't just cherry-pick someone who's become a breakout success. Try to talk to people in the middle of the pack, or even some folks who went through the program and failed. Consider fallback options as well. If your career plan requires certain things that may not come to pass (such as being accepted into a top ten law school), and your plans are forced to change, what are your options? An undergraduate degree in business or engineering at that point may bear more fruit than a bachelor's in philosophy.

Think about your career

If you're headed to college, think long and hard about getting a degree that won't pay for itself. For any career, you should talk to several people who work in the field about your education plans and that career path to make sure your plan makes sense.

What about STEM?

A lot of noise has been made lately about STEM careers. However, remember that your working career is going to span multiple decades; that's a very long time to spend doing something you aren't passionate about—or at least enjoy. Virtually nobody wakes up eager to go to work just because of their paycheck so it's important to pick something that excites you, because without passion, you're most likely destined to never be particularly good at your field of study.

• Science
• Technology
• Engineering (click for more information)
• Math

• Generally, if you're a minor, you will need to open a joint account with a parent or guardian. Note that joint bank accounts can be emptied by either account holder at any time so it is strongly recommended you open your own account after you turn 18.

  If you don't have a trusted parent or guardian, read the Financial Accounts section of the "Kicked Out" wiki page.

• When you turn 18 (19 in Alabama), it's definitely time to get a bank account in your own own name (and transition away from joint accounts with your parents). You will no-monthly-fee checking account and a savings account. Credit unions, online banks, and small banks tend to have better customer service than large banks.

• You're not going to get rich off interest, sorry! But you can find better savings interest rates at online-only banks and credit unions. Put away savings as soon as you can, it's a good habit to get into, and start your emergency fund. Investments and retirement savings are covered more in the next several age-range articles. With limited or part-time income, savings are a better bet for now.

• College is often when young adults start building credit via student loans and credit cards, but it's also when a lot of people start a long relationship with expensive debt.

• If you are responsible with money and have income, applying for a credit card can be a reasonable move for many people. This is different than the debit card your bank will provide with your account. It's a very good way to independently establish credit without paying interest. A student credit card or secured credit card is probably your best option. Read the credit building wiki for more advice on this topic.

• Pay the balance in full every month! If you can't do that or you're not sure if you are ready, then you should not get a credit card. You can always build credit later when you have a more steady income and more experience handling money.

• You may find yourself working part-time or even full-time. This is a good time to learn about your rights and responsibilities as an employee, including how you are paid and taxed, as well as what your employer can legally do with your hours and even when you can be let go. Fortunately, taxes are low for most young people (if only because their income is low...), and you may even get a refund if you file taxes! While your lifetime income is the single biggest determinant in your personal finance situation, at this age, your priority is not on current income as much as preparing for the future, thus the focus on education.

• If you're earning extra money, consider saving it as an emergency fund and for education expenses, following the advice in "I have $X, what should I do with it?".

• This is also the time to start learning about budgeting if you have significant responsibilities; more on this in future posts.

• If you want to save money, live with your parents as long as you can. Seriously! But there comes a time when you want to / have to leave, and you'll need to rent a place. Landlords will want to see that you have income, so try to keep payments below 30% of your takehome pay. You may need a co-signer if you have minimal credit history. You'll need first month's rent and a security deposit up front, and even utility deposits sometimes. Read your lease before you sign it, and know your rights and responsibilities as a tenant, and what organizations can help you if you encounter issues.

• Roommates are a popular way to save money on rent. Be aware of the issues that can come up with roommates though, since circumstances change, and you may be on the hook for their share. Have all roommates on the lease. You might even want a roommate agreement. Perhaps Sheldon Cooper has it right after all? Alternatively, consider renting a room from someone who owns their own house.

• Aside from rent, cars are the biggest expenditure for many young people. You can save a lot of money if you don't need to pay for one! It's not just the purchase cost. There's gas, repairs, and especially car insurance, which is very expensive for young people, typically at least $100/month, and can even be $200/month in some places, or if you have a tickets / accidents.

