Read "Personal Finance 101" by Alfred Mill

I recently read Personal Finance 101 by Alfred Mill. If you’ve been exploring finance or investing for a while, you might already know about 70% of what it covers—this book is really aimed at beginners. That said, it provides a solid roadmap for learning personal finance. Using its key topics as a guide, here, I’ll share all my notes on what was useful to me as a 26-year-old W2 worker with no savings.

Basic Concepts

You borrow an amount of money, called the principal, for a set amount of time, called the term, at a fixed or variable interest rate. Most loans are installment loans, which require regular payments, usually every month.

Interest Rate

Interest Rate(利率): The interest rate is the percentage charged on a loan or earned on an investment over a specific period of time (usually annually).

• Example: You borrow $1,000 at 5% annual interest → You’d pay $50 in interest in one year (ignoring compounding).

Simple Interest (简单利息)

Calculated only on the original principal:

\[\text{Simple Interest}=\text{Principal} \times \text{Rate} \times \text{Time}\]

Compound interest (复利)

Interest is calculated on both the principal and previously earned interest (a.k.a. “interest on interest” 利滚利).

• If compounding annually:

  \[A=P\times(1+r)^t\]
  • P = principal
  • r = annual interest rate (in decimal)
  • t = number of years

• If compounding more frequent

  \[A=P \times (1+\frac{r}{n})^{n\times t}\]
  • Where n is the number of compounding periods per year (e.g., semi-annually: n=2; quarterly: n=4; monthly: n=12).

APR (Annual Percentage Rate) vs APY (Annual Percentage Yield)

The APR (年化百分比利率) represents the total yearly cost of borrowing—including interest and fees (like origination fees and closing costs). It gives a true picture of your loan’s cost.

• A mortgage with a nominal rate of 4% might have an APR of 4.5% once fees are included.

Key Takeaways:

• The key difference between APR and APY is that APR does not include compounding, while APY takes compounding into account.
• APR is mainly used for a personal loan or credit card, whereas APY is typically used for savings accounts and investments.

Personal Finance Steps

The topics progress from common sense to more advanced concepts.

1. Budgeting

Budgeting isn’t about guilt—it’s about ensuring you have money for the things you want. A simple formula:

Available Budget = Income - (Monthly Payments + Mandatory Savings)

Monthly payments include expenses like rent, utilities, and phone bills. If your available budget is tight, be extra cautious. And if you’re carrying high-interest debt, prioritize paying that off instead of saving.

2. Eliminate fees

Cut out unnecessary fees:

• High-interest debt: For example, credit cards charging around 28% should be paid off as quickly as possible. As a rule of thumb, if you can’t earn a higher return on your cash than the interest rate on your debt, it’s best to pay off the debt first.
• Service fees: Avoid ATM fees, overdraft fees, or penalties that provide no value.

3. Credit Cards

I believe the best way to pay in the U.S. is by credit card for daily expenses. Credit cards offer benefits that debit cards do not, it’s safe and rewarding.

1. Always pay your balance in full and on time.
2. Research which card fits your spending habits by using resources like NerdWallet. While every credit card offers some benefits, they aren’t all created equal.
3. If you are already in good position, consider paying off your balance before the closing date (the end of each statement period, not due date) to keep your Credit Utilization Rate low (ideally below 15%), which can boost your credit score.

4. Emergency Funds

Once you’re free of high-interest debt, work on building a cash reserve covering about six months of essential expenses. Aim to save at least 10% of your paycheck, but adjust as needed.

• Where to keep it? Look for high-yield savings accounts or consider a brokerage account (like Fidelity) that invests your cash for better returns, but also offer easy access for emergencies. Avoid low-yield options such as some Chase saving accounts that barely keep up with inflation, offering returns as low as 0.01%. Lame.

5. Tax

Your paycheck withholding is essentially a prepayment of your annual taxes. As a W-2 employee, there’s really not many ways to cut taxes. However, you can use strategies like contributing to retirement accounts to lower your taxable income or using an HSA, details on which will follow in later sections.

• Fill out your W-4 form accurately to avoid over-withholding.
• For deductions (mortgage interest, property taxes, state income taxes), compare itemized deductions with the standard deduction to see which benefits you more.
• Remember: Tax credits reduce your tax bill dollar-for-dollar, while deductions lower your taxable income.

6. U.S. Retirement Accounts

If you’re living paycheck-to-paycheck, saving a bit less for retirement might be acceptable because spending a few hundred dollars today can bring more happiness than delaying gratification for decades.

In the U.S., retirement accounts include employer-sponsored plans (like 401(k) or 403(b)) and individual retirement accounts (IRAs).