• Your best bet if you do need a car is to save up enough cash to buy a reliable used car without needing a loan so you can avoid finance charges and make your own insurance choices. Above all else, make sure you follow the budgeting advice in the vehicles wiki. And if you do need to finance a car, be very careful of financing offers for young people. Double-digit interest rates are a Bad Thing. You do not want to "build credit" that way! The loan and the car are different things. You can't give back the car and be done with the loan, since you will typically be "underwater" and owe more than the car is worth.

• Choose your spending wisely. Money spent is unavailable for anything else. Make sure it was your highest priority use of that money.

• What to do if you've been kicked out of your family home as a teenager
• Building credit
• Extra income (on the side)
• Student loans
• Read one or two books from the reading list.

You have money now, congratulations! Read this excellent summary of how to handle it. Here's a ginormous flowchart showing what to do first: bills? loans? investments? Good self-study! We'll highlight three Big Ideas to get you started.

• Taxes. Your employee income is taxed like so: 7.65% goes to Social Security and Medicare taxes until you reach $160,200. Also, at the same time your income is taxed in chunks at various rates. Assuming no special deductions, 0% for the first $13,850 due to standard deduction and exemption. Then 10% of the next ~$9K, 15% of the next ~$28K, 25% of the next ~$54K, and so on. For more detail about how taxes are computed, see the wiki page on Taxes. Most states also have state income taxes of ~6%ish but they vary a lot. Your marginal income tax rate affects only the dollars within the highest bracket; so you always come out ahead with more income, even if it means entering a new top tax bracket. You reduce your taxes with credits and deductions.

  Big Idea 1 is: reduce your current taxes by making less of your income taxable.

• Debt. You borrow money now so you can spend it, yay! But then you have to pay it back, and typically pay back more than you borrowed, boo! You've lost money as a result. The extra amount you repay is determined by the interest rate; the annual rate is called APR.
  3% APR student loan? You'll pay $30 annual interest on $1,000. Not bad.
  12% APR car loan? You'll pay $120. Not good.
  23.9% APR credit card? You'll pay $239. Yikes! (Never do this!) You repay the money you borrowed, too; that's called principal. The longer you take to repay the loan, the smaller each payment, but the more interest you'll then pay. It's a tradeoff.

  Big Idea 2 is: reduce the amount of interest you pay by getting lower interest rates, and avoiding / quickly repaying higher interest debt.

• Investing. In Advice for high school students and teenagers, we noted bank interest won't make you rich. The good news for you now is: investments can make you current millionaire rich. The catch is: it takes decades, and you must regularly invest significant sums. This why you start at early! Our approach to investments is based on investing into low-cost index funds where you buy shares of either a target date fund designed to be worth a lot more when you retire at a target date 40+ years in the future or a three-fund portfolio where you manage your own allocation. Historically, this approach gains about 6% annually after inflation although it varies significantly year to year. At a 6% rate of growth, your money doubles every 12 years, and goes up by 10x after 40 years. (All numbers are after taking inflation into account.) So that $5,000 you put aside at 22 could easily be worth $50,000 of today's dollars at 65. (But, there could be years where you temporarily lose 10%, 20%, even 30% of your savings. Do not panic! It will come back eventually.)

  Big Idea 3 is: invest early and often for your future, especially your retirement.

Got the the Big Ideas now? Good! Let's see how we combine them for some meaningful benefits for your ~22-year-old self.

• Retirement contributions. You are going to retire someday. Invest and perhaps reduce current taxes by letting your employer contribute a percent of each paycheck to your 401(k) account (or similar things with different names for government employers). A recommended investment percentage is 10%, but it's up to you; more is better, the annual maximum is $22,500. The cardinal rule is Take The Match if you have one. A typical employer adds 3% of your salary when you contribute 6%, so that's like Free Money. Take The Match. (Your actual match depends on your employer's rules.) The money is invested for you, available penalty-free when you retire after age 59½ (usually.) If you change jobs, the money can go with you. A 401(k) can only invest in what your employer offers. Most employers have target date funds, so choosing one is an easy decision. If you need or want to, you can sometimes achieve an even better result by picking other available choices.

• "What do you mean 'perhaps reduce current taxes'?" Retirement savings are wery wery complicated. (Thank your congresspeople.) A "traditional" 401(k) reduces your current taxes because it exempts your contributions from your taxable income. You pay taxes when you take the money out, deferring the taxes, but you still pay something. If you would prefer, you can reverse this if your employer offers a "Roth" option. In that case, you pay taxes on your 401(k) contributions , but no taxes when you take the money out. The best choice is complex; for those below the 22% bracket, Roth is usually better.

• Yet more retirement options: IRAs. Individual Retirement Accounts are do-it-yourself 401(k) plans. You set up an account with a company like Vanguard, Schwab or Fidelity, and give them up to $6,500 annually to invest for you. You have more investment choices, target date funds plus other options. Depending on your income level and whether you have an employer 401(k), you open a traditional or Roth IRA, with tax treatment equivalent to the previously described 401(k) types. IRAs are your go-to option if you have no employer 401(k), but you still may (and even should) want to use an IRA, especially a Roth IRA, even if you have one. You can tap IRA and 401(k) resources before retirement for certain allowable reasons, though it's not usually recommended because you lose future gains and might owe current taxes. A Roth IRA is the best choice for raidable retirement savings because contributions can be taken out at any time without taxes or penalties.

OK. That was a lot of information! Ready to repay student loans? If you do have student loans, the interest rate clock is ticking. Loans are typically 10 year repayment, so you'll owe about 1% of the loan balance each month for ten years. You will have to pay these loans back unless you get them forgiven.

• If you owe $20,000, that's $200/month. Like a car payment. Not terrible.

• If you owe $100,000, that will be $1,000/month. Like a mortgage payment, only without the house. Not fun to pay.

You have several approaches available for repayment:

• Pay them back on schedule. It sounds crazy, but it just might work! If your income supports it, pay the minimum on low-interest (<~4%) loans. If you have even more income, repay them faster with extra payments, especially on higher interest loans, and save by paying less interest than you would over time. This is your primary option on private loans. If you have high-interest private loans, look into refinancing them; if you have good income and credit, you'll qualify for lower interest rates.

• If you have a lot of federal loans but little income, look into reduced payment plans like Income-Based Repayment (IBR) and Pay-As-You-Earn (PAYE) plans. You'll pay less (even nothing) each month, based on your current income, but you'll pay longer, and ultimately pay more over time in many cases.

• If you are really in a deep hole, maybe over $100K federal with only $40K annual income, give a special look into Public Service Loan Forgiveness (PSLF). This program allows you to work for ten years in public service, make minimal payments, then your unpaid balance is magically forgiven, which is a really sweet deal if you can get it. (This differs from forgiveness programs for IBR/PAYE that will charge you taxes on any amount forgiven in the future.)

Enough about student loans. Let's wrap up with a few other topics of general interest to 22 year olds:

• Grad school can be a good idea, but can also be a very expensive idea. If you are sure this is for you, try to get someone else to pay for it, whether the school via scholarships / stipends, or your employer, if they do education reimbursement. Med school is worth the money no matter who pays. Law school and MBA return on investment is iffier these days. Going to grad school because you are not sure what else to do is probably a big mistake, especially so if you have to pay for it.

• You may be responsible for your health insurance. (You could be on your parents' plan until age 26 in many cases, though that may cost them something.) If your employer will pay for it, that's your best option. They may offer a lower-premium High Deductible Health Plan (HDHP), where you pay routine costs, but insurance kicks in for major expenses. This is a good choice if you have good health and make few claims. You should take advantage of a Healthcare Savings Account (HSA) with an HDHP. This lets you deduct contributions to pay for out-of-pocket medical expenses, with other unique features that make them attractive. You can contribute $3,850 annually to your HSA. Some employers pay some of this for you as more free money.