401(k):

• Pre-Tax 401(k):
  • Lowers taxable income. Taxes are paid on withdrawals.
  • It has a rule that called Required Minimum Distributions (RMDs): Mandatory withdrawals starting at age 72. So if you have large balance when you are 72, every year you have to withdraw a huge amount money, results in higher income tax. So plan accordingly.
• Roth 401(k):
  • Contributions are after-tax. Tax-free growth/withdrawals.
• After-Tax 401(k):
  • Rarely offered: Only ~10% of employers provide this.
  • Primary use: Convert funds to a Roth IRA (Mega Backdoor Roth).

IRAs (Individual Retirement Accounts):

• Traditional IRA:
  • Taxes are deferred until withdrawal. Similar to a 401(k) but available to anyone with earned income.
• Roth IRA:
  • Funded with after-tax dollars; earnings grow tax-free.
  • Contribution limits are about $7,000, and you must wait 5 years after your first contribution for tax-free withdrawals.
  • High earners exceeding IRS thresholds cannot contribute directly. One strategy called backdoor is contribute to a Traditional IRA → Convert to Roth IRA (no income limits).

	Tax deferral	Tax free growth	No tax benefits
Company	pre-tax 401K	Roth 401K	after-tax 401K
Individual	traditional IRA	Roth IRA

Key Terms:

• Contribute: Adding new money to an account (subject to annual limits).
• Withdraw: Taking money out of an account (may trigger taxes/penalties).
• Rollover/Convert: Moving funds between accounts (e.g., 401(k) → IRA, Traditional IRA → Roth IRA).
  • Rollovers/conversions do not count toward annual contribution limits.
  • Withdrawal rules differ for contributions vs. converted funds in Roth IRAs.

Source:

1. [IRA] 用最少的时间给F1学生和工作新人介绍美国退休账户的核心要点
2. 十分钟讲清楚美国退休账户

7. HSA (Health Savings Account)

An HSA offers triple tax benefits:

1. Tax-Free Contributions: Contributions are tax-deductible, which lowers your taxable income.
2. Tax-Free Growth: The funds in your HSA grow tax-free.
3. Tax-Free Withdrawals: Withdrawals for qualified medical expenses are tax-free.

Other pros:

1. No “use-it-or-lose-it rule”; HSA funds never expire, even if you change health plans, employers or retire.
2. You can use your own credit card to pay for medical bills or even everyday purchases (like at CVS) to earn rewards. Then, simply upload and save your receipts on your HSA account and reimburse yourself later with cash. However, it’s generally best to leave the funds in your HSA to invest, so they can compound over time.

Cons:

1. Eligibility Requirement: You must be enrolled in a high-deductible health plan (HDHP) to contribute to an HSA. If you’re young and healthy, an HDHP might be a good choice since you likely won’t have high medical bills. However, if you anticipate significant medical expenses and your employer offers a plan with lower deductibles, that option might be more suitable.
2. You can have either an HSA or an FSA—not both. (But who wants FSA anyway)

8. Loans

Types of loans:

• Secured loan (抵押贷款): A secured loan is a loan that uses an asset as collateral, a mortgage (按揭) is a type of secured loan.
• Unsesured loan (无抵押贷款): These do not require collateral and typically have higher interest rates.
• Revolving credit (循环信贷) refers to loans for which the amount borrowed changes over time, unlike non-revolving credit (regular loans), where you borrow one amount and then pay it back. With revolving credit, there’s a maximum you can borrow (usually referred to as credit limit), and a minimum payment you must make each month, but the rest is up to you.
  • Credit cards and home equity lines of credit (HELOCs) are the most commonly used types of revolving credit.

Mortgage

Plan on getting a house:

1. Improve your credit score to secure a lower interest rate.
2. Save for a down payment, which reduces the loan amount and monthly payments. Also saving for closing costs, which also need to be paid upfront.
3. Get a mortgage. A mortgage has two main parts: principal (the amount you borrow) and interest (the cost of borrowing the money). In the beginning, most of your payments will go toward interest.
   • Short vs. Long-Term Mortgages: Shorter mortgage terms mean paying less interest overall. However, if you believe you can invest the money and earn a return higher than the mortgage interest rate, a longer-term loan might make sense—even if you can afford a shorter one.
   • Property Taxes: Keep in mind that property taxes can increase over time, which could raise your monthly payment.

Paying Points(支付点数)

• When you’re getting a mortgage, “paying points” refers to the option of paying an upfront fee to reduce the interest rate on your loan.
  • Discount Points: Fees paid at closing (typically 1% of the mortgage amount per point) to lower the interest rate.
  • Origination Points: Fees for processing the loan, which usually do not lower the interest rate.

Refinancing: If interest rates drop, you can refinance—taking a new loan to pay off the old one at a lower rate or with a better term.

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This is a starting point on my personal finance journey. Remember, the key is to build a strong financial foundation by budgeting wisely, eliminating unnecessary fees, and planning for the future. Happy saving and investing!