• If your employer doesn't offer health insurance and you can't use your parents' plan, you'll want to get an individual plan such as those found on healthcare.gov. You can only sign up at certain times, including open enrollment in November / December. If you don't have health insurance of some form, you could pay a penalty, unless you have an exemption.

• With more income, you can rent a nicer place within the same 30% of take-home guideline. You may not even want a roommate! Of course, any money you spend on housing is money you don't have for other things. Living with your parents is still a viable option if you want to save, e.g. to pay down student loans. Please make sure you have renter's insurance, it's well worth the small cost. (Note that we assume you are not yet ready to buy a house; you may not yet be sure where you want to live long-term, have limited work history, or have insufficient down payment.)

• While you may be able to afford a nicer car (since you hopefully have better credit and lower insurance rates), you'll save money if you don't. Above all else, make sure you follow the budgeting advice in the vehicles wiki. Paying cash is still an option, but if you qualify for an auto loan at 2% or lower, it's a reasonable option if it frees up some income for retirement savings and loan repayments. A good target price is perhaps $15K, with a $10K loan, which works out to 4 years at $220/month. Your total cost of ownership would be about $5K annually. Selling your old car privately will also get you roughly 20% more than you would by trading it in to a dealer.

• With more expenses, budgeting becomes much more important. You'll want to have a bigger emergency fund; we recommend at least three months' expenses, to cover that bad day when you lose your job and your car breaks. With more expenses to track, look into a program like You Need a Budget (ynab) or Mint to help keep track of where your money is, and where it needs to be in the future. Look for ways to economize where you can, whether by cheaper cell-phone plans, learning to cook so you want to eat at home, or taking advantage of employee discounts.

• While you don't have a lot of tax deductions yet outside of retirement / HSA savings, take a look at possible tax breaks for student loan interest, moving expenses associated with a job change, and certain tuition expenses (American Opportunity Tax Credit). You don't have to itemize to take advantage of these, but income limits apply in some cases.

Marriage changes your legal situation and, consequently, your financial options.

• Your married / single tax filing status is determined by your December 31 situation. Joint taxes may vary a bit vs. single, but should be much better than filing married separately, except for certain income-based student loan repayment scenarios. With two incomes, withhold taxes as "married at single rate" to simplify your W4.

• Ownership of assets / debts is complex and varies by state, but in the majority of cases: individuals retain assets and debts they had before marriage (e.g. student loans), whereas both parties share ownership of assets and debts acquired during the marriage. If a marriage ends, there is legal framework for separating assets / debts, which differs vs. owning an asset or debt jointly outside of marriage.

• You'll have some additional options regarding health insurance and social security benefits.

• Marriage financial LPTs include: do not go into debt for a ring / wedding / honeymoon; decide how to use joint accounts; make big decisions together, including what constitutes a big decision.

One of those big decisions could be buying a house. Here's some information on buying a house that applies to couples as well as single people.

• House buying usually involves thousands in transaction costs, so don't keep paying those if you move frequently. As a rule of thumb, buy only when you will stay in the same house for at least five years. Don't buy just because you don't like paying rent; while rent doesn't build equity, it also avoids maintenance and repair expenses, allows greater location flexibility, and doesn't require a down payment. Early mortgage payments are 75%+ interest, insurance and taxes, and only 25% equity. Property price appreciation is not guaranteed, but if you live somewhere for 20+ years, ownership is almost certain to build wealth over time. Here's a calculator to do some what-if's.

• While mortgage criteria vary by lender, you need stable income history (two+ years), a good credit score (700ish), low debt to income ratio (all monthly debt payments below ~35% of gross income), and usually a significant down payment. One rule of thumb is your house should cost less than three times your annual income. [Edit: OK, we'll let you have 4X, counting just the mortgage, if you are in a low-property tax state. No Illinois or New Jersey!]

• There are many types of mortgages. You usually want a fixed-rate mortgage to lock in current attractive rates in case you stay in your house for many years. A 30-year mortgage might have about a 4% rate; each $100K of mortgage would cost $477/month for principal and interest. With a 15-year mortgage, you'd get a lower rate but higher payments; at 3%, each $100K would be $691/month. The 15-year saves you an enormous amount after 15 years when payments stop; until then, it costs you more out of pocket, as you build equity. It's worth shopping around to get the best rate on a long loan.

• Principal and interest isn't the only cost. You'll also pay property taxes and insurance, which can add ~20% to these payments, varying by location, and could be higher. All condos, most townhouses, and some standalone houses also have monthly Homeowner Association (HOA) fees for maintenance / repairs, that can be several hundred / month. Even with a fixed-rate mortgage, you'll find that taxes, insurance and HOA fees often increase year over year.

• The gold standard in down payments is 20% of the house price, though many people put down a smaller amount. Some types of mortgages like VA and FHA allow lower down payments, but limited to certain borrowers, or with extra costs. For a conventional mortgage, you will usually pay Private Mortgage Insurance (PMI) if you have less than a 20% downpayment. On a typical-size mortgage, this could be $100-200/month. We recommend you save for your downpayment, but gifts from family members are also acceptable to lenders.

• Adding all that up: that $200k mortgage on a $220K condo isn't just $950 /month for the loan, but also $200 for taxes, $250 for HOA / insurance, and $100 for PMI, so $1500 / month all told.

• Buying a house often gives you enough deductible interest and property taxes to allow itemizing deductions, but only the amount of deductions that exceeds the standard deduction is your net advantage. I.e. if a couple can itemize $30K in deductible interest and taxes (including income tax), they benefit by a net $4100 deduction and save perhaps $500-1500 in taxes annually.

Children are another popular thirty-something decision. Here are some ways children affect your finances:

• Children are expensive. Even if they don't eat a lot, they add costs for housing, health insurance and especially child care; potentially $10-15,000 annually for the first child; less per child beyond that. Many working couples find child care costs their biggest expense after housing. Family health care premiums can approach $1000/month in some cases. As a parent, married or not, you must budget for child-support-related costs at least until children reach age 18.

• On the plus side, children can reduce taxes. A family of four with two children gets $28,000+ in untaxed income as standard deductions and personal exemptions in any event, more if they can itemize. Then you could qualify for the Child tax credit and the Child and Dependent Care credit, which can be worth thousands of dollars annually.

• We'll discuss longer-term issues like college in a future installment; you have some time and options here. But we must cover life insurance now. If you have children (or significant responsibilities to your spouse, etc), you need life insurance. Term life insurance pays in the event you die, but otherwise expires after the ten- to twenty-year term. Other types of insurance don't expire, but are much more expensive over time so are not the best choice for most people. (Even if an old college friend tries to sell you this.) In round numbers, you may need $500K to $1M death benefit; that much 20-year term life for a 30-year-old is around $50 $30/month, but it varies, so shop around. You also need disability insurance; you are more likely to be disabled than to die early, with loss of income plus high medical bills.

• Speaking of mortality, when you have children, you also need to have a will, whether or not you think you have a lot of assets to distribute. In the absence of a will, a court will decide what happens to your children if you e.g. get killed in a car accident, as roughly 100 people do every day.

• For a more detailed checklist, go through the end-of-life planning wiki page.

Even if you don't want a house, spouse, or kids, you may have other financial events to deal with. Let's close with two popular scenarios: job change, and self-employment income:

• You are probably going to change jobs several times in your career. It's a good way to increase income, statistics tell us. When you do change, you might have other financial ripples, such as moving costs, so take that into account. What do you do with your 401k and your employer healthcare?

• You own your 401k, net of unvested employer contributions. When you leave a job, you have options. You can leave the money in the old employer's plan (but not contribute); roll it over any amount without tax or penalties into an IRA, either traditional or Roth as your 401k was; sometimes roll it into your new employer's 401k (but that depends on them); or you could in theory cash it out. Never cash it out. That defeats the purpose of retirement savings. The IRA rollover is the typical recommendation, although it can affect your ability to do backdoor Roth contributions.

• Switching employers often means changing healthcare plans. This can mean higher (or lower) premiums, and resetting your deductible for the year. You may have to bridge a short coverage gap; you can do this at low costs without paying penalties. Your HSA stays with you whether or not you have an HDHP at the new job.

Self-employment deserves its own post, and we've neglected it 'til now. Let's cover the high-level points to partially rectify that:

• Self-employment (1099) income is when you are paid for work without being an employee (W2). You could be a contractor, take cash side jobs, or otherwise get paid without withholdings. You owe income taxes as well as self-employment taxes in lieu of social security / medicare employee taxes; these are annoyingly large at 15.3% without a standard deduction until you reach 118K total income, after which it drops to just medicare at 2.9%. You can owe 40% on self-employment income when you also have a regular job in the 25% bracket.

• The good news is you can deduct related expenses from your taxable net self-employment income, whether or not you can itemize otherwise. This can include mileage to/from the job; home office space; cost of computers, cell phones, etc.; travel expenses, education expenses, it's a long list. Carefully track these to correctly fill out your schedule C.

• The not-so-good news is you have to directly pay taxes yourself, using quarterly estimated taxes if your self-employment income is significant. You use your crystal ball, figure out what you will owe in taxes for the year, and then send in part of that money in April, June, September and January. (You can increase regular job withholding to avoid quarterly estimated taxes on small self-employment income.)

• Self-employed people have more and better options for retirement accounts, oddly enough. You get more control and higher contribution limits, and you can even make your own 401k, but you have to do it yourself. Since you're your own employer.

• Most self-employed people don't need any special legal business status. You can remain a sole proprietor and report your taxes as personal income. You establish a Limited Liability Company for liability reasons, but it doesn't change your taxes. To do that, you'd establish a corporation, such as an S-corp, which gives you some alternatives that can reduce your tax liability.

While you can use this info before or after 40, employment income growth often starts to taper off then. If you have ~$50,000 or more in savings outside of retirement / house savings, put it to work for you. (You can put less to work; it just won't get much done.) Without trying to replicate /r/financialindependence, your options include:

• Let's first make sure your retirement funds are adequate. For example: to sustainably generate a median ~50k today's-dollars household income just from investments in your mid-60's, you'd need $1M+ in retirement assets. If at age 30 you (yourself, or household) have close to $100,000 in tax-advantaged retirement assets (401k, IRA, etc), you are on track for that $1M+. That's a lot for people who might have been in school longer, or had to repay loans. A checkpoint at age 40 is somewhere near $250,000. If you want that income but your savings are considerably lower, consider adjusting your retirement contributions before doing other types of investments. If you have different goals and assumptions, then your checkpoints would be different, and perhaps lower.

• As you start investing for shorter-term goals, you need to understand types of financial assets, types of income, and how they are taxed. Government and corporate bonds are loans that pay you interest and eventually return your principal, much like bank accounts or CDs. Equities aka stocks give you an ownership share in a private company, providing current income from dividends as well as potential price appreciation. Each has its advantages.

• Stocks and bonds pay current income, and have a resale value based on how the company is perceived for stocks, and what interest rates are doing for bonds; bonds lose value when interest rates rise. Stock prices changes up or down of 10% in a week and 50% in a year are common. Bonds are more stable; less than 10%/year is more typical. Stocks are usually valued more for their future price growth, called capital gains, whereas bonds are valued for their income and stability. Stocks historically provide better overall returns than bonds, at higher risk. Not everybody is happy seeing the value of their stocks go down 20% for a while, but it's part of the deal.

• You buy and sell shares of stock from people who want to do the opposite transaction. Who's right? Statistically, most people are bad at buying and selling stocks. Professional investors are not any better than average, either. Can you win trading stocks? Sure. You could be smart, or you could be lucky. But you probably won't be both over an extended period of time. If you want to try your luck, do it with a small percentage (~5%) of your investments.

• We reduce our risk of being wrong by investing in mutual funds. We pay a fee to own shares of a fund that gains or loses value based on the stocks it owns. (There are also bond funds.) The funds that statistically offer the best gains at the lowest risk with the lowest cost are know as index funds; these blindly invest in all shares meeting a given criteria, not trying to pick only "undervalued" stocks. It sounds crazy, but it works better than other alternatives, with lower fees, making John Oliver happy. Lower fees always helps you. Investing in a few different index funds provides potential gains at lower risk of steep price drops. You create a portfolio of investments; the selection of investment types is determined by your asset allocation. The so-called three-fund portfolio uses index funds of US stocks, international stocks, and bonds to provide high expected growth and lowest volatility. The target date fund we introduced in Advice for young adults uses more stocks when you are younger to get better long-term growth, moving to bonds as you near retirement age to protect against large losses.

• To invest this way, you open an account with Vanguard, Fidelity or Schwab as you would with an IRA, but you designate it as a taxable account. You give them money to invest it in your choice of index funds. There's no limit to this; you can invest hundreds of thousands of dollars this way. You don't try to time the market by selling out based on market changes, because you are probably wrong about that. Your account will pay you dividends on a monthly, quarterly or annual basis, which will be reported as taxable income at a favorable tax rate. When you do decide you want the money for some other reason, you will sell some of your funds, and pay capital gains tax on the difference between what you paid for the fund and what you sell it for. This is also at favorable tax rates.

And that's the basics of how to invest your spare cash in the stock market, where you can expect to make up to ~30% or lose up to ~15% of your money in any given year; the long-term average is usually about 6% after inflation, but it can take a decade to realize that average. There are many, many more aspects to consider, including how to save taxes with capital losses, how to be tax-efficient, and when to use Exchange-Traded Funds. But you know enough to be make money (and be dangerous...) now.

Financial assets are not the only option for investing. Let's do a brief overview of the most popular alternative investment, that being real estate held for rental or resale.

• Real estate provides current income as well as price appreciation (or loss) potential. Unlike financial investments, real estate has significant ongoing management and maintenance cost and effort, with some favorable tax treatment and leverage potential to counterbalance that.

• You invest in real estate by buying something that someone wants to sell. The hope is you choose wisely. You look for a property with either good rental income potential, or good resale potential. (Possibly both.) Note that this may not be the same as a house you might want to live in; it could be a cheaper multifamily building, for example. You provide a down payment and take out a loan as with a residential property, though your financing won't usually be as favorable in terms of down payment, credit and rates. You'll be responsible for the mortgage, taxes, insurance and repairs while you own it. Now for rental, you find renters who will pay you to live there on an ongoing basis, or for resale, you improve the property to make it more valuable for a quick profit on subsequent sale.

• If you rent the property, you are a landlord, congratulations! There are many legal responsibilities of being a landlord, in terms of how you decide who to rent to, how you handle maintenance, and what you can do regarding evictions. Many investors use a property management company to handle details of finding renters and managing the property, at a fee of perhaps 10% of rent. You will also have to pay for repairs (sometimes immediately), maintenance and your ongoing financing. Your rental income is taxable to you as Schedule E income, but you can deduct almost all of your costs, including interest, taxes, maintenance, management fees, etc. You also deduct depreciation, which means the tax code thinks your building is losing value, although you hope it is not.

• When you resell the property, you hope that it has increased in price; you take this as capital gains if you own the property for more than a year, or as business income if you are flipping houses. If you kept your down payment small and your rent covered your ongoing costs, it's possible to leverage a small down payment into a good ongoing return at low tax rate. You may even use your returns to invest in more rental property. The downside of real estate investment centers around the tenants; they can miss payments, damage the property, or have to be evicted, which reduces your rate of return.

• Note that it is possible to rent just a subset of a building; this is how you handle renting out rooms in your residence, for example. Many of the same income, tax and landlord consideration come into play. You take a deduction on the expenses of the portion of the house you rent out.

If you would like to discuss real estate investing more with other Redditors, we recommend checking out the /r/realestateinvesting and /r/Landlord subreddits.

So, there we have a couple of alternatives for you to invest your hard-earned money. You could also start your own business, invest in collectibles, make peer-to-peer loans; lots of possibilities for self-study!

If you would like to discuss starting a business more with other Redditors, we recommend checking out the /r/smallbusiness and /r/Entrepreneur subreddits.

• Selling your primary residence is a complicated process, either taking your time and money, or the costs of real estate broker, who might then claim 5%+ of your sale price. You want to price the property correctly, negotiate the sales contract carefully, and figure out where you will go after the sale. You might even be making an offer on a new house contingent on the sale of the old one. The good news is that any gains on the sale of a primary residence are typically free of capital gains taxes up to $250,000 (or $500,00 for a couple). You could instead hold onto your old house and rent it for investment purposes, but this may mean that you lose this tax break (see here for a publication from the IRS discussing the requirements in more detail). Also, since you probably didn't buy your house thinking it was an attractive rental property, it may be too expensive to make this a good use of your money, though; your mortgage may also not allow you to do this legally.

• Investing for college is another complicated topic. State-run 529 plans allow college savings to accumulate tax-free as with an IRA, but with no a priori limit on contributions, so you can invest in these at any time. You can only use 529 plan balances to pay for higher education, so if your child/children don't go to college or don't need all the money because they chose a low-cost school, then you'll owe taxes and be penalized at 10% of any gains not used for education. 529 plans may provide breaks on state income taxes. There are various ways to optimize how 529 plans are treated in terms of FAFSA/ financial aid; for example, if a grandparent establishes a 529 plan, then this is not counted as parental assets. 529's are not your only option; you could invest generically, perhaps using a Roth IRA to pay for college expenses without paying taxes or penalties.

Speaking of helping / being helped by family members, here are some general tips to be aware of regarding family transactions:

• There is almost never any "gift tax" on any transaction, either to giver or recipient, whether or not they exceed the annual exclusion of $17,000 per recipient. You just need to do more paperwork as the giver of gifts exceeding that amount, and it may reduce your eventual $12,920,000 estate tax exemption. So, for most people, gift taxes are not an issue.

• Inheritances have some unique tax treatment. You don't owe any federal taxes on inheritances of money or property. It's "free money"... unless you are in one of the six states with an inheritance tax, but even then, you probably aren't affected. (Along with gifts, these are separate property even if the recipient is married.) If you receive a house or stock, the basis of the investment is the fair market value of the property at the time of death, which means you can sell these without owing taxes. If you inherit a retirement plan like an IRA, then you will be taxed on distributions, though.

• Sometimes we advise younger people to get a co-signer for apartments, cars and student loans. This is good for the person who you are co-signing for. For you? Not so much. Co-signing is actually a huge risk. You could be on the hook for $100,000 of student loans if your ungrateful child decides they don't want to repay them. Not fun. You should never co-sign for any amount that you wouldn't be comfortable gifting instead.

• Taking The Mystery Out Of Retirement Planning (PDF from the U.S. Department of Labor)
• Bogleheads retirement planning start-up kit

• Two books we recommend in the PF reading list:

  • How to Make Your Money Last (2020 Edition) by Jane Bryant Quinn
  • The Bogleheads' Guide to Retirement Planning by Taylor Larimore et al

It's obviously not an ideal situation to be approaching retirement age without enough money to retire comfortably, but if you find yourself or a loved one in this situation, read the PF guide on retirement predicaments.

Here are several guides on estate planning topics